Why You're About to See MAJOR Market Volatility

Are we in the calm before the storm? The stock market's rocky start to 2025 might be more than just turbulence. It could be a preview of what's to come. As an investor, the question isn't just where the market is headed, but how prepared are you to navigate the twists and turns of 2025? In this video, I'm going to break down we're seeing all this volatility, what's fueling it, how you can position your portfolio to weather the storm and capitalize on opportunities.

So the market has kicked off 2025 with a really bumpy ride, and unfortunately this could be the new normal. I still believe that we're in a bull market thanks to earnings growth that could continue to lift stocks, but we are likely later in the current cycle. Historically, that means heightened volatility. It means tighter margins for error and increased pressure on investors to make better decisions.

One major source of this volatility, let's talk about rising long-term interest rates. The 10-year treasury yield, it's getting really close to 5%. Now, why is 5% important? Well, that's the level when stocks got really rattled in some recent trading sessions. Over the last few years, when it gets near 5%, stocks don't like it.

Just last week, we saw how good news, it turned into bad news. It was a stronger than expected jobs report. That's what caused the market dip. Now, why was that? After all, strong labor markets, those should be positive data points, but it also reduces the likelihood that our Federal Reserve can cut rates further. Personally, the cutting is over. Now they're modeling for about one to two rate cuts in 2025. I don't believe that'll happen.

What is driving this? So a rebound in that term premium. It essentially is the added compensation that investors are demanding for taking on the risk of holding bonds over that longer period. For over a decade, this premium was suppressed by what everybody today knows as quantitative easing, and we had interest rates near zero, and that's because the government, the Fed, was buying its own paper to drive down those rates. But now it's reverting to more normalized levels. That could continue pushing long-term rates higher, and that's not a good thing when it comes to stock prices continuing their rally.

So why does all this stuff matter for stocks? Well, I can tell you that in periods of high inflation, stocks and bonds, they tend to become positively correlated. Investors, they compare yields on treasuries with the yields on stocks, or the earnings yield, and right now treasuries are actually cheaper than stocks when you adjust for risk. Either stocks need to come down or the price of bonds must rise to bring these assets to a closer balance. In my opinion, stocks will be the first to break. I think they will adjust lower given the backdrop, and that backdrop probably stays in place throughout 2025.

Now, another red flag, it's the market's loss of momentum and breadth. You remember in the latter half of 2024, it seemed like the rally was spreading well beyond our Magnificent 7, the big tech giants, if you will, and so we saw the market broadening. But since December, that trend has reversed. Only 24% of stocks are now trading above their 50-day moving average, and just 29% of the S&P 500 stocks are outperforming the index.

If this narrow leadership continues, investors, let's be real, you're going to be facing a challenging reality. Chasing winners, it's going to feel tempting, but timing the top of any market, it's notoriously difficult. I don't encourage you to do that.

Now, despite these headwinds, there's a potential bright spot, and that's corporate earning. We're just now getting into fourth quarter earnings. That's fourth quarter of 2024. It's underway, and analysts have been forecasting about a 7% rate of growth. Historically, the actual results tend to outperform the estimates. That could mean another double-digit quarter. I'm not sure that I'm optimistic about that, but let's see how it turns out.

If earnings grow as projected in 2025, and a lot of analysts are calling for 11 to 133%, it could help offset some of the downward pressure from those rising bond yields that I talked about. But make no mistake, I'm confident that 2025, it is going to be a tug-of-war between those forces. And again, I believe that the downside risk here is probably more likely to be stocks adjusting lower versus stocks going higher.

So how should you be positioning yourself in this uncertain environment? Here are three strategies that you need to take into consideration.

Number one, diversify your portfolio. Now, I know you hear about this all the time, and everyone says diversify. There are a couple of things that you need to hear specific to diversification. With market leadership concentrated in really a handful of stocks, diversification really becomes a top priority. So consider spreading your investments across sectors or asset classes, even geographic regions. Be sure that you are not investing in highly correlated assets, or you just might suffer the consequences.

And number two, focus on quality. In volatile markets, you want to look for companies with strong balance sheets, consistent cash flows and lower levels of debt. Those kind of companies, they tend to outperform. Look for investments in industries that are resilient to rising rates. Two examples in these conditions might be, say, health care and consumer staples.

And number three, don't chase the herd. Please resist the urge to follow the crowd by overloading on last year's winners. It rarely ends in a good way. Instead, here's what you need to do: focus on long-term fundamentals when you're selecting your positions, and avoid trying to time those market tops or bottoms. That is a futile effort. It's a losing proposition.

The market may be in for a wild ride in 2025, but with the right strategies and mindset, I am sure that you can navigate it with confidence. If you found this video helpful, please give it a thumbs up and share it with anyone who's serious about investing. And don't forget to subscribe to We're Talking Money for more insights to help you build and protect your wealth. Turn on notifications so you never miss a video. Let's tackle 2025 together and make it a year of informed, confident investing. Thanks for watching. I'll see you next time on We're Talking Money.