Tom Lee Explains Why Gold & Silver Just Sold Off
Audio Brief
Show transcript
This episode covers the market implications of President-elect Trump’s selection of Kevin Warsh as the next Federal Reserve Chair, featuring insights from Wharton Professor Jeremy Siegel and Fundstrat’s Tom Lee.
There are three key takeaways regarding the Fed transition, market structure, and sector rotation.
First, the appointment of Kevin Warsh is generating what experts call the Warsh Effect. Viewed as a figure of independence rather than political subservience, Warsh’s selection has strengthened confidence in the U.S. dollar. This perceived stability triggered an immediate, sharp sell-off in gold and silver, reversing trends that were previously driven by fears of currency debasement.
Second, Fundstrat’s Tom Lee outlines a three-phase structure for the market in the year ahead. Following a strong start to the year, investors should prepare for a potential mid-year drawdown or correction triggered by policy shifts. However, Lee predicts this volatility will ultimately resolve into a strong rally, potentially pushing the S&P 500 toward 7,700 by year-end.
Third, the market is shifting from concentration to broadening participation. While the Magnificent 7 tech giants are priced for perfection, Professor Siegel points out that the remaining stocks in the S&P 500 trade at reasonable valuations of 18 to 19 times forward earnings. This suggests a long runway for growth in industrials, financials, and small caps as AI adoption spreads from tech creators to the broader economy.
Investors should view current volatility as a mid-cycle adjustment rather than a market top, looking for value outside the mega-cap tech sector.
Episode Overview
- This segment features a discussion between CNBC host Scott Wapner, Wharton Professor Jeremy Siegel, and Fundstrat's Tom Lee regarding the market implications of President-elect Trump's selection of Kevin Warsh as the next Federal Reserve Chair.
- The conversation analyzes the immediate market reactions, specifically the sharp sell-off in gold and silver and the strengthening of the U.S. dollar, interpreting these moves as a response to the perceived stability and independence Warsh brings to the role.
- Tom Lee provides an updated market outlook, predicting a potential short-term drawdown followed by a rally to 7,700 on the S&P 500 by year-end, while Siegel discusses the divergence between the "Magnificent 7" stocks and the broader market.
Key Concepts
- The "Warsh Effect" on Currency and Metals: The appointment of Kevin Warsh is viewed as a stabilizing force. Professor Siegel argues that Warsh is an experienced, independent figure who will not debase the currency merely to suit political whims. This confidence triggered a rally in the U.S. dollar and a simultaneous, sharp sell-off in gold and silver, which had previously been rallying on fears of currency debasement or instability.
- Three-Phase Market Structure: Tom Lee outlines a specific trajectory for the 2024 stock market: a strong start (already achieved), followed by a significant drawdown or correction (potentially triggered by policy shocks or the Fed transition), concluding with a strong rally into year-end. This framework suggests that current volatility is a natural part of a mid-cycle adjustment rather than a market top.
- Market Broadening vs. Concentration: Both guests discuss the shift from a market driven solely by the "Magnificent 7" tech giants to a broader rally. Siegel notes that non-tech stocks are trading at reasonable valuations (18-19x forward earnings), making them attractive. Lee adds that strength in industrials, financials, and small caps indicates a healthy, broadening economy, even if the headline tech stocks experience a pause or divergence.
- The AI Valuation Gap: Siegel highlights a critical distinction in the AI narrative: while the "Mag 7" stocks are priced for perfection, the vast majority (80-85%) of other companies have yet to fully implement or benefit from AