Expect a Year-End Rally in Late December

Commentary

Historically, December tends to be flat in the first half but explosive in the second half. Sure enough, we’ve seen small gains in the first half of December, but the Fed’s expected rate cut tomorrow, plus the formation of a growth-oriented Trump cabinet and the holiday spirit should fuel more gains by year’s end.

Two of our big AI stocks have risen this year but have come under attack lately. Nvidia is up over 170% year-to-date, but China opened a probe last week into Nvidia, alleging that it broke anti-monopoly laws, which is strange criticism coming from a state-controlled economy. My comment: “Of course, Nvidia is a monopoly. That is one reason we own it, for its fat operating margins!” But China alleges that technology curbs between the U.S. and China have escalated under the Biden Administration, so we’ll see if President Trump modifies these restrictions next year. In the meantime, Nvidia is a great near-term buy!

Also, Investor’s Business Daily featured an article last Tuesday which pointed out that JPMorgan analyst Samik Chatterjee said that Super Micro Computer’s customers are sticking with the company, which means that its massive order backlog persists. Chatterjee added that Super Micro Computer said it is on track to ramp up production at its Malaysia plant in the first half of 2025.

Here are the most important market news items and what this news means:

– The new “dot plot” survey of the Federal Open Market Committee (FOMC) members on Wednesday is not anticipated to show all the potential key interest rate cuts in 2025 since global interest rates are expected to plunge due to a recession in Europe and lackluster growth in Asia. A recent Bloomberg survey forecasted that the ECB will cut its key interest rate to 2% by next June (currently the key ECB interest rate is 3%). Furthermore, some economists are predicting that the ECB will cut key interest rates to 1.75% in 2025. As European interest rates decline, it should also trigger a big rally in U.S. Treasuries that should further encourage the Fed to cut key interest rates.

– Trump 2.0 is simply a godsend for the natural gas industry. The Biden Administration’s attempt to squelch LNG expansion is over. The existing ban on drilling on federal lands is expected to be lifted by an executive Presidential order on President Trump’s first day. I am expecting to add more mid-stream companies and some new natural gas drillers, as soon as “drill baby drill” identifies the winners of an anticipated natural gas boom. The production of crude oil should also increase, but due to weak global demand due to sputtering economies in Asia and Europe, I am expecting crude oil prices to range from $58 per barrel to $80 per barrel in 2025. Since crude oil demand is seasonal, prices are expected to rise in the Spring and decline in the Fall. As a result, I may not add many integrated crude oil stocks. The exception is Exxon-Mobil that is increasing the production in Guyana, which is the most exciting crude oil discovery in over a decade.

– I am not that excited about the expansion of nuclear power, despite Microsoft committing to a 20-year deal with Constellation Energy to restart on reactor on Three-Mile Island. Interestingly, Constellation Energy initially shut down Three-Mile Island, since natural gas fueled power plants were cheaper. The growing call for small modular nuclear reactors, even from Amazon and Google, may not come to fruition for a decade or more, since there are no working prototypes. Frankly, I find it fascinating that a magnet now exists that can lift and aircraft carrier, which will be used in small modular nuclear reactors, but until the entire reactor is finished and tested, I do not want to invest in nuclear energy, except the companies that supply uranium, like Cameco Corporation (CCJ).

– President-elect Trump likes to fight an economic war rather than a real war by making our trading partners very uncomfortable, so the U.S. can negotiate from strength. In theory, if Canada and Mexico, seal their respective borders to stop the flow of illegal drugs and aliens, then Donald Trump would not impose the proposed 25% tariffs. As a result, I suspect that Canada and Mexico will continue to fully cooperate with Trump 2.0, since otherwise, the economic cost of 25% tariffs would destroy their respective economies. In fact, Canadian Prime Minister Justin Trudeau already visited Donald Trump at Mar-a-Lago to discuss border security and trade. Mexico’s new President, Claudia Sheinbaum, also pledged cooperation on immigration. China will be more problematic and is expected to be less cooperative with Trump 2.0.

– The S&P 500’s earnings are reaccelerating from 8.4% in the third quarter to over 10% for the next three quarters, so I am especially excited about stocks with (1) positive analyst earnings revisions, (2) robust operating margin expansion and (3) accelerating sales growth. We remain in a fundamentally focused stock market.

– The money supply, based on M2, continues to grow. Stock market appreciation is highly correlated to M2, which is money in checking accounts and up to 1-year deposits. This is evidence that the “velocity of money” is increasing, which is how fast money changes hands and is really what Trump 2.0 is all about. So, when consumers are out and about spending, the velocity of money rises, and prosperity naturally rises. The reason that Trump 2.0 is boosting the velocity of money is uncertainty has been uplifted with “drill baby drill” and other pro-business policies.

Overall, there is no doubt that the U.S. is the economic engine of the world due to (1) household formation from better demographics, (2) the U.S. assimilates immigrants much more effectively and (3) our 50 states are competitive with each other and are essentially economic laboratories. The first agenda under Trump 2.0 is to end the manufacturing recession, since according to the Institute of Supply Management (ISM), the manufacturing sector has contracted in 24 of the past 25 months. The second agenda is to end senseless wars in the Middle East and between Russia/Ukraine, so the world can finally benefit from a “peace dividend” like Bill Clinton enjoyed. As soon as the manufacturing sector resumes growing, 4% annual U.S. GDP growth is possible, but if peace in the world is achieved, up to 5% annual U.S. GDP is possible.

*Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.