The Golden Age of America

By Crest Capital Advisors on January 27, 2025

Dow: 2.15% to 44,424.25
S&P 500: 1.74% to 6,101.24
Nasdaq: 1.65% to 19,954.30
Russell 2000: 1.40% to 2,276.51
Bitcoin: 105,450
10 Year Yield: 4.62%
Outperformers: Comm Services 4.01%, Healthcare 2.90%, Industrials 2.40%
Underperformers: Energy (2.90%)

Major US equity indices were higher this week, locking in a second straight week of gains.  The official S&P index outperformed the equal-weighted one after underperforming it last week. Areas of strength included telecoms, hospitals, managed care, investment banks, credit cards, and software. The weak sectors included the energy sector and insurance. Treasury rates and oil both declined for the week. 

Investors processed several moving pieces this week amid the first days of President Trump’s administration. Stocks ended the week higher supported by some ongoing Trump optimism even with some uncertainty around tariffs and legislative developments. Equities were also supported by rate reprieve, the AI theme (Stargate) getting a boost, animal spirits, and a decent start to Q4 earnings season. Still, the bulk of headlines this week centered on developments inside Washington, especially around comments from Trump.

Given the speed at which Executive Orders, announcements, and speeches were delivered, it’s hard to believe the Trump Presidency is only 5 days old. During the inaugural speech, Trump announced that the Golden Age of America was upon us.  Forgetting the politics, we here at CMD are “HUGE” fans of the United States and its economy, so we all are here for it. The market has taken some solace in the view that tariff commentary out of the White House has been more benign than expected with China largely spared thus far (though Trump did threaten 10% tariffs on Tuesday). However, Mexico and Canada remain in the crosshairs with Trump setting February 1st deadline at which he will “potentially” place 25% tariffs on Mexico and Canada – the negotiation for a deal has already begun. Separately, Trump announced a $500B AI investment deal called Stargate which boosted the AI secular growth theme. On the legislative front, it was reported that Republican leaders are mulling a big debt-and-funding deal with Democrats. Meanwhile, The Hill reported Republican leaders agreed to push ahead with Trump 2.0 legislative agenda in one sweeping bill, though House and Senate leaders did not confirm. Finally, at Davos Trump called for interest rates and oil prices to be lowered.

The Power of the Media to Drive the Narrative

Media narratives surrounding Trump’s economic policies often overemphasize potential negative consequences, potentially misleading investors. Tariffs and immigration enforcement are portrayed as significant economic risks, yet these arguments may overlook potential benefits from simultaneous policy approaches like tax reduction and deregulation. Investors should critically evaluate media coverage and seek diverse economic perspectives before making financial decisions. Take the recent week as case in point. After a drumbeat of negative news coverage leading up to the inauguration, stocks wobbled and investor bullish sentiment plummeted, whilst bearish sentiment jumped higher. And then, the actual inauguration, and since that point, stocks have reversed all the negativity to close at a new all-time high. All of this occurred just as individual investors ran in the other direction.

The Bull Case for Infrastructure Investing

It’s becoming very apparent that major investments in the US power grid will be necessary to meet the demand from AI, EV, climate, crypto, and simply to be able to improve living standards. According to Strategas Research Partners, grid investment needs to nearly double by 2030 to over $600 billion per year after over a decade of complete stagnation at the global level. As AI growth continues to grow seemingly without bound, the requirement for infrastructure to support it will provide investors with many opportunities to profit.

Inflation Sanity Check

As we’ve pointed out for years now, the rent component of key US inflation metrics like the Consumer Price Index (CPI) has a very heavy weighting (>30%) and is very slow moving (hence the “stickiness” label). But the Bureau of Labor Statistics (BLS) also produces a New Tenant Rent Index on a quarterly basis. This indicator leads the shelter component in the official data, and as we have suggested it would do, it plunged in Q4 (see the first chart below on the left). This bodes well for future inflationary readings. Our friends at Strategas Research Partners have modeled this out (chart below on the right) and suggest this will pull the official shelter CPI component lower still in 2025. The new rent data at a minimum reinforces at worst a lull in inflation, and may even open the door to some downside risk. At this point, we’d suggest a second wave of inflation is likely off the table in 2025 if shelter prices are indeed anchored lower.

At Strategas Research Partners, their models have suggested we’ll see an inflation lull (not an increase as many of the doomsayers on financial TV like to push) in 2025. Recent US data supports the Strategas call, and not that of the pundits. Here’s a look at their Core CPI model (red line) v. actual (blue line).

Education Corner: 2025 Gift & Estate Tax Exclusions

With the inflation of the past few years, one of the benefits to wealthy households (which is you, dear reader) has been an increase in the amount one can transfer annually, and over a lifetime, without incurring gift or estate taxes. The 2025 figures are as follows:

The Annual Exclusion

The annual federal gift tax exclusion – commonly referred to as the “annual exclusion”—is the amount that a taxpayer may gift to another individual without incurring gift tax or using up the taxpayer’s lifetime gift and estate tax exemption. The 2025 annual exclusion amount will be $19,000 (up from $18,000 in 2024). The annual exclusion applies to gifts of $19,000 to each donee or recipient per calendar year. This means that a parent may gift up to $19,000 per child (or any other donee) without being required to report the gifts on a gift tax return (Form 709) and without using up any of their unified credit. Additionally, since each individual may take advantage of this exclusion, a married couple may gift up to $38,000 to each donee per calendar year without using any estate or gift tax exemption.

