Countdown to 2025: The Market's Biggest New Year Hurdle  | | Robert Ross
Speculative Assets Specialist | Many of you read my work to get a sense of where the markets are headed. And my track record is good. For instance, going into 2024 I told you to stay bullish on stocks and crypto. This has worked out well. The S&P 500 is currently up 24% this year while Bitcoin is up over 120%. But that was then... and this is now. I'm still cautiously optimistic... but I do see some unusual headwinds as we enter the new year. And chief among them is rising bond yields. The Santa Rally Got Run Over By a Reindeer This time of year between Christmas and New Year's Day is statistically a standout for U.S. stocks. It's known as the "Santa Claus Rally." The S&P 500 has delivered positive returns during this seven-day period nearly 80% of the time. On average, the index gains about 1.3% over this stretch - significantly outperforming its typical weekly return. 
View larger image To put that in perspective, if every week matched this performance, we would see an astonishing 67% annualized return, far exceeding the S&P's historical average of 8% to 10%. But that hasn't happened so far in 2024. While there is still time left for the markets to turn around, the performance thus far has been historically bad. For instance, the S&P 500 narrowly missed back-to-back 1% down days during this period for the first time since 1952. And rising bond yields are the culprit. Why Rising Bond Yields Are a Problem for Stocks Rising bond yields are a significant headwind for stocks, particularly small caps, for several reasons. At their core, higher bond yields increase the cost of borrowing for businesses. Smaller companies, which often rely heavily on debt to fund operations and growth, feel this impact more acutely than their larger counterparts. Higher borrowing costs can shrink profit margins, slow expansion plans, and make it harder to compete. For investors, rising bond yields also make bonds more attractive relative to stocks. When yields climb, bonds become a safer alternative to equities. Capital moves out of the stock market. This creates additional downward pressure, especially in sectors like small caps that are seen as riskier investments. And while rising bond yields are bad news for stocks, the fact that bond yields are rising while the Federal Reserve is cutting rates creates even more problems. A Highly Unusual Scenario Typically, when the Fed lowers rates, bond yields fall in tandem. But this time, they're climbing, defying historical norms. 
View larger image Why is this happening? One reason could be increased government borrowing. The U.S. Treasury has been issuing a flood of new debt to fund spending, putting upward pressure on yields. Another factor could be rising inflation expectations. Even with falling rates, investors may still demand higher yields as a buffer against long-term inflation risks. This unusual combination is creating a challenging environment for stocks, as rising yields offset the benefits of lower rates. It's a headwind that's difficult to ignore as we head into 2025, especially for small caps and other rate-sensitive sectors. But there is a silver lining to this recent surge. We've Seen This Before While bond yields - and the U.S. dollar by proxy - have risen in the face of the Fed cutting rates, it's worth noting we've seen this pattern before. Back in late 2016 after Trump's surprise election victory, we saw a similar surge in bond yields and a strengthening U.S. dollar. While investors were nervous at the time, this trend quickly reversed over the following six months... 
View larger image In the face of rising bond yields and a strengthening dollar, investors should go into 2025 with caution. History shows that these pressures are often temporary, as similar patterns have reversed in the past. While challenges like higher borrowing costs persist, the key is to stay diversified and focus on quality investments. We've navigated uncertainty before, and I'm confident there are opportunities to thrive in this environment. Let me close by wishing you and your loved ones a Happy New Year and a joyful holiday season filled with health, happiness, and success. See you in 2025, Robert Want more content like this? | | | | | | 
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