RealTMOR Asset Mgmt LLC and RealTMOR Apartment Mgmt LLP
Now What? THINGS CHANGE, HOW DO YOU REACT FINANCIALLY?
Post-Election Trading Momentum
Once the election results were evident, the stock markets reacted in an exuberant fashion anticipating deregulation and potential tax cuts from the new administration in 2025.
Investors contemplate that the positive effects of these proposals could result in upward momentum for an already bullish stock market and stimulate economic growth. Speculation was rife and certain types of stocks and assets took off on a speculative joyride! The frenzy involved real assets with real value and others that have no discernible value.
Gradually, a greater emphasis was placed on the potential for tariff proposals and a decline in immigration levels to create financial and economic headwinds. There is talk of increasing tariffs on Chinese imports, especially auto related imports. Many economists and Wall Street strategists are building a base case of 10% tariffs on imports with expectations of higher tariffs for Chinese imports.
Import tariffs could spark an inflationary trend in the US and have an adverse impact on employment. And this may impact the trajectory of the Fed rate cuts going forward. Most market participants estimate one rate cut in December 2024 and maybe two-three cuts in 2025. However, in December there has been release of contradictory inflation data, which obscures the future pathway of Fed rate cuts. The current Fed funds rate is 4.5%-4.75% after two rate cuts were enacted till early December 2024. So, clear effects of the policies of the incoming administration need some time to play out before properly understanding how markets/ the economy would react over the medium-term. Over a short-term and even a longterm the overall trends of US equity markets would tend to be bullish. There needs to be more nuance when trying to analyze effects on the US residential real estate markets. During the months of November /(current month to date) December 2024, speculation has taken over in US equity markets and in cryptocurrency. Certain stocks and cryptocurrency which are part of the “Trump Trade” have vaulted upwards, one could argue, too much and too fast.
YTD 2024—US Equity Markets are on a BULL RUN!
Its unmistakable that there is a strong Bull Market in 2024 in US Equities. There was an exuberant reaction to the election, among the broader indices, on the day after the election. But, that was momentary and then the macro market stabilized and resumed its bullish trend. Over the medium to long term the US equity markets would definitely provide the BEST RISK RETURN OUTCOME for investors across any asset class. The reasonable strategy, at this time, would be to remain adequately invested in US equities without taking on undue risks or getting caught up in the speculation frenzy. The current scenario is definitely a “risk-on” environment. However, there will be short-term volatility and downside risks/ consolidation of current highs over the near term. It may be sensible to buy small positions on dips or maybe even just sit out this volatility without doing anything major. There is strong indication, at this time, that 2025 would again be positive for US equities. Indices, broad based ETFs, high quality /blue chip names across various sectors provide good risk-on alternatives. To enhance risk, for investors feeling more bullish, adding some leverage through levered ETFs or taking some debt is an option. Small and reasonable options strategies can be used by sophisticated investors to address volatility etc. Risk of inflation due to policies of the incoming administration and potential for ensuing economic uncertainty can be hedged by allocating a small part of the portfolio to GOLD. Recently, the ECB and the Swiss National Bank cut rates by 0.25% and 0.5% respectively and that could impact inflation, foreign exchange rates among other items.
But, adding risk by getting into speculative assets or outsized use of derivatives would be a gamble that most, other than the high risk-taking people, may not be comfortable with
There are pockets in the market that have detached from its regular trading patterns and have demonstrated significant bullishness over the last month or so. These stocks and crypto have entered the speculative category.
How the Trump Trade Reacted in November and December 2024
Certain stocks like Tesla had under-performed its broader peers (Magnificent 7) till October 2024. Stocks like Palantir had performed well throughout 2024 but got turbo-charged after the election. Tesla has started trading in a speculative manner because of Elon Musk’s relationship with Donald Trump, the market perceives that the closeness will benefit the company.
Stocks like Palantir would benefit from the focus on Defense and the focus on domestic companies due to protectionist instincts of the incoming administration. The stocks like Coinbase and MicroStrategy are perceived to benefit from the “crypto friendly nature” of the incoming administration. So, as the crypto currencies has run up sharply those stocks have too.
Lastly, private prison stocks like CoreCivic and Geo are perceived to benefit from the muscular immigration outlook of the incoming administration. These stocks have far outperformed the Russell 2000, especially since the election results.
These speculative assets and meme stocks are definitely attractive for certain types of buyers, buyers with very high-risk tolerance, and these are fine for them but not for the average investor. However, stocks like Tesla, Palantir and some others are very good companies with a real business and in most times have a realistic valuation. These are stocks that investors could/ should hold, but the recent speculative sharp moves up skew the risk-reward dynamic. Forward PEs for companies like Tesla, Palantir, Coinbase have increased by 65% to 90% from October to December 2024. That should be reason for investors to pause and think before entering into this frenzied buying!
Speculative stocks/ assets, stocks/assets in a Bubble, meme stocks etc look like the great idea/trade when they are on the upswing. For such assets, being able to exit at the “right time” is key!! If that window is missed the ensuing results are painful when things turn south and many regular investors get left holding the bag. And things do go south, it’s just a matter of time. The down moves are vicious and significant value is lost quickly. Also, people hold onto hope that these negative events are temporary and there will be a bounce back soon. And before long, it’s too late!
CRYPTOCURRENCY: Currently the most speculative assets are crypto assets. Many of these have no underlying value or use and are literally just “things” that people are buying and selling to each other. This may almost be a case of selling to the “next fool”!!
