We approached 2025 with a great deal of trepidation: elevated equity valuations, elevated inflation, rising unemployment, impending tariffs, war, etc. It left me feeling bearish, but with a significant caveat. We posted The Year Ahead: 2025 on Jan 13, with the S&P 500 closing at 5836 and offered the following forecast:
I’m looking for December CPI due out this Wednesday to top 3% and to go even higher for January (due out Feb 12.) Depending on how inflationary Trump’s tariff and deportation announcements are next week, we could easily see the 10Y reach 4.83-5.0% – testing the Nov 2023 highs.
…the Jan 2022 highs of 4818 were never backtested. This price level would cross the yellow channel .236 line in April 2025 or the yellow channel bottom in Feb 2026.
Taking all the above into account, I have a bearish bias going into 2025, even though Trump’s (and Musk’s) laser focus on positive stock performance renders any bearish forecast suspect. If I’m wrong, then we can expect a number of factors to come into play such as a weaker dollar, lower oil/gas prices and, of course, much lower values for VIX.
If I’m right, however, the following downside targets should be recognized.
4818-4883 (-21%)
4518 (-25.9%)
5459 (-10.5%)
5329 (-12.6%)
I want to be clear, however, that any drop below 5459 (-10.5%) would likely be met with an enormous effort to prop up stocks. It’s also safe to say that the bulls will definitely defend the SMA200 – currently at 5578.
A few days later, CPI reached 2.9% [it would reach 3.0% the following month] and the 10-year reached 4.81%. It was a 5-alarm fire for Trump, who had returned to power on the promise that he’d “end inflation on Day One” and the implicit promise that equity prices would rise.
Oil, which had spiked by over 20% in the previous 30 days, was the first fire to be targeted. Trump’s first state visit was to Saudi Arabia, resulting in a spectacular 32% crash in oil prices over the next three months. It must have rankled the oil company CEOs who had pledged $1 billion to aid Trump’s election.
It might have actually crushed inflation had it not been for Trump’s ill-advised rollout of widespread, inflationary tariffs on Apr 2.
As we expected, the rise in inflation in January and February had led to a fear of stagflation, which resulted in the market stalling and ultimately topping out on Feb 19 at 6147. The tariff announcement gave SPX a push. It tumbled to our 5459 target on Apr 3, our 5359 target on Apr 4, and our 4818-4883 target on Apr 7. At the eventual bottom at 4835 – 18 points from our backtest target – it had fallen by 21.3%.
The afore-mentioned crash in oil prices began in earnest at this time, sinking 24% in a single week. It temporarily brought CPI down into the 2.3-2.7% range, though it was back above 3.0% by September. Stronger measures were needed, and they provided the boost the market needed to rebound.
Rebounds are always the tougher aspect of our forecasts. It didn’t help that there was substantial divergence among the major indices.
SPX came up just shy of a full backtest, while COMP overshot its backtest target. But, as in 2016, it was the DJIA that mattered the most – crashing 13.6% in a single week to nail the January 2022 highs. Two sessions later, it rallied 8.3% in a single day when Trump announced a pause in the tariffs he had just unleashed on the global economy – the equivalent of an arsonist sprinkling a little water on the fire he started.
The rebound eventually took hold two weeks later when SPX backtested the falling channel it had broken out of. The fundamental picture was muddled at best because the tariff picture was muddled. As we wrote in our Apr 29 Big Picture post:
,,,this Big Picture forecast comes with a massive caveat: they are absolutely subject to the continuation of Trump’s tariffs. If he backpedals, reverses, or changes the terms enough, the risk is to the upside – at least short term. If he sticks to his guns, the risk is very much to the downside – at least until the markets force him to blink again.
It didn’t help that the data coming out of the federal government was becoming increasingly suspect. Almost all of the inspectors general had already been fired (right after the 2024 election.) The BLS commissioner was fired after a disappointing jobs report (which didn’t support Trump’s rosy narrative.) And Fed chair Jay Powell was under attack for not being dovish enough.
The FOMC was justifiably concerned about the inflationary effects of Trump’s tariffs, but also about a worsening employment situation which raised the specter of stagflation.
Trump found himself in a catch-22: admit to worsening employment and the need for a rate cut or insist that the economy was doing great (and, was therefore in no need of a rate cut.) In the end, the solution was vintage Trump: secure a sharp drop in oil/gas prices from his Middle East pals to bring down inflation and interest rates, keeping up the pressure on the FOMC, and “fine-tuning” the tariffs when markets needed a boost.
