JOLTs, Apple Intelligence, Tariffs, Catch-Up Contributions, Merger and Acquisition Deals, Drones, ETFs, Consumer Debt & Stock Symbols

The job report was good, but why is that bad?

Before we go into why the good report was bad, let’s talk about some of the data. The expected number of payrolls was 155,000, which came in well above that at 256,000 jobs for the month of December and also increased from November when it was 212,000 jobs. This high increase in payrolls caused unemployment to drop to 4.1% and came along with an increase in average hourly earnings of 0.3% for December. Over the last 12 months average hourly earnings have increased 3.9%, which is a decent number, but just under the expected growth in average hourly earnings.

Job Growth was seen in healthcare with an increase of 46,0000 jobs. That was followed by leisure and hospitality which saw an increase of 43,000 jobs and government jobs, which includes Federal, state and local jobs were up 33,000. Because it was a holiday season there was an increase in retail jobs of 43,000 after the loss of 29,000 jobs in November. There are always revisions to the previous two months, but there was not much change here as October saw an increase of 7000 jobs and the November report was actually cut by 15,000 jobs which produced a total decline of only 8000 jobs for the past two months.

Because the job report was so good compared to expectations, this put fear in the stock market and bond market that there may not be any interest rate cuts until the fall of this year. This also led to concerns that we could maybe see more inflation going forward. Maybe that makes sense for traders to sell, but investors should want a strong economy. That means your businesses will sell more goods and services and increase their profits. Interest sensitive equities like real estate were hit pretty hard with a good job report and banks also had a little trouble digesting the good report and declined as well.

For investors I think this is a good report because it shows strength in the economy and based on the recent job openings from the JOLTS report, I think 2025 will be a good investment year for investors in fairly valued equities, but you will see a lot of scary volatility, which smart investors should use as a buying opportunity. 

Job openings report sends the market lower!

The JOLTs report, which stands for Job Openings and Labor Turnover Survey showed an impressive increase in job openings in the month of November to 8.096 million. This easily topped the estimate of 7.65 million and October’s reading of 7.839 million, which was revised upward from the initial number of 7.744 million. While this points to a labor market that has continued to remain strong, there were some indications of softening.

On a year-over-year basis, job openings fell by 833,000 and the quits rate moved from 2.1% in October to 1.9% in November. This indicates workers are less confident in finding another job if they quit their current one, which should put less pressure on wage inflation.

The resiliency in the labor market is concerning for those that are looking for more rate cuts as a strong labor market allows the Fed to be patient and wait for inflation to cool further. The news paired with a December US services sector report that showed faster-than-expected growth and higher prices paid caused the ten-year Treasury to climb to around 4.7%. This spooked many speculative areas of the market including technology and cryptocurrencies. 

Apple Intelligence, maybe not so intelligent?

Apple’s AI system, also known as Apple Intelligence, has been having some issues and has been spreading fake news. One of the AI features for iPhones summarizes users’ notifications, but some of the news stories it has been summarizing has been completely inaccurate. It recently attempted to summarize a BBC News notification that falsely claimed British darts player Luke Littler had won the championship. Unfortunately, this came a day before the actual tournament’s final, which Littler did end up winning.

Maybe Apple Intelligence is so good it can predict the future? This was not the only false story though as Apple Intelligence has now wrongly claimed that Tennis star Rafael Nadal had come out as gay, Luigi Mangione, the man arrested following the murder of UnitedHealthcare CEO Brian Thompson, had shot himself, and that Israeli Prime Minister Benjamin Netanyahu had been arrested. The BBC in particular has been trying for a month to get Apple to fix the problem. In response, Apple apparently told the BBC it’s working on an update that would add clarification that shows when Apple Intelligence is responsible for the text displayed in the notifications. This compares to the current situation where generated news notifications show up as coming directly from the source.

To me this doesn’t sound like a good solution as it doesn’t solve the problem and most people likely wouldn’t read past the headline anyway. This could still make the news organizations look bad, which I’m sure they are trying to avoid. Personally, I’m still not seeing the need to upgrade to the new iPhone, especially if these new AI features don’t provide any value. From an investment standpoint, as you likely know we still believe Apple is extremely expensive trading at nearly 30x future earnings and would not recommend the stock at this time. 

The tariffs are coming, who could get hurt?

The retail industry will take a big hit on profits. It is estimated that about 23% of durable consumer goods like refrigerators, washers and dryers are connected to imported goods. About 19% of non-durable goods such as diapers, clothing, shoes and towels have some sort of dependency on imported products. These could be slightly higher because the only data available was from the Federal Reserve Bank of San Francisco that came out in a 2019 study.

You may think that technology and the Mag Seven will be immune from the hit to profits, but even they could face problems. Nvidia has a 76% gross margin so they should be able to absorb most, if not all of any tariffs that come their way. Apple has half the gross profit margin of Nvidia at 37% and most of their products are built in China, which could be a huge dilemma for Apple. It is no guarantee but last time around the CEO of Apple, Tim Cook, was able to get an exemption on their products.

