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 Federal Reserve’s expected rate cut on Dec. 18, 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 more than 170 percent year-to-date, but the Chinese regime opened a probe into it last week, 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 the Chinese regime alleges that technology curbs between the U.S. and China have escalated under the Biden administration, so we’ll see if President-elect Donald Trump modifies these restrictions next year. In the meantime, Nvidia is a great near-term buy!
Also, Investor’s Business Daily featured an article on Dec. 10 that pointed out that J.P. Morgan 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 they mean:
- The new “dot plot” survey of the Federal Open Market Committee members on Dec. 18 is not anticipated to show all the potential key interest rate cuts in 2025 since global interest rates are expected to plunge because of a recession in Europe and lackluster growth in Asia. A recent Bloomberg survey forecasted that the European Central Bank (ECB) will cut its key interest rate to 2 percent by next June (currently the key ECB interest rate is 3 percent). Furthermore, some economists are predicting that the ECB will cut key interest rates to 1.75 percent 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 liquefied natural gas expansion is over. The existing ban on drilling on federal lands is expected to be lifted by an executive order on Trump’s first day. I am expecting to add more midstream 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 given 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 ExxonMobil, which is increasing production in Guyana, which is the most exciting crude oil discovery in more than 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 a 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 an 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 for the companies that supply uranium, such as Cameco Corporation.
- Trump likes to fight an economic war rather than a real war by making our trading partners very uncomfortable, so the United States can negotiate from strength. In theory, if Canada and Mexico seal their respective borders to stop the flow of illegal drugs and aliens, then Trump would not impose the proposed 25 percent 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 percent tariffs would destroy their respective economies. In fact, Canadian Prime Minister Justin Trudeau already visited Trump at Mar-a-Lago to discuss border security and trade. Mexico’s new president, Claudia Sheinbaum, also pledged cooperation on immigration. The Chinese regime 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 percent in the third quarter to more than 10 percent 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 deposits of up to one year. 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. When consumers are out and about spending, the velocity of money rises, and prosperity naturally rises too. Trump 2.0 is boosting the velocity of money by dispelling uncertainty with his “drill, baby, drill” and other pro-business policies.
Overall, there is no doubt that the United States is the economic engine of the world because of (1) household formation from better demographics, (2) its ability to assimilate immigrants effectively, and (3) the fact that our 50 states are competitive with one another and are essentially economic laboratories. The first item on the agenda under Trump 2.0 is to end the manufacturing recession, since according to the Institute of Supply Management, the manufacturing sector has contracted in 24 of the past 25 months. The second item on the agenda is to end senseless wars in the Middle East and between Russia and Ukraine, so the world can finally benefit from a “peace dividend” such as the one President Bill Clinton enjoyed. As soon as the manufacturing sector resumes growing, 4 percent annual U.S. GDP growth is possible, but if peace in the world is achieved, up to 5 percent annual U.S. GDP is possible.