Since CPI is a year-over-year measure, inflation only needed to be held steady for few months. It was the opposite of what happened to gas prices in 2021, when the huge year-over-year price change from the COVID lows of 1.88 to 5.06…
…saw CPI race from 1.7% in Feb 2021 to 9.1% in Jun 2022. It was worsened significantly by Russia’s invasion of Ukraine in Feb 2022.
Prices are still 11% higher than they were in 2018. But, the YoY change in gas prices has been negative every month since Feb 2025 – offsetting the inflationary changes in many other components of CPI such as food away from home (+3.7%), fuel oil (+11.3%), natural gas (+9.1%), electricity (+6.9%), and used cars (+3.6%),
The result is that CPI has appeared to be under control, mitigating the impact of tariffs which would otherwise support a stagflationary outlook. The lows that we called in May [see: CPI Lower Than Expected] didn’t hold, but were low enough to get stocks up over the resistance we had identified.
The biggest contributor to lower inflation remains oil and gas, which registered double digit declines. Unfortunately, the 12% YoY decline in retail gas prices has likely bottomed out unless CL and RB continue to fall. At current prices, the YoY delta will be back to flat – removing a key source of falling inflation rates.
As we discussed in our Jun 20 Big Picture post, the runup in oil/gas prices had likely run its course. On Jun 23, with CL at a high of 78.40 and RBOB at 2.40, we hazarded a forecast:
A spike in oil prices makes Fed rate cuts extremely unlikely. At some point, it even argues for a rate hike. Therefore, I assume that oil prices are due for a retreat – unless, of course, things spiral further out of control in the Middle East.
Remember, the last time oil prices reversed back below the triangle top they fell about 25%. (from January to April.) CPI fell commensurately, from 3.00% in January to 2.35% in April. There is nothing so appealing to Trump as a huge drop in inflation that would force the Fed’s hand in cutting rates.
WTi had fallen to 56 and RB to 1.74 by the middle of October, enabling CPI to remain below 3.0%. CL had no trouble reaching our 57 target and came within 2% of our 53.87 target.
RB slightly overshot our 1.75 target.
Currency pairs were a mixed bag in 2025 – at least as they related to equity prices. The yen carry trade was relatively reliable, with a strong positive correlation between yen weakness and equity strength. But, the range was relatively small as the value of the USD was pummeled by the disintegration with formerly cooperative trading partners and, of course, by the volatile inflation and tariff picture.
Don’t look now, but DXY has almost fallen to our 98.976 target from last year. The culprits are numerous, led by the euro and yen which are both soaring relative to the greenback. The EURUSD has broken out and has nearly reached our 1.15 target.
These moves represent a very serious development for US markets, as the targets were initially established as part of a worst case scenario in 2024 and are exacerbated by a breakout in the 10Y yield.
The breakout in the 10Y is contrary to (temporarily) tame inflation and, as we have discussed, is consistent with a rejection of the USD and of Treasuries at a time when they would normally be buoyed by a flight to safety.
The correlation between DXY and SPX was all over the map, so it was easier to forecast the moves in currencies than it was to forecast the impact on equities.
The volatility in interest rates, both in the US and in the eurozone, made forecasts all the more difficult.
In the end, euro strength and USD weakness were aided by rising interest rates in the eurozone – due largely to the reduction in US military support for Europe and NATO pursuant to Trump’s America First posture.
As for US interest rates, the initial Apr 2025 plunge in the 10Y which was driven by the tariffs and trade wars (and, later, remedied by the sharp drop in oil/gas prices) saw the 2s10s break out. Had the 2s10s not reversed by early May, the equity downturn would surely have been much worse.
As detailed above, drops in oil/gas prices were plentiful and convenient, enabling occasional flattening on an as-needed basis.
We’ll dig into most of these developments in greater depth in our next post – a look ahead at 2026, due out in the next week or so.
In the meantime, stay frosty. More geopolitical and economic uncertainty is on the way.
Another day, another dearth of data. But, VIX is off 4% (so far) so the algos are only too happy to begin their run to the barn.
I got a good chuckle out of John Williams’ interview on CNBC this morning. While agreeing with me that the latest CPI data was hinky (my word, not his), he insists the Fed’s resumption of large scale treasury purchases is (obviously) definitely! not! QE!
“We are … obviously not doing QE, from my point of view, We’re not trying to change the 10-year, you know, term premium or something like that… The purchases are designed “to provide reserves to the banking system to meet the demand that the banks in our country and that operate here need in order to carry out their business.”
