The November 2024 payroll report revealed that 227,000 jobs were created in October. The unemployment rate edged higher to 4.2 percent, but it has now been under 4.5 percent for 37 months since October 2021. That is a heckuva run. The U.S. unemployment rate has fallen to 4.5 percent or lower during several periods since 1948, with some of these durations extending for at least two consecutive years. Notable instances include:
- 1951 to 1953: The unemployment rate remained at or below 4.5 percent for approximately 24 months.
- 1965 to 1970: This period experienced a notably low unemployment rate, at or below 4.5 percent for about 60 months.
- 1997 to 2001: The rate was at or below 4.5 percent for around 48 months.
- 2017 to 2020: The unemployment rate remained at or below 4.5 percent for approximately 36 months until the onset of the COVID-19 pandemic.
Examining the performance of the S&P 500 in the two years following each of these low unemployment periods reveals varied outcomes:
- 1953 to 1955: After the low-unemployment period ending in 1953, the S&P 500 experienced a downturn due to the 1953 recession but began recovering in 1954.
- 1970 to 1972: Post-1970, the S&P 500 saw gains, aligning with economic-recovery efforts.
- 2001 to 2003: Following the low unemployment of the early 2000s, the S&P 500 experienced declines due to the dot-com bubble burst and the 2001 recession.
- 2020 to 2022: After the low unemployment period ending in early 2020, the S&P 500 initially dropped sharply due to the COVID-19 pandemic but rebounded later in the year, continuing its upward trend into 2021 and 2022.
The S&P 500’s return in the first year after those stretches averaged 18.4 percent, including one big down year in 2002 (-22.10 percent) when the bubble in technology stocks was popping.
The average return of the S&P 500 in the second year was 15.3 percent, including one big down year in 2022 (-18.11 percent) when the Federal Reserve aggressively hiked interest rates to fight inflation.
These patterns indicate that while low unemployment often coincides with strong market performance, external factors such as economic recessions or global events can significantly influence market trajectories. The bad news is that those shocks usually come out of nowhere. Still, barring any unforeseen exogenous event, history suggests a good 2025 for the stock market, not a painful one.
For now, the labor market is good, and so is overall economic growth. The Atlanta FedGDPNow model is tracking the U.S. Gross Domestic Product at 3.3 percent for the current quarter.
The Federal Reserve’s next meeting to set monetary policy is December 18. According to the CME FedWatch Tool, they are widely expected to cut rates by one-quarter of a percentage point. I do not think they should cut rates, but it looks like they will. The economy is running too hot, and leaving policy as it is, which is restrictive, makes sense to keep the inflation rate on its downward trajectory.
The November Consumer Price Index (CPI) measure of inflation was released on Wednesday, December 11. The headline year-over-year number came in at 2.7 percent. Regarding tracking inflation, the Fed focuses on Personal Consumption Expenditures (PCE) in getting to its two percent inflation target, not CPI. Still, CPI is a good proxy, and inflation is getting near the Fed’s target, but it is not yet there.
It does not make sense to me that the Fed should cut rates when the labor market and the broader economy are doing so well and while there is still wood to chop to get the inflation rate down.
But it looks like they will. And I expect them to cut two or three more times in 2025. So, while there have been huge down years following long periods of low unemployment, I will not fight the Fed. It seems like they plan to prop up the economy and the stock market for now. The calendar year 2025 could be a party, and 2026 could be a hangover. Good times in the market are often followed by periods of meaningful digestion.
Investor optimism is typically correlated to good times in the market, and investors are feeling rather jolly nowadays. At extremes, the crowd is often wrong when it comes to timing the market. (That is a contrarian take, and I am a contrarian.) Those contrarian indicators are turning bullish, which suggests to me that we might start 2025 with a meaningful five to 15 percent correction, followed by a second wind for the market, with the real problem occurring later.
What effect will an Artificial Intelligence Czar appointment have on AI stocks?
