Will 2025 See A Big Correction In Stocks? | David Hay & Jeff Dicks

After runs like the markets has had, the following year often sees a 20%+ drop

It's certainly an interesting time in the markets.

The world's major central banks have returned to cutting interest rates. Yet bond yields are rising on the long end.

Meanwhile, ‘risk on’ assets are in rally mode. Stocks are back at all-time highs.

Yet so is gold, the grand-daddy of ‘risk off’ assets.

To make sense of all of this, we're fortunate to speak today with capital managers David Hay and Jeff Dick of Evergreen Gavekal. David is its Chief Investment Officer & Principal and Jeff is a Managing Director and Partner there.

In this chart-rich discussion, they flag a sobering statistic about 2025’s prospects: after big runs like the stock market has seen this year, the following year often experiences a negative return averaging over -20%.

For the details, click here or on the video below:

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Adam’s Notes: David Hay & Jeff Dicks (recorded 10.21.24)

EXECUTIVE SUMMARY:

• Evergreen Gavekal characterizes the economic environment as leaning toward a “no landing” or “soft landing” scenario. Key indicators include the ISM Services PMI at 54.9, with new orders at a 19-month high, signaling continued expansion in the services sector, which makes up over three-quarters of U.S. GDP. Other indicators, such as record-high retail sales and net worth, support the view that economic activity remains strong despite broader recessionary fears.

• The U.S. is operating at a 6.5% deficit-to-GDP ratio, an unusually high level outside of a recession. Recent government outlays have surged by 35% over the past quarter, injecting stimulus that’s keeping the economy buoyant. While this spending has provided short-term economic stability, Evergreen cautions that such high deficits are unsustainable long-term and could lead to inflationary pressures and bond market disruptions if left unchecked.

• Corporate credit spreads remain unusually tight, particularly in investment-grade bonds, indicating low market stress. However, there’s a distinct bifurcation within the high-yield bond market. Lower-quality segments, like triple-C-rated bonds, are yielding around 11.8%, compared to the 3% spread seen in more stable high-yield bonds. This disparity reflects heightened risk for weaker borrowers, especially in potential downturns, and could foreshadow