When I buy a new pair of jeans, the sales clerk doesn’t question whether I’m updating my wardrobe or a tornado ripped the pants from my body on the way to the store (a truly cataclysmic wardrobe malfunction.) Either way, they would ring up the sale, thus preserving our capitalist society for future generations.
Likewise, tossing another $500 billion annually into the money supply is quantitative easing and will stimulate the economy regardless of what you call it. Obviously.
continued for members…
If ES can hold 6865, it will complete a small IH&S targeting 6970. SPX has one, too, completing at 6816 and targeting 6913. Keep in mind that today is a triple witching day, so volatility could be quite high (i.e. it ain’t over till it’s over.)
We should get existing home sales and UMich consumer sentiment at 10am.
VIX made it out of the falling purple channel (16.50) by the close yesterday, but it’s right back in it today. And, VX has a shot at a bullish 10/20 cross today, but it will depend on it remaining above 17.95ish.
It’s another moment of truth for USDJPY. It broke out of the rising white channel on Nov 19 in order to halt a minor meltdown. Yen strengthening has ended many a rally [see: Yen Carry Trade.] Will it do it again?
It’s another day of stabilization for CL and RB…
…which has produced a small gap higher for TNX.
The approaching holidays remind us that it’s time to produce our 2025 Review and 2026 Forecast. We’ll take a break next week from daily posts (unless something really exciting goes down) and try to harness the remaining brain cells into producing something interesting, if not profound.
Inflation data was already going to be suspect enough, given that Trump only likes “good” data and that the Secretary of Labor was one of the very few people who hailed Trump’s decision to fire the head of Labor Statistics over her “bad” data.
Toss in the absence of October data due to the shutdown, and you’d need the faith of a village idiot to believe that CPI increased only 0.2% from Sept-Nov.
If the annual rate of 2.7% were accurate, it would be the first time in years that CPI increased during a period when YoY gas prices were increasing.
Nevertheless, the algos liked what they heard and didn’t hesitate to react as though Stephen Miran was the new Fed chair.
continued for members…
Yet, it’s interesting that ES hasn’t broken out of the small, falling red channel. Either the downtrend is still intact and this is a nice big bump designed to shake loose a few bears, or TPTB are getting nervous.
The answer will likely depend on whether carbon-based analysts call BS on the sketchy data. I, for one, declare it so.
Ceteris paribus, VIX suggests there’s more downside. Keep on eye on VIX 16.56.
We’ll also keep a close eye on USDJPY. The BoJ has shown unusual restraint so far, but then again the Nikkei is doing just fine.
And, EURUSD still owes us a SMA200 backtest.It shapes up as a good chance of DXY surprising folks to the upside.
We’ve talked a lot about oil and gas this week. With the administration (and OPEC) declaring that inflation is over and rate cuts are urgently needed, it’s not surprising to see CL and RB bouncing today even as the 10Y is lower.
Of course, the 2s10s is still flashing a big, red warning sign.
Futures continue to vacillate about the 50-day moving average as algos grapple with incomplete and contradictory economic data. According to the Census Bureau, retail sales for November will be released “at a later date.”
continued for members…
Dropping through the SMA50 (6765 for SPX) would be problematic for the bulls.
VIX has reversed course again, retreating back below the purple channel it has broken out of several times over the past two months.
Currencies remain muted, with the euro and the yen both reversing yesterday’s moves and lending a bit of strength to the DXY.
Oil and gas have bounced after yesterday’s trouncing, with RB still technically broken down.
At 4.6%, November’s unemployment reached the highest level in 4 years while CPI has been locked in the same 2.4 – 3.0% range for 2 1/2 years. Had it not been for plunging oil and gas prices, it would also be at 4-yr highs.
“Inflationary slowdown” doesn’t exactly roll off the tongue. So, let’s call it what it is: stagflation. Will the stock market ever start to reflect the slowdown, or will it be content to bounce at the 50-day moving average again?
continued for members…
SPX and ES have yet to make new highs, and still owe us a backtest.
Meanwhile, VIX is breaking out of the falling purple channel yet again.
Were it not for the falling DXY, we’d see a much bigger reaction in equities.
Oil and gas continue to wield dramatic influence on markets, with RB dipping back into the giant white channel while the 10Y remains stubbornly elevated.
CL has done the same, though it has Fibonacci support just below current levels at 53.87.
There have been many dips below the yellow channel top over the past several years.They typically don’t last very long. But, this time could be different as supply/demand is a secondary consideration.
