American Exceptionalism: 2025 Soft Landing

I want to apologize for missing last week and giving you some market content.  We had a 50 year historic snow event here in Houston mid-week which kept us from filming, as well as postponing OHFG’s first half market summit from Thursday the 24^th to last night, Thursday the 31^st.  There’s a link in the description below to the portion of last night’s event we livestreamed over YouTube for clients and one-line guests. We covered a lot of ground over the hour and a half from interesting stock, bond, and currency market topics to ongoing economic events and of course a few of the things going on in Washington DC.

Before we get into this weeks topic, I want to briefly cover a term that has been thrown around in the financial markets now for about 3 months, the term “American Exceptionalism”.  It’s largely being used to try to describe to investors why American stock markets have outperformed most of the worlds the last decade plus.  Why a diversified portfolio of global stocks has lagged the S&P500 performance for not just last year, but for most of the last few decades, since the great Financial Crisis.  Many are siting technology stocks and innovation as the reason for US exceptionalism.  To me the answer is easy, investment capital likes capitalistic leaning countries and their economies regardless of how flawed they might be over, socialist, communist and dictator-controlled countries.  They like markets with the rule of law over markets where the government elected officials or worse yet dictators control their economies.  At the end of the day, money goes where it is treated best and where there is less friction, be it government interference and political decisions, or higher taxes, and regulations.  At the end of the day, here in the US, your money is green, not colored blue or red.

So quickly, this weeks investment content as our team has been busy listening to and digesting the waterfall of earnings releases from many of the largest most well know companies in the S&P500.  Please remember though this piece was written 5 days ago, so some things might have changed short term since this writing.

First off, as they have for over 18 months, the economy and stock markets remain on a “soft landing path”.  At OHFG, we’ve discussed the Greenspan induced soft landing of 1995-97 almost every month for a year now comparing it to Jay Powells soft landing od 2024+.  Here’s the updated overlay of the S&P500 then and now.

As we previously mentioned, soft landings do NOT guarantee no volatility, and straight lines up line the 2017 move higher under Trump 1.0.  The markets saw a down move of almost -4.5% peak to trough to start 1996, and our current S&P500 saw the nearly exact same % decline from its Dec 6^th peak to mid-January lows, right near -4.5%.

For those of you wanting to compare the S&P500 back leading into Trump 1.0 in 2016, then 2017, the first year under his first term, here’s that overlay.  2016/2017 versus 2024/205YTD.

While long term investors would welcome a repeat of 2017 in 2025, as 2017 was a year of historic low volatility and almost straight lines higher in the S&P, particularly after the 1q17, our team is not currently expecting that “great” outcome. Recall from out previous video on 3 paths for 2025, a 2017 like great outcome would equate to S&P500 7000+ by year end.

So investors, recent economic hard data releases have been coming in a bit short of economist expectations and the economic surprise index has headed back down toward positive +10.  That’s still good growth but slowing.  Much as inflation data in the US tends to be highly seasonal with the year beginning with higher inflation prints and then slowing throughout time, it is quite normal for this cumulative economic surprise data series to come under economist forecasts to start the year.

One can see that the economy is slowing in the real-time real-interest rate chart.  Here’s the chart of the 2-year real interest rate.

Down and to the right is “ok”, but it means slowing at the pace of growing. So, a dec-acceleration in growth rate.  Growing but slowing, I like to say. All those math folks would say it’s decelerating.

And my final comment this week, yes those who have been following us for the last 2 months, it’s on the US dollar.  The DXY Index.  The stronger dollar in the 2h2024 weighed somewhat on investor sentiment.  Largely those investing in foreign markets and those investing in slower growth multinational American based companies. Along with our team, I can count on one hand the number of economists and strategists who are anticipating a weaker dollar in 2025.

A weaker dollar?  Why would investors want a weaker dollar Almost every TV financial evangelist was projecting a higher dollar for 2025? Don’t we all want a stronger dollar if there is truly US exceptionalism?  Isn’t a stronger dollar good for America?