President-elect Donald Trump has announced venture capitalist David Sacks as the White House Artificial Intelligence (AI) and Cryptocurrency Czar. This appointment is a tailwind for investments in both, but I am currently interested in acting on only one.
I am not against Bitcoin and other cryptocurrencies, but I cannot value them. In many ways, Bitcoin is a Veblen good, a luxury product whose demand is directly related to its price. The higher the price, the more people want to buy it. It appears to me that people are not buying Bitcoin because they want a cryptocurrency; they are buying it because they expect a return. Its price is dictated by fear and greed and not any fundamental value.
I am not saying that is a bad or even a new phenomenon. It is the same reason I do not trade gold, buy $250,000 Rolex watches, or buy Mickie Mantle’s rookie baseball card. And I only buy diamonds if someone will wear them and I will get brownie points (because outside of that, a tiny rock is not worth what it costs!). All these things can and have appreciated in value, like Bitcoin and other currencies.
As I said, I am not against cryptocurrencies. Heck, four years ago, I gave each BMM employee $1,000 to buy Bitcoin. But I see it for what it is: a trading and gambling vehicle. With a bit of luck, I like to think that I can identify potential meaningful turning points in the equity markets because I have a sense of trends and an understanding of human psychology when it comes to the markets. However, my skill set for Bitcoin and other cryptocurrencies is the same as everyone else’s—it is straight-up gambling but without the advantage of cutting cards. For sure, Bitcoin holders are on a hot streak, but I’ve got no edge. The best edge for Bitcoin investors has been to take enormous risks and load up on it.
I have no problem with people buying cryptocurrencies so long as they discuss it with their financial advisor, but I also expect it to continue its cycle of being repeatedly cut in half—or more—in price. That is not just my view; the never-sellers will tell you they expect the same, but they will keep holding and expect the good times to last forever. But I do not have the same confidence that the next crash will recover.
It just ain’t my style to hold things that get cut in half. My job is to ensure investors do not run out of money in retirement. I am not against throwing down several thousand of my own dollars on the blackjack table, but it is not my job, interest, or skillset to gamble with other people’s money. Especially when it has been way less risky to gain about 10 percent per year in the stock market for the last couple of decades.
Investing in AI never felt so intelligent
I may not have an edge in timing when the good times will end with cryptocurrencies; however, relatively speaking, I do have an edge on artificial intelligence, not as an investor but as an early adopter who understands the technology and its current and eventual effect on corporations. I have been content with investing in AI in two ways: directly through stock market indices that have significant weightings in the biggest names in AI and indirectly through the increased productivity in the economy affecting corporate growth and profit margins.
Now that technology investor David Sacks has been named the “White House Artificial Intelligence and Cryptocurrency Czar,” however, I am becoming more interested in buying more directly for my personal portfolio and for people who identify as aggressive investors. President-elect Trump wrote in a social media post, “David will focus on making America the clear global leader in both areas.”
I have personally followed Sacks for years in his “All In” podcast (for full disclosure and balance, I also regularly listen to the left-leaning “Pivot” podcast—I fast-forward through both pods when they get off the topic of business and bloviate about politics). Sacks will guide the Trump administration’s policies for artificial intelligence. It is a signal of Trump’s pro-industry stance. Sacks is expected to allow the streamlining of regulations to develop AI models and applications further.
Sacks is the former chief operating officer of PayPal, runs the venture-capital firm Craft Ventures, and launched an AI-powered work-chat app called Glue this year. He has argued for a freer ecosystem for AI to be able to train on everything on the Internet under fair use. And as an avid venture capitalist, Sacks’ appointment signals that startups and venture capital will be a focus for the Trump administration. Large-cap stocks have dominated my portfolio with an emphasis on growth. I am seeking opportunities to widen my exposure to smaller capitalization growth stocks or the equal-weighted Nasdaq 100 and, for aggressive investors, more direct AI exposure.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
