Stock market concentration and overvaluation … bond market craziness … the yield curve normalizes … are consumers healthy? … the abysmal shape of our federal debt … what does it all mean for investing in 2025? As we kick off 2025, here is where we stand… Over the last two years, investors have stampeded into a handful of beloved tech stocks. The result is a market concentration so imbalanced that just 10 stocks now account for 38% of the entire U.S. market’s capitalization. As you can see below, the last time this occurred was the Great Depression. 
Source: Goldman Sachs, ZeroHedge, Charles-Henry Monchau Gains from these top 10 stocks have driven the lion’s share of the market’s return. In fact, their cumulative performance accounts for 59% of the S&P’s total return since the October 2022 low. Meanwhile, the next 10 stocks account for 11% of the return, and the bottom 480 stocks in the S&P contributed just 30% to the overall return. 
Source: Bloomberg / Kobeissi Letter So, you were either in these tech darlings and enjoyed a monster bull run…or you likely trailed the market over the last two years. Most investors trailed the market. According to JPMorgan from mid-December, the average retail investor was up 9.8% year-to-date while the S&P 500 had exploded 26.6%. Since 2015, that marks the second-weakest retail performance in years when the S&P posted a positive return. 
Source: JPMorgan / The Kobeissi Letter From a valuation perspective (using the price-to-earnings ratio), the S&P 500 now trades at its highest valuation in history barring two other periods: the Dot Com Bubble, and the Covid-QE Bubble. 
Source: David Markin @Marlin_Capital / Bloomberg If we switch to the S&P’s forward year-end price-to-earnings ratio, the S&P trades at its second most expensive valuation since 1999. 
Source: Barchart To be clear, these valuations don’t signal an imminent crash, but they increase the potential for such an outcome. It’s a bit like sitting at a blackjack table in Vegas when you’re holding 17. Could you be dealt a “4” and hit blackjack? Sure. But if you “hit,” requesting another card from the dealer, the odds favor your receiving a card with a greater value than 4, which would mean you “bust.” | Recommended Link | | | | If you have a significant amount of money in the stock market right now – or if you’re sitting on the sidelines waiting to make a move – you DO NOT want to miss my latest research. My goal is to get as many people as I can in front of what’s coming. If you wait until your hand is forced, it will already be too late. You absolutely MUST get on the right side of this thing. Go here now to see my urgent warning. |  | | Over in bond land, we’re in rare air For the first time ever, 100 basis points of interest rate cuts from the Federal Reserve have resulted in an increase in the 10-year Treasury yield of 100 basis points. This has never happened. 
Source: ZeroHedge / Bloomberg When the Fed cuts rates, we tend to see a similar decline in bond yields. The fact that the opposite has occurred tells us that the bond market believes the Fed is making a mistake. Specifically, the bond market fears that the Fed’s loose rate policy is opening the door to a resurgence of inflation. So, traders are selling bonds in anticipation of higher yields to come. Meanwhile, the inverted yield curve has finally become un-inverted after its longest stretch upside down ever To make sure we’re all on the same page, a yield curve is a graphical representation of the yields of all currently available bonds, from short-term to long-term. In normal times, the longer you tie up your money in a bond, the higher the yield you would demand for it. So, you’d expect less yield from a 2-year note and more yield from a 10-year note. Given this, in healthy market conditions, we usually see a “lower left” to “upper right” yield curve. But when economic conditions become murky and investors aren’t sure what’s on the way, the yield curve flattens. And an inverted yield curve has been a highly accurate predictor of an eventual recession. But here’s the kicker… Those recessions tend to arrive about when the yield curve finally un-inverts – which just happened in recent months. Let’s back up to fill in a few details… In the summer of 2022, the 10-2 yield spread inverted…and stayed inverted. By March of last year, it set the record for the longest 10-2 inversion ever. Finally, this past fall, it un-inverted. And as you can see below, it’s now at its highest positive spread since spring 2022 (at 0.33%). 