Will that happen in 2025? That’s the big question. If they don’t get the exemption, their stock could take a massive hit that could be more than Apple investors have seen in a while. If you’re an Apple investor, you may want to use the sophisticated investing technique of crossing your fingers and anything else you’re able to cross as well and hope for the best. With the other Mag Seven such as Microsoft, Alphabet, Amazon and Meta, their products are safe but keep in mind that combined they spent roughly $200 billion in capital expenditures in the most recent quarter and about 60% was on imported equipment.

The other industry that could take a big hit would be carmakers, such as Ford, General Motors and Stellantis and we could see hits to the operating profits anywhere from 20 to 30%. The big fear here is the estimate is between 50 to 70% of parts for the popular cars sold in the U.S. come from Canada or Mexico. Experts estimate that the consumers will see about a 6% increase in the price of new cars sold here in the US. I can’t even imagine what the increase on the price of a car will be if it’s a full import like a Porsche, Maserati or Ferrari.

The good news is that the economy in the US is far stronger than Europe, China and Mexico, so we can weather the storm and be in a better negotiating position than those countries. With that said, I do believe we will go through some pain before things get better. I also believe if you have equities with high valuations in your portfolio that are affected by the tariffs, they could take a much larger hit than your low valuation companies that pay dividends.

Changes to Catch-Up Contributions

Every year the contribution limits for retirement accounts increase. This year is a little different because one of the provisions from the Secure Act 2.0 is now active. If you are under the age of 50, your contribution limit for an employer sponsored retirement plan like a 401(k) is now $23,500, an increase of $500 from 2024. If you will be 50 or older by the end of the year, you may make an additional catch-up contribution of $7,500 which means your total contribution limit is now $31,000.

However, starting in 2025 thanks to the Secure Act 2.0, if you are between the ages of 60 and 63, you may make a catch-up contribution of $11,250 rather than $7,500, meaning your total contribution limit is $34,750. This age range is based on how old you will be at the end of the year, so if you are turning 60 this year, you are eligible to contribute the entire $34,750. However, if you are currently 63 but will be turning 64 this year, you may only contribute $31,000.

If you are wanting to max out your retirement plan, make any necessary adjustments to your payroll contributions now so you don’t have to scramble at the end of the year. This addition catch-up contribution was implemented to help older workers prepare for retirement, but I don’t see how this will make much of a difference for anyone. It increases the contribution limit by $3,750 for 4 years, which is a total of $15,000. An extra $15,000 is not going to make or break anyone’s retirement, especially considering we already the option of funding non-retirement investment accounts after maxing out retirement accounts.

Will there be big merger and acquisition deals in 2025?

The table appears to be set for some big deals in 2025 with lighter regulations, a projection of two interest rate cuts, and a stock market that appears unstoppable. Incoming FTC chairman Andrew Ferguson is expected to make many changes from outgoing FTC chair, Lina Khan. When big companies see their stock rise in value, they many times use it as a currency to buy out other companies so they can increase their sales and earnings.

Private equity firms can also play a role in mergers and acquisitions in 2025 as they sit on roughly $2.5 trillion in cash and hold some investments that could be sold to generate more cash to do more deals. The possibility of tariffs in 2025 is a double edge sword. It could encourage foreign companies to acquire US businesses as a way to get around the tariffs. On the other side, it could hurt US companies profits by absorbing more of the tariffs rather than passing it along to consumers. That would obviously reduce their cash flow and perhaps reduce the extra cash they hold on their balance sheets. This could cause CEOs to be a little more cautious on spending. My opinion, I think we will see some big deals or at least the hint of some big deals. With that said I do believe there will be a lot more volatility in 2025 than investors have become used to.

The drones are coming!

It sounds futuristic, but in the very near future we could be looking up in the sky and seeing drones zooming back-and-forth like a scene from the old cartoon the Jetsons. As of today, roughly 14,000 deliveries per day are happening globally delivering $250 million of goods. According to PwC, 10 years from now there will be 800 million deliveries a year transporting $65 billion of goods. Currently there is more drone activity in cities like Dallas-Fort Worth, Salt Lake City and Phoenix.

A big leader in the drone industry is a private company called Zipline, which talks about delivering favorite items like rotisserie chickens, ice cream and beverages. The company says their drones can carry up to 4 pounds with a delivery range of about 15 miles from the store. They currently fly as high as 300 feet in the air at 65 miles an hour. I can’t imagine this, but they say in the future orders will be lowered by a tether from 300 feet in the air. Don’t think about a person with a joystick driving drones, they’ll be controlled by software and able to navigate through all kinds of weather, dodging wires, trees, hills, and buildings and still be able to land a package on a target the size of a dinner table. The company is currently valued at $4.2 billion.