We have long expected Trump’s OPEC+ and big oil pals to help with inflation by suppressing oil prices. But, at what point will they say enough is enough? Prices are below the level where it’s profitable to pump any new shale oil – a bonus for OPEC+ producers if they can discourage US production. But, Trump is doing all in his power to encourage US production.
One thing is clear: keeping CPI in the 3% range means oil & gas prices must remain at or below current levels – particularly as the effects of tariffs are increasing.
And, there’s a lot riding on CPI remaining below 3%, including the 2s10s which is pushing 3 1/2 year highs.
The Empire State Manufacturing Index came in at a dismal -3.9 versus expectations of +12.5 and prior +18.7. In traditional “bad news is good news” fashion, futures are up nicely…
…but have a lot of work to do to top recent highs.
continued for members…
Bears are right to be concerned, however, as we’ve seen two H&S patterns busted and the continuation of a significant VIX smackdown.
The DXY continues to break down, courtesy of the euro. EURUSD has ignored the arrival of the SMA200 at its recent lows and has resumed its ascent toward our longstanding 1.2028 target.
CL and RB are awfully close to breaking down…
…which has done little to prevent the rise of the 10Y…
…of the steepening of the 2s10s. Of all the charts we watch, this is the more problematic for equities. Our 10Y cycle chart suggests big drops in the 10Y in the next couple of months. This could be driven by many things: a collapse in oil/gas prices, the tariffs being struck down, an equity crash, etc. If the 2s10s reverses by 85 bps, the damage would be minor. Anything north of that, however, would likely unleash a significant downturn.
Futures are slightly lower as investors look forward to a slew of earnings announcements. This will be the 4th day that ES tests its .886 Fibonacci retracement.
continued for members…
VIX continues to drive the bulk of the upside, nearing the Sep 2025 and Dec 2024 lows since breaking down in late Nov.
The other algo driver is the faltering DXY, with most of its weakness courtesy of the euro.Interestingly, the dollar’s weakness is in contrast with a resurgence in the 10Y…
…which is occurring despite continuing suppression of CL and RB.
But, the biggest risk to equities is still a steepening yield curve. At 62 bps, it’s sending a warning signal. At anything north of, 67 bps, the year-end algo led rally could fizzle very quickly.
While the official vote tally included only three dissents (two who opposed any rate cuts and Trump’s sock puppet Stephen Miran) the dot plot illustrates a much greater degree of dissent. Six showed no interest in pushing through the additional rate cut the market is pricing in.
It was this realization that sent ES 92 points lower overnight. But, it was the QE (not so subtly renamed) of $40 billion/month which allowed stocks to recover much of those losses.
continued for members…
Note that the initial spurt allowed ES to tag the .886 again. However, it also enabled ES to regain its 10-day moving average.
SPXSPX, on the other hand, came quite close to a double top and to the purple 1.618 extension it just missed on Oct 29.
COMP continues to look shaky, with a 16% slump still in the cards.
Keep an eye on the bond market however. The 10Y has gapped back down to its SMA20 and the 2s10s is pushing 60 bps. Would we really need half a trillion dollars in additional liquidity to provide adequate liquidity to a healthy bond market?
Once again, the global economy is in the hands of the 12 members of the FOMC who are arguably more divided in their thinking than at any time in the past 30 years. The problem is stagflation, The solution is elusive.
The market has pinned its hopes on a return to easier money, which will most certainly stoke higher inflation. The cure to inflation, however, is higher interest rates which usually means a recession.
While betting markets expect a rate cut, it’s hard to see how one would make much difference to the real economy. Consider the latest ADP employment data, where small businesses (under 50 employees) lost 120,000 jobs while larger ones gained 90,000 jobs.
How many of those smaller employers which were under so much pressure that they laid people off would, instead, hire additional employees if interest rates fell by 0.25%? Exactly.
Meanwhile, the market is flat at less than 1% below all-time highs.
Futures are flat ahead of today’s important initial claims data and tomorrow’s PCE print. These will be among the most important data for the FOMC’s rate decision next week.
If the Fed is looking for weak jobs data, this morning’s print will be the last best chance to justify a rate cut.
continued for members…
Currencies are still on track to go nowhere, with EURUSD’s SMA200 tag coming up……and DXY still undecided.But, keep an eye on SI, which is coming up on our 60.20 target – important Fib resistance – while GC is still having trouble breaking above 4223.
Big downturns in December are very unusual. But, there’s a lot riding on the Fed’s upcoming rate decision.
I will be on the road tomorrow and early next week. So, I’ll only post if something unexpected occurs.