Many crypto enthusiasts make the case that if one believes in the digital economy then a digital currency makes sense. And that is a real plus point. Further, the blockchain technology is touted as making this asset “secure”, “free from government interference/ encumbrance” and “provides anonymity”. However, there have been many security breaches and anonymity results in criminals, terrorists, money launderers etc abusing crypto which is highly undesirable and actually makes government oversight more incumbent. There needs to be some government frame-work around how crypto would be issued, stored, used etc. That will be helpful for legit players and could prevent fraud. Currently, there is a lot of fraud, of all types, surrounding crypto assets. Additionally, people are not clear about what type of crypto will work and what type will not work. The space is rife with failure, Tether failed and Lite coins are languishing, among many others.
Currently, the volatile nature of Bitcoin and Ethereum make them unsuitable for use in ecommerce. And the view that Bitcoin is a “store of value” and would replace gold is unproven. Ethereum is built on the block chain, ether, and that has use outside of just “store of value”, it is actually used as a ledger for other electronic activities like NFTs etc. So, there is definitely a space for crypto in the future. Bitcoin crossing the $100,000 mark is not clearly indicative of anything substantial. Among the crypto assets, currently, Bitcoin and Ethereum MAY BE the most suitable for average investors that want to have a crypto position
SPECULATION COULD BE PAINFUL: A good example is the dot.com bubble burst, it was critically important to be owning internet names back in 2000 but if one owned pets.com then one was bust but if one owned Amazon then…..the rest is history. Having said that, for the more prudent investors, buying Amazon or Google or Microsoft or Apple in 2004, 2005 or later provided good value too and at lower risks. Speculation, bubbles, price dislocations can happen in any asset (even seemingly safe assets) condominiums in Miami lost more than 50% of their value when the real estate bubble burst in the US, in 2008, and it took years for prices to come back to pre-bubble burst levels. If one owned real estate, even in Miami, and one didn’t need to have a fire-sale (due to financial constraints) during the crisis things improved with time. If one could adequately collect rent during the ensuing years, then all those unrealized losses were recovered and overall annualized returns, till date, are very healthy even considering the previous falls. During and after the global financial crises of 2008, gold became a safe haven asset and its prices sky rocketed and peaked by 2011. Prices came down from those levels, and got back to those highs in 2020, from 2020 to now the returns on gold have been very good.
Ideal situation is to be in and out of Bubble assets in a timely manner or avoid Bubble scenarios /speculation as much as possible. But, if one does get caught in a Bubble situation then one must have the wherewithal to be able to ride it out, as long as the asset has “real intrinsic value”. If the asset does not have intrinsic value and is only hype then most probably it will disappear and it’s hard/ impossible to recover from that.
US RESIDENTIAL REAL ESTATE
For 2024, in generic terms, using various parameters (S&P CoreLogic Case Schiller Indices) US residential real estate is up around 5% of so. Mortgage rates have started falling once the Fed made its first rate cut in September 2024. 30-year fixed rate mortgages started the year above 7% and hit a low of below 6.5% in September 2024. These rates are currently at 6.8% +/-. US Residential real estate prices are still at historic highs and rents are high too but prices have started weakening across many previously very “hot markets”. Real estate price growth and time required to sell properties are definitely indicating a weaker real estate market. Having said that, its not reached levels where it’s a compelling scenario to buy or sell residential real estate assets. Adding risk in real estate, at this time, should be very carefully considered and done only if there’s a compelling reason. If one has risky non-core residential real assets and if one has a sizeable gain then booking the said gain could be a good idea. It is best to hold onto ones “core real estate holdings” and receive appropriately available yields. Favorably owning and operating core, risk adjusted real estate assets makes sense.
INDIA EQUITY MARKETS AND ASIA ECONOMICS:
Indian markets hit highs in September 2024 but then volatility set in. The major reasons could be lowering of US interest rates, economic slowdown in China and other parts of Asia and the potential for an economic stimulus from the Chinese government to rev up its economy. After the US elections, there has been uncertainty regarding tariffs, reaction from China’s government and a slowdown of the Indian GDP growth rates. It seems the RBI is not very intent on aggressively creating liquidity in the Indian markets. This has resulted in some selling of Indian equities by FIIs and all these factors combined result in the historic weakness of INR against USD. It seems there is some rotation of foreign investor funds from Indian equities to other Asian markets. There are questions about the size of the stimulus from China and this has resulted in investor money transferring between Asian markets. As happens often, Indian investors are lowering their EPS forecasts for the “out-years”. The “future sky-high growth rates” for Indian companies, to justify high multiples, need to be adjusted from time to time and these high growth rates are pushed out into the “future”.
However, the Indian equity markets (in INR terms) would be among the most promising asset class for investors (medium to long term) looking for exposure to Asia/ International markets. If one already has a position in Indian equities buying the indices and high-quality Indian companies on dips may be a prudent way to build a position.
CONCLUSION:
Being prudent, diversified and having a medium to long-term approach always works well. For most investors risk-reward should matter and be proportionate. If one is taking on additional risk then one should be aware of it and be comfortable with it. At this time, the best thing, for most investors, is not to make outsized, impulsive decisions on either side of the risk spectrum. Being invested in risk assets and maybe adding small positions high quality assets, as appropriate would be a viable strategy. It is important and will be helpful to have more clarity on the upcoming situation over the next couple of quarters. There would be other considerations for high-risk appetite investors or people with very high net worth making speculative decisions with a small percentage of their assets.