Could Amazon, Walmart or maybe a Federal Express or UPS acquire the company as this could be the future of delivery? Drones are currently not regulated by the state or local municipalities, but instead fly under the radar of the FAA, which stands for the Federal Aviation Administration. This could change in the future, especially in high regulated states who see a chance to increase their regulation fee income. Along with new technology comes new acronyms. For the drone industry it is BVLOS, which stands for beyond the visual line of sight.

I think it’s a possibility looking forward that investor enthusiasm could perhaps shift from the excitement in AI to other exciting areas like the drone industry, but at our firm Wilsey Asset Management we will not be investing in any drone companies because we are a conservative value firm. We may invest in companies that could benefit from this growing industry, but not the drone company used directly. The future is changing and while exciting, it can also be scary!

The growth in ETFs continues, is that a good thing?

At the end of November, ETFs, which stands for exchange traded funds, hit an all-time high of $11 trillion in total assets. The growth continues and people using ETFs climbed 30% in the first 11 months of 2024. By the way, Bitcoin ETFs have reach $100 billion, which is still a small percent of overall ETFs, but that’s a whole different story. ETFs have now been available for over 30 years with the first one created in 1993. Many became popular as an alternative to the higher fee, actively managed mutual funds, which currently have an average annual fee of 1.02%, above the average ETF fee of 0.63%.

The other advantage of an ETF is you can buy or sell during the day, unlike a mutual fund which you buy at the net asset value at the close of business each trading day. I do believe the growth in ETFs will continue going forward, unfortunately I think some investors will mistake them for a better investment than an actively manage mutual fund, which could be a mistake. A good mutual fund with a well-designed philosophy for producing good returns over the long-term I believe is better than many ETFs.

Don’t get me wrong, mutual funds have their down sides which is why we don’t use them in managing our nearly $700 million in assets for clients, but if given the choice between mutual funds or ETFs, I would likely take the actively managed mutual fund from a sound investment manager. Investors should understand the differences between using a mutual fund, an ETF or a managed portfolio like we produce for our clients.

Is there more to the story when looking at consumer debt?

You may see some news media organizations trying to scare you with how weak the consumer is based on consumer credit card debt write offs. In a recent report it was released that for the first nine months of 2024, lenders had to write off $46 billion of consumer credit card debt, which was the highest since the year 2010. At first glance, that does sound scary because $46 billion is a high number and it was the highest write off in 14 years. But one thing the media never does for you is give you the whole story.

What the reporter or writer should do is look back 14 years to see what the total amount of consumer credit card debt was and how much it is today. On a percentage basis, it is likely much lower, but the $46 billion number by itself sounds scary. The other important factor we continue to discuss is when we talk about consumer debt, it should be compared against what consumers have in assets or what the income levels look like. In other words, if over the last 14 years the US consumer has increased their assets by 100% and their debt by only 50%, they now have a stronger balance sheet and are in a better financial situation. But I guess if the news media gave all the facts, they would not have a story worth reporting that would rattle your emotions! 

There is more behind stock symbols than just the letters

It is easy to invest in stocks and just simply look at the symbol to complete a trade. Unfortunately, there are times when investors don’t take their time during the trade and either enter the wrong symbol or don’t understand what the symbol is. Both of these can cost you hundreds if not thousands of dollars depending on how much you’re investing and what you’re investing in. Putting in the wrong symbol can happen for two reasons.

First, you just didn’t know what the real symbol was for the company you wanted to invest in because you didn’t spend enough time on your research. Second, what is known as a fat finger is where you accidentally hit the wrong key. These two things are easy to correct by simply slowing down what you’re doing. Another problem is not understanding what the symbol means as it is more than just a group of letters. The last letter can have meaning to it that you need to understand. If you see the letter A in the fifth position on a NASDAQ created security, that means there are other classes of shares such as class A, class B class C etc. The class A shares could mean that the founding family or investors still have major control over the company with super voting shares and you could be buying shares that have no voting power.

If you see the letter D at the end of the symbol, don’t disregard it as it designates that this is a new issue and there has been a recent corporate restructure. Eventually, the D is dropped from the symbol. The letter Q at the end of the symbol does not stand for quality, it actually means that the company is in bankruptcy. The NASDAQ has now switched over to using a financial status indicator to try to make it more clear for people to understand that you are investing in a bankrupt company. If you are investing in a non-US company trading on US financial markets, the symbol Y is used to designate bankruptcy and the letter T may indicate that the company also has either rights or warrants on the stock. This may have no current effect on the stock and earnings, but if these rights or warrants turn into shares of stock, this will dilute the earnings of the company which would then increase the price/earnings ratio, known as the PE.

I know with investing sometimes emotions can run high, but be careful when putting in that stock symbol as you may be investing in something that may have consequences you are not aware of. There are other letters and symbols that could be used as well and if something looks unfamiliar to you, be sure to understand what that symbol means before investing.