The Unified Credit

The unified credit is also known as the lifetime estate and gift tax exemption, applicable exclusion amount, or basic exclusion amount. The unified credit is a combination of the gift tax exemption and estate tax exemption amount. It is the amount that an individual may give either during their lifetime or at death before any gift or estate taxes will be assessed against the individual (or their estate). The unified credit in 2025 will be $13,990,000 (up from $13,610,000 in 2024) per person. The unified credit may be shared between spouses. When used correctly, a married couple may transfer up to a combined $27,980,000 without incurring gift or estate tax. This allows a wealthy married couple to gift an additional $760,000 in 2025 compared to 2024 without incurring additional tax liability.

Speaking of Taxes

Is there some SALT (State and Local tax deduction) relief on the way? Maybe.

It was reported this week that House Republicans are in talks over raising the cap for state and local tax deductions after winning pledges from President Trump and congressional leaders to include the measure in a must-pass tax bill this year. Lawmakers are hoping to come up with a figure for the deduction cap in the coming weeks, with one GOP House representative saying a hike to $20,000 (From the current $10k cap) wouldn’t be enough. There is one proposal that would lift the cap to $100,000 for individuals and $200,000 for those filing jointly. Stay tuned, tax relief for high state tax residents could be on the way.

Earnings Season Preview

After last week’s strong earnings results, the Q4 EPS growth rate moved higher to 10.7%, with much of this attributed to the Financials as 16 of the 20 companies that reported last week were Financials. EPS Growth for the Financials now sits at 26.4%. On the sales side of things, growth was unchanged at the index level at 4.1% and the Financials only saw a small uptick.

Economic Funnies

Crazy Stat(s) of the Week

• On Thursday of this week, the S&P 500 closed at a new record high. New highs have been a common occurrence for the index throughout 2024 so to hit another new record in 2025 shouldn’t be too surprising. But what is extremely interesting is that the index went from a 2-month low to a record high in only 8 trading sessions! The only date that had a quicker rebound was June 24th, 1998.

• What a business model! Get a huge number of users to subscribe to your service. Deliver them content over time that encourages ongoing user engagement. Then slowly, and steadily raise the monthly fees, just not so noticeable that it causes users to terminate their service. Well, that’s Netflix and after posting record results this week, they also announced yet another price increase. We found the following chart of the history of Netflix price increases of great interest so we’re sharing it here with you!

Quote of the Week

“Political change creates market volatility, which creates investment opportunities.”                    

   –       Howard Marks

Calendar of Events to Watch for the Week of January 27th

Unlike this past week, next week’s news flow promises to contain a huge amount of market-moving data. For starters, we enter the biggest week of the earnings season with 40% of the S&P 500 market capitalization scheduled to report. On the monetary policy front, the Federal Reserve will conclude its first meeting of 2025 on Wednesday (with markets expecting no movement on rates) with questions abounding about when they may resume cutting rates again. On the economic front, the week will be back-end loaded with the first look at Q4 GDP on Thursday and the Fed’s favored measure of inflation (The Personal Consumption Expenditure Index or PCE) on Friday.

Monday 1/27 – December New Home Sales are expected to show an increase of 2.7% over November’s pace. The Dallas Fed Index and Chicago Activity Index are both expected to remain in contraction.

Tuesday 1/28 – US Durable Goods for December are expected to show a 0.4% increase after November’s -1.2% contraction. January Consumer Confidence is expected to increase to 108.3, up from 104.7 last month.  

Wednesday 1/29 – The big event of the week will be the conclusion of the Fed meeting. Economists expect no action on rates, with the Fed Funds target remaining at 4.5%. The key will be the language around the pause and whether trading algorithms perceive it as “hawkish” or “dovish”. Jerome Powell has a very poor track record when it comes to saying the right things for markets. And with Trump’s latest comments demanding low interest rates this week, we suspect the Fed will try to push back and flex its “independence” muscle.  

Thursday 1/30 – The first preliminary look at Q4 GDP is expected to show a 2.4% year-over-year growth rate, down a few ticks from last quarter’s 2.7% rate. US Pending Home Sales are expected to show a modest 0.8% uptick. 

Friday 1/31 – On the heels of the Fed meeting fallout, the next major look at inflation will come in the form of the Personal Consumption Expenditure (PCE) index. Economists are expecting a 2.6% annual rate and a 0.3% monthly increase at the headline level. The all-important Core PCE (Ex-Food/Energy) is expected to post an unchanged annualized rate of 2.8% and a 0.2% monthly increase. Note, this is the data-set the Fed targets when they suggest they want to achieve the target rate of inflation of 2%.

Source: MarketWatch / FactSet (January 2025)