Source: YCharts.com As noted a moment ago, historically, the danger with an inverted yield curve isn’t at the time of inversion; it’s at the time of normalization. Here’s the research/investment shop Dunham with analysis: When the yield curve steepens because the Fed is cutting rates, it usually signals that the central bank is “behind the curve” and scrambling to catch up as the economy deteriorates. Take a look at the data: Since 1990, every time the 10yr/2yr curve normalized (when the blue line goes above zero), a recession wasn’t far behind (shaded area). 
Figure 1: Dunham Trust & Investment Services / Fed Reserve data So, it’s not the inversion that’s the biggest warning sign - it’s the un-inversion that signals real trouble ahead. To be clear, we’re not predicting a recession. With Trump coming into office, likely bringing deregulation and tax cuts, a recession seems unlikely. If anything, too much gas (and inflation) appears the greater concern. That said, we do need to look directly at this irregularity and factor it into our market positioning. Shifting our analysis to the U.S. consumer… U.S. consumer spending makes up nearly 70% of the GDP. So, the consumer’s health is critical to support our economy, and by extension, our stock market. As we enter 2025, the remarkably resilient U.S. consumer appears to be hanging in there which, we’ll be the first to admit, comes as a surprise after years of suffocating inflation. To be clear, consumers aren’t shopping up a storm. Instead, they’ve become rather tightfisted about what they’re willing to spend money on. But spending has not fallen off a cliff. And sentiment is actually improving. Here’s the consulting group McKinsey: In the fourth quarter of 2024, U.S. consumer optimism reached its highest level since before the COVID-19 pandemic. Positive economic indicators, such as low unemployment rates, steady job growth, and rising wages—as well as a swift outcome in the US election—likely helped fuel this swell of optimism… The data indicate that although consumers are feeling more optimistic about the economy, the increase in confidence is not reflected in their intent to spend. The share of consumers trading down—opting for lower-priced goods, delaying purchases, or taking another action to save money or get more value from a purchase—remained persistently high… The current consumer landscape presents a paradox in which rising optimism coexists with restrained spending. Driving this paradox is a tale of two consumers: “the haves” and “the have nots.” The “haves,” who own assets like real estate and stocks, have generally seen their net worths surge alongside inflation. They’re still out there spending without as much of a slowdown. However, the “have nots” have grown increasingly stretched. And this is where some cracks are forming. As one illustration, we just learned that U.S. credit card defaults jumped to $46 billion in the first 9 months of 2024. That’s the highest rate since 2010. 
Source: FT, Kobeissi Letter Meanwhile, credit card defaults are up 50% year-over-year. And according to Moody’s, the savings rate of the bottom third of U.S. consumers is 0%. Overall, while we’ll keep an eye on the financial health of lower income Americans, we remain cautiously optimistic about the U.S. consumer. Inflation – and by extension, interest rate policy from the Fed – will be a major influence on their spending health this year. | Recommended Link | | | | You have just days left to prepare for a sudden change in the stock market we believe will open the biggest money-making opportunity in our firm’s 20-year history, without any long-term risk exposure. Already, you could have made a 11,340% gain in 46 days on just one of the plays identified by our study, using a system that works with 83% backtested accuracy. Learn more here. |  | | Finally, turning to the government… Perhaps Elon Musk and his DOGE (Department of Government Efficiency) team will usher in a new era of fiscal responsibility, but we doubt it. Instead, our government begins 2025 in abysmal fiscal shape. The U.S. Treasury’s annual interest expense passed $1.117 trillion last year, making it the second-largest government expense on record. 
Source: Bloomberg / Joe Consorti If we extrapolate today’s treasury issuance schedule and assume interest rates remain where they are, interest expense will pass Social Security to become our government’s largest expense – this year. For a different visual on the scope of our government’s hyper-speed acceleration toward bankruptcy, take a look at this next chart. It shows our government deficits in red dating to the 1940s. 
