This week on Inside the Economy, we discuss recent market activity, Treasury Bills, Oil, and the U.S. international trade balance in light of recent tariff discussions. The U.S. equity markets had a strong year last year but have been more volatile as the new year begins. Net profit margins and forward earnings are good, but what does the price-to-earnings ratio tell us about equities? Market expectations for Fed Policy has raised its target Federal Funds rate from 3% to 4% by 2026 between last fall to the start of the year. Is there a chance the Fed will hike rates in 2025? In oil production, the U.S. remains a net exporter of oil and petroleum products. Historically, we were dependent on imports from Saudi Arabia—are we still dependent on them today? Finally, with ongoing tariff discussions, will they dramatically affect the U.S. international trade balance? Historically, the U.S. has had a service surplus and a goods deficit, but could the trade deficit shift with potential tariffs being implemented? Tune in to learn more!
Key Takeaways:
- Durable Goods at -2.2%
- ISM Survey at 50.9
- U.S. Core CPI at 3.2(YOY)
Full Transcript:
Welcome to another edition of Inside The Economy!
I’m Larry Howes. Thanks for joining me!
I want to talk about the markets, treasury bills, S&P 500, oil and kind of the trade. Are tariffs going to be an issue for us? Quick look at the numbers. This is a good economy. I’ve mentioned this before. This administration is inheriting a very good economy.
The first estimate for GDP for the fourth quarter is 2.3. 9 months ago we were thinking it might be negative or tiny number. It’s not. The estimates for the first quarter of 2025 are already in the threes. ISM – The manufacturing numbers are back into expansion mode. Above 50. Initial jobless claims are down. Unemployment is down.
Mortgages were in 7% for a couple of days. Now they’re back in the sixes. We’ll talk about that a little more. And oh, oil is going to go through the roof because of the problems with the tariffs and a few other things. No, oil went down this morning. The housing market is moving along. It’s not what I would call correcting, but it doesn’t have to correct. It’s not in a bubble.
We have new completions doing very well. We’re kind of back where we were decades ago. Still a lot of single family homes. They’re completed and they’re being sold. Granted they’re expensive, but they’re still being sold. Increase in multifamily. That’s where the other end of the market is going and that’s picking up, especially in Denver. Part of the marketplace is what they like to call the deficit of homes.
Here’s some estimates of numbers from the realtors and a number of other places that say, well, people would have bought these homes had they been on the market. It isn’t just about money. So there’s been a deficit of homes in the market for quite a while. That’s correcting. It’s coming back. There’s more inventory coming online, existing and new. It’s coming back to where it was long, long time ago. There’s not a crisis in the housing market.
Unfortunately, in this kind of a marketplace people have to invent drama because that’s how they sell newsletters. But there isn’t any drama in the housing market. Affordability is still very high and that’s not going to change, certainly not under this administration. But nor are these prices going to come down. I think that’s very clear.
We had a great year in the stock markets last year. Everybody, it should show in everybody’s account balances. I wouldn’t anticipate that same kind of return in 2025, everything is expensive. S&P 500 is a little pricey. The Dow, well, that’s just the industrial side of things. They’re doing okay, but they’re not really that expensive or that profitable.
Small caps are pretty pricey. A double digit return in 2025 I wouldn’t view as good news. That would be a bubble. So let’s enjoy 24 and hope that there isn’t some incident that would push everything down in 2025. The earnings are great. I was hoping that the net profit numbers would come in this, the fourth quarter. Yeah, you’re above 12%. That’s just great.
But on the other side of the coin, truly, and I will say with great humility that those of you that follow markets kind of like I do, you have to remember that there’s another side of the markets that is trades not on the markets, trades that aren’t public, trades that aren’t mentioned in the media. That’s the off market, the off exchange. It’s just private deals. And there’s actually been more private deals. Now officially. Now reported by the markets, there’d been more private deals off the marketplace than on.
So, if they trade a couple of hundred billion dollars a day on the markets, they’re trading that privately too. Yes, there’s a lot of money out there. And that’s not private equity or private credit. This is publicly held stuff. So mutual funds, ETFs, hedge funds, I mean, they’re buying their inventory off market in huge amounts and leaving little pieces behind to do the valuation. It’s not bad news. It just sort of helps you remember how much money there is in the marketplace.
For those of you that when you look at the mortgages at 7 now and think, Gee, when are they going to be 3? There’s been a change in the perspective of the Board of Governors, hence the Federal Open Market Committee, so on and so forth. Well, and we even talked 12 months ago, gee, when are they going to get back down to like 3? The cost of money at 3, inflation at 2, mortgages in 5s.
Well, the arithmetic isn’t there now. This economy is doing too well now. We’re looking at maybe the Fed will have the cost of money. Right now, it’s call it four and three quarters, might get down to four right now. There’s some arithmetic out there that says there’s a 20% chance they’ll raise rates in 2025.
So don’t anticipate much lower cost of money much lower mortgages. That’s just not going to happen. They’re not going to put stimulus by lowering rates. They’re not going to put stimulus in an economy that is moving along great, and we are moving along great treasury bills and we talked about the inverted yield curve and I don’t want to bury you with technicalities, but the 10 year is the red up there.
In the last couple of years, you get more yield by buying a three month bill than a ten year bond. That’s an inverted yield curve. Well, that’s correcting that short end. The bill side of the market, which we’ll talk about here in a minute. But the bill side of the market is actually getting some corrections. We’re getting higher yields. When you go out 10 years, which is where the mortgage people get their money, it is correcting that is the marketplace is actually coming around thinking, yeah, there’s been a couple of things out of the way.
Bill’s short-term stuff has been growing as a piece of the marketplace for years and it shouldn’t be. The last couple of administrations have put most of their debt out three months, six months a year, partially for money markets, partially for a lot of reasons. But a lot of their short-term debt is going to be adjusted.
The new administration is going to detail how they do what’s known as the refunding conference. That’ll be Wednesday. And I think it’ll be some criticism of how they’ve been handling, they meaning the last administration, how they’ve been handling how they sell treasuries and how we’re going to do it better going forward. Okay, that’s fine.
It is weird that there’s so much short-term stuff out there and I think that’s going to correct here in the next year. Oil was going to be a big deal in a tariff environment because it has been a big deal before. Well, this is the barrels a day that these countries import. And you know, the US is a net exporter of oil. China imports huge numbers. Eurozone, India, Japan, they are very dependent on importing the oil. That’s just not the US anymore. So, it has a much different impact on the economy.
In fact, here’s basically the amount of oil we’ve been bringing in per day from the Saudis for that long. Just the Saudis, those days are probably over. It’s had an impact on their economy. Even though the trillions they’ve made, they’re trying to figure out what to do with it. Oil went down today. They don’t care what the administration’s going to do with tariffs.
The United States is a juggernaut. It really is our GDP in real numbers and I’m not even going to mention cash and personal wealth and all the rest of that stuff. It’s so much better than the rest of the world.
Just after COVID, that was the last incident maker China’s in there. I think there’s a fair amount of fibs in those numbers. But the Eurozone, India and the UK those are pretty close. They are lagging, they are going to continue to lag. The US is becoming more and more the buyer of everything and the seller of high margin services and a currency that continues to creep up and up. It’s hard on them and we don’t sell that much stuff.
Goods we don’t manufacture, stuff for the most part to sell everywhere a few cars. But the US is really going to make it hard on everybody else for the next couple of years. This is our trade balance you’re going to hear all about, oh look at this huge deficit. Don’t believe it when they say oh, the rest of the world is financing our spending. We’ve been through that enough. It’s just wrong.
Services surplus, which is where the highest margin is, is in services. Our services are everywhere. It’s not just software, it’s legal, accounting, business, everything make real money doing that. The rest of us, we buy shoes from Vietnam and you know, the rest, the sweaters and the jackets and the low end consumer stuff that’s built by everybody else because they have to. And that deficit is not going to change dramatically.
Tariffs will have a little bit of impact but not much. This isn’t going to change. What we have is an administration that’s going to do a lot of things, some of it good, some of it bad. There’s not going to be any huge impact for the foreseeable future because you have an extremely strong economic base.
Changing how treasury spends some of its money or furloughing some employees or a few other things is going to play in the media but it’s not going to have any impact on the economy as a whole. So less glorious return in 2025. That’s not bad.
Well, send questions along to info@shjwealthadvisors.com. I’ll be happy to deal with it! And thanks for joining me!
