Back and Forth Action
By Cory McPherson | January 2025
After a positive 2024 ended with a down December, the stock market has experienced back and forth action in the first couple of weeks of 2025. I think these up and down movements could become the norm for 2025 on a larger scale as the market digests the incoming administration and their policies, as well as Fed policy going forward. I’ll review some charts I’m watching and levels that are important for this bull run to continue. I’ll also take a look at interest rates, as they’ve gone in the opposite direction than what the Fed would like to see.
In looking at the S&P 500 chart below, right now the market sits at about the same spot it was the day after the election in November 2024 after some choppy action the last 2+ months. The long-term trend obviously continues to be up, while in the short-term the trend has been down since it peaked in early December. If we see continued weakness in the short-term, I’ll be watching the 5600-5700 area in the S&P as support. That coincides with a rising 200-day moving average (red line) that is approaching the 5600 level. A breach of that support zone could signal a change in character for the market. Overall, I expect 2025 to see exaggerated swings to both the upside and downside. Some may look back at the first year of the presidential term (2017 and 2021) for the last two cycles and expect smooth sailing like we saw in those years. I think conditions are quite a bit different, from valuations to interest rates to inflation as this four-year term begins.
Momentum indicators shown above and below the price chart have approached levels seen at previous bottoms over the last year. This would give an expectation that we will see some sort of extended rally in the near future. Sentiment has also reset in some indications with this recent weakness in the market. That is a bit surprising considering the drop in percentage terms has not been much but could add fuel to any rally that is seen.
In looking at small-caps below, a big bounce occurred the day after the election and brought small-caps to new highs not seen since the end of 2021. That breakout was short-lived, though, as you can see, it has since broken back down and has recently tested its 200-day moving average.
I’ve highlighted the importance of small-caps and their barometer for the health of the economy before. A continued breakout would have been a positive sign for stocks and the overall economy. I’ll continue to monitor to see if another attempted breakout occurs and can stick.
While the S&P 500 enjoyed a nice uptrend in 2024, gold experienced a nice uptrend as well. You can see below the chart on the exchange-traded fund GLD which tracks the price of gold. It has gone through a nice period of consolidation in the last few months after peaking in late October. It looks ripe to continue its uptrend in the near future even if this period of consolidation continues for a few more weeks.
Does this mean bad news for stocks? Or bad news for inflation? I don’t believe so, as 2024 certainly shows. Both gold and the stock market went up together and there’s been plenty of times in the past where that has occurred. It also, of course, went up while the rate of inflation was coming down last year. In fact, in 2021 and 2022 when inflation first really started to take hold, gold was not a great place to be and experienced a downtrend for most of 2022. What I’ve found historically is that gold does not correlate to much of anything but is great to use technical analysis with. If we eventually do see an important top in the market with a period of weakness, it’s certainly possible for gold to go down right along with it. It does not act as a hedge that some may believe.
Interest rates did not end the year as the Federal Reserve had planned. While the Fed reduced their benchmark rate 3 times before the end of the year, starting in September, rates on the long end of the curve went higher. You can see below the yield on the 10-year U.S. Treasury reaching over 4.8% recently. That is just below this cycle’s recent high of 4.98% in late 2023. When the Fed began cutting, the 10-year was just over 3.6%. With this move in interest rates, it puts into question how much more the Fed will cut, if any, this year. The 10-year yield has a big effect on what mortgage rates do and what loan terms businesses can get. Higher interest rates for a longer period of time than expected can continue to put pressure on the economy and the bond market.
With the move higher in long-term rates, and the reduction in short-term rates by the Fed, it has also caused an un-inversion to the yield curve. You may recall a few years ago when the yield curve inverted that it sent up warning signs for the market and economy. The yield curve inverts when short term rates become higher than long term rates, which is, of course, backwards from what you expect. In most measures, the yield curve has normalized or un-inverted, and below shows that relationship with the 10-year Treasury and the 2-year Treasury yield. When the black line went below the pink dashed line in 2022 is when the inversion occurred. You can see at the end of 2024 it went back above that line.
In the past, you can see the yield curve will un-invert before a recession occurs. Many confuse the inversion as the recession signal, but historically recessions don’t occur until after the curve normalizes. Of course, after many predictions for recession the last couple of years from economists never panned out, those calling for one this year are now hard to find.
In summary, I expect more volatility and swings up and down in 2025 than what we’ve seen recently. Watching support and resistance levels on the broad market will be important. While the broad market may go back and forth, there will still be sectors of the market and individual stocks that will have better charts to follow.
Wishing everyone a healthy and prosperous 2025!
Cory McPherson is a financial planner and advisor, and President and CEO for ProActive Capital Management, Inc. He is a graduate of Kansas State University with a Bachelor of Science in Business Finance. Cory received his Retirement Income Certified Professional (RICP®) designation from The American College of Financial Services in 2017.
Disclosure