Source: @America / @stat_sherpa Our federal debt now clocks in at $36.3 trillion, making our debt-to-GDP ratio 123%. In other words, for every dollar of productivity our economy creates, we get $1.23 of debt. That’s unsustainable. Now, the pushback is, “It’s not unsustainable, Jeff. The government has spent recklessly for years and yet here we are. Nothing is going to change. We’re not going over some economic cliff anytime soon.” Perhaps. But going over a cliff isn’t the only potential negative outcome. Our federal debt is more a sliding scale of pain rather than a binary “on/off” light switch. Here’s the perspective of Stanley Druckenmiller, arguably one of the greatest investors of all time, who “broke the Bank of England” with George Soros: [The government has] spent and spent and spent, and my new fear now is that spending and the resulting interest rates on the debt that’s been created are going to crowd out some of the innovation that otherwise would have taken place. There’s a name for what Druckenmiller is describing: the “crowding out effect” theory. It suggests that increased government deficit spending, leading to higher interest rates, ultimately requires more taxes. This tax burden demands a reallocation of capital within businesses (and family budgets) – away from research, productivity, and growth – toward the government’s black hole of spending. Now, Trump has said that not only won’t he raise taxes, but that he’ll cut them. But then how will we fund what’s likely to be enormous deficit spending under his administration? More debt (bond issuance) … which, all things equal, will create an upward pressure on bond yields… which is bad for stock valuations… at a time when stock valuations are already near all-time highs. Everyone hopes the economic output will offset debt spending. But we must factor this into our analysis regardless. So, what does all this mean for our portfolios as we enter 2025? If you stand too close to an impressionistic painting at a museum, all you see is a swirl of formless color. Only when you step back does the image come into view. Let’s step back… We have historic overconcentration in a handful of stock winners… near-record-high valuations… Treasury yields surging despite interest rates falling… yield curve movements that, historically, suggest increased odds of a recession… a reasonably strong U.S. consumer despite a marked deterioration of the financial health of lower-income Americans… and a federal debt/spending problem that’s unsustainable. Not exactly pristine conditions for a starter position in the average stock today. That said, we have bullish momentum in stocks… reasonably strong earnings… and the potential for a Trump economic boom thanks to deregulation and tax cuts. Put it altogether, and what is the image we’re looking at? As we see it, it’s a stock market that we want to stay invested in…yet done with a default “defensive” posture. This means being deliberate about position sizes and stop losses… being judicious about which stocks you’re willing to speculate with… and yet taking advantage of “fat pitch” opportunities that come our way. We’re excited to bring you such ideas from our experts Louis Navellier, Eric Fry, and Luke Lango as 2025 unfolds. On that note, before we sign off, put Wednesday, Jan. 8, at 10 a.m. on your calendar Want to increase the odds of placing a winning trade in 2025? Why not look to historical data? Specifically, what if you knew exactly when certain stocks had climbed in past years…down to the specific days? This is the essence of the new Seasonality Tool from our corporate partner TradeSmith. You see, all sorts of companies have predictable seasonal cycles that savvy investors can benefit from. For example, for the past 15 years, Nvidia shot up during a 15-day time span, starting Oct. 24, every single year. There was a 100% hit rate across that period. But Nvidia is hardly the only stock with such a repeatable pattern. Here’s TradeSmith’s CEO, Keith Kaplan: There are plenty more of these seasonality cycles waiting to be found out there, hidden in the data of thousands of different stocks. And my team has developed a new strategy to capitalize on them – built around a system that can track and chart the most optimal seasonality patterns of the year, like our own “Farmer’s Almanac” for the stock market. Keith explains that over their 18-year backtest, these seasonal trades delivered 857% in total growth: more than twice what the S&P delivered over the same period. Even in 2007, the strategy’s worst year, it delivered an annualized return of 37.9%. This coming Wednesday, Jan. 8, at 10 a.m., Keith will be hosting a webinar that dives into more detail on the Seasonality Tool. You’ll also get to try it for yourself, free of charge for a limited time. Click here to reserve your seat and learn more. Coming full circle… It’s not time to throw in the towel on this market, but it is time to treat it with a great deal of respect. As legendary investor Louis Navellier recently said, this is a stock picker’s market. So, focus on your strongest ideas… trim or keep a tight leash on your more speculative plays… and if you haven’t created an investment plan as we detailed in yesterday’s Digest, we urge you to make time to do so. But we’re still in a money-making market, even with December’s wobbles. So, keep trading it higher until your investment plans tells you otherwise. Have a good evening, Jeff Remsburg | 
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