2025 will provide a reality check for markets - and these assets could benefit the most

Summary

In this insightful interview, Harry Cvin, Director at Longview Economics, shares his outlook for 2025 and beyond. He highlights concerns about market complacency and predicts a potential equity market 'crack' due to fading investor participation. While inflation risks are overblown, he sees a shift in leadership from tech stocks to more cyclical and value-oriented investments. Cvin also discusses the implications of U.S. tariffs, a possible recession in Germany, and Europe's recovery driven by stimulus and consumption. With a positive outlook on gold and treasuries, he emphasizes the importance of uncomfortable investment decisions for long-term success.

Takeaways

• 😀 **Complacency in Equity Markets**: Strong bullish sentiment heading into 2025 could be overconfident, with the potential for a market correction due to fading investor participation and expensive valuations in growth stocks.
• 😀 **Investor Participation Declining**: Falling trading volumes, especially in the ‘Magnificent Seven’ stocks, suggest diminishing investor interest, which often precedes market corrections.
• 😀 **Inflation Risks Overblown**: While inflation remains a concern, Harry believes inflation is likely to continue decreasing, especially in the service sector, driven by softening wage growth and a weak labor market.
• 😀 **Tariff Impact on Inflation**: Harry suggests that tariffs, including those potentially reinstated by Trump, are unlikely to have a significant long-term inflationary impact, with the effect being more of a short-term blip.
• 😀 **Potential Recession in Europe**: Germany faces significant economic challenges, including rising labor costs and potential recession, but peripheral Eurozone countries like Spain and Portugal are positioned for stronger growth due to past economic adjustments.
• 😀 **Sector Rotation Expected**: A shift from large-cap growth stocks to mid and small-cap stocks is expected, as the economic environment moves away from tech-driven leadership toward cyclical, value-oriented sectors.
• 😀 **US Recession Not the Base Case**: While there are challenges in the US, particularly in labor markets, Harry doesn't foresee a full-blown recession, and instead expects weaker labor conditions and inflation to push for looser monetary policies.
• 😀 **Long-Duration Bonds Are a Safe Bet**: Given weak economic indicators and the expectation of further interest rate cuts, Harry recommends long-duration bonds as a favorable investment for the near term.
• 😀 **Gold Outlook Positive**: With a weaker dollar expected, gold is seen as a strong investment pick, benefiting from the gold-dollar correlation, with Harry emphasizing that the yellow metal has been oversold recently.
• 😀 **Oil Market Dynamics**: Despite bearish sentiment, oil prices could see a modest rally as inventory levels stabilize, though global supply-demand dynamics and concerns over Chinese economic growth may cap any significant upside.

Q & A

What is Harry Cvin's primary concern regarding equity markets as we approach 2025?

Harry Cvin's primary concern is the complacency in equity markets. He notes that the strong bullish sentiment going into 2025 may lead to a market downturn, as overconfidence and a lack of investor participation, evident from declining trading volumes, can often signal a potential market 'crack'.

How does Harry Cvin assess the current state of inflation in the US?

Harry believes that inflation concerns are overstated, with inflation trends in the US already showing signs of moderating. He highlights that service-sector inflation is trending down, wage growth is decelerating, and the labor market is weak, all contributing to a likely disinflationary environment in the US.

What impact does Harry Cvin expect Trump's proposed tariffs to have on inflation and the economy?

Harry suggests that the tariffs have already been priced in by the market. He estimates that a 15% tariff on all imports would cause a one-off increase in the US Consumer Price Index (CPI) by about 1.3%, primarily affecting durable goods, which are currently deflationary. He doesn't expect a long-term inflationary effect, especially with service-sector inflation declining.

What is Harry's view on the risk of a US recession in 2025?

Harry does not see a US recession as his base case. While there are risks, especially with weak labor markets and inflation trends, he believes that the US economy is not necessarily headed for a recession in the near term.

Which regions in Europe does Harry Cvin consider most at risk, and why?

Harry identifies Germany and France as facing significant challenges. He points to Germany’s rising unit labor costs, which have resulted in a loss of competitiveness and a potential recession. France, while struggling politically, doesn't seem as vulnerable to market impacts, as liquidity and monetary policy are key drivers for equity markets.

How does Harry Cvin view the economic outlook for Southern Europe, particularly the PIGS countries?

Harry is more optimistic about Southern Europe, including Portugal, Ireland, Italy, Greece, and Spain (the 'PIGS'). He believes these countries, which have undergone significant economic adjustments and deleveraging over the last 15 years, are now in a stronger position and will benefit from ECB stimulus, leading to better earnings growth and economic performance.

What is the key driver for Harry Cvin’s positive outlook on small and mid-cap stocks in the US?

Harry’s positive outlook on small and mid-cap stocks stems from their undervaluation and potential for recovery. These stocks have underperformed for several years due to economic slowdowns, rate hikes, and the pandemic. With the market possibly rotating into more cyclically sensitive sectors, small and mid-caps look attractive due to their cheaper valuations and potential for better earnings growth.

How does Harry Cvin explain the shift in market leadership from tech stocks to cyclically sensitive sectors?

Harry attributes the potential shift to a change in the macroeconomic environment, where global central banks are moving from tightening to loosening monetary policy. This shift will likely benefit cyclical stocks, which have underperformed in recent years, including small and mid-cap stocks, and value stocks. A rotation into these sectors is expected as a response to looser monetary policy.

What does Harry Cvin believe about the future of gold and oil in 2025?

Harry is bullish on both gold and oil. He expects gold to benefit from a weaker dollar and anticipates that gold's correlation with the dollar will continue to support its price. While he expects a moderate rally in oil, he notes that oil's upside will be limited by flat global oil inventories, with a bearish sentiment currently around the commodity.

What commodity does Harry Cvin express bearishness toward, and why?

Harry is bearish on commodities sensitive to China, particularly those tied to the construction boom. He notes that China’s economic slowdown, caused by the deflation of its asset price bubble, will reduce demand for commodities such as steel and copper, leading to long-term pressure on these markets.