The answer is yes and no.  Yes, a stronger dollar is good for America and Americans.  It shows we retain our position as the world’s reserve currency, even if that status is weakening in favor of gold our digital currencies. It’s good for US consumers and bad for foreign consumers as its inflationary for them and positive for USA consumers if you’re buying goods produced elsewhere or traveling abroad.

However, a stronger dollar is a definite headwind for the overall S&P 500 as much of the S&P 500 is comprised of USA companies operating in a multinational arena.  The likes of JNJ, KO PEP, CAT, and even technology companies based here sell anywhere from 25-50% of their goods and services outside the states. For these multinational companies, a stronger dollar is a headwind to both revenue and earnings growth as it depresses both numbers when their foreign sales are translated and converted back into USA dollars.

Look no further than the previous earnings reports from both Oracle and Adobe in the software technology world warning of $100; s of millions of dollars in headwinds to their recent 4q24 and future 1h25 revenue and earnings due to the strong US dollar in 2h24.

However. I stand by this chart that we’ve showed subscribers for over 2 months.  The US dollar under Trump 1.0 versus the current path.

If that doesn’t look like it’s almost tracing out the near exact same pattern to the week?  I don’t know what does. In 2017 under Trump 1.0 the DXY index looks like it peaked on the first Monday in January.  So far, in 2025, the DXY looks to have peaked on the 2^nd Monday in January.  Investors, a weaker dollar, would go a long way to helping S&P 500 earnings estimates look to low in the 2h of 2025, not to high as they usually start the year with too much optimism.  Remember, these macro factors take a long time to flow through companies’ P/L statements but the markets and the stocks that are most affected will move in advance of these reports.

Finally, one of my favorite topics for 2025, China.  The US relationship with China from both a competitor and adversary position have been widely discussed for the better part of 8-10 years.  Over the last 2 years, many have said China is univestable.  This sounds to me a lot like the “univestable” call that many TV personalities made about “dirty energy” companies when Joe Biden was elected President in 2020. Of course this sector turned out to be one of the top assets over the first 2 years of Bidens term.

Listen I do not like a large number of things I hear about China’s economy, as well as their political and social positions.  Right now, Chinas domestic consumption economy is pretty bad and the stimulation programs that have been announced to date don’t seem to be working yet.  However, China is still one of the top economies and largest markets in the world for products and services, and whether you agree with their political policies or not, global stock markets and investors would be best served if they put in place some programs to stimulate consumption by their population in 2025/26.

Maybe they are waiting to see President Trumps hand and gameplan, I don’t know, what I do know is that their markets were one of the best performing asset classes under Trump 1.0 in 2017 and that was with the Trump Tariffs and geopolitical tensions.  I would venture to guess that the best known publicly traded Chinese company and stock is Alibaba, founded by Jack Ma. I’m going to leave you with the overlay of BABA under Trump 1.0 and now.

Will history repeat?  Will Baba and other Chinese heavy names make investors big money in 2025? I don’t know.  Instead of “US exceptionalism” and narrow global markets, will the bull market in equities spread beyond the S&P 500, the German DAX, yes the German markets are also at new all-time highs, and Argentina, yes you heard that right, the Argentinian stock market was one of the best in the world the last year, to include a surprising to most invesotrs gargantuan rally in Chinese and Chinese leveraged stocks in 2025 much like 2017?  Of course, no one knows for sure, but I would Not bet against it.

As we can see by the prior soft landing under Greenspan, historically speaking higher volatility out of the gate like we had the first two weeks in January does not mean that the bull market in US equities is over or that 2025 cannot be the third year in a row of healthy investor gains in US stocks.

We hope that you joined us last night for our first half market outlook. Once again here’s the link for the replay and feel free to pass it on to anyone who might find it educational.  Until next week, when the firehose of earnings reports and conference calls starts to slow and the investment team here at OHFG can catch its breath, and stock buybacks begin to ramp again in earnest, have a blessed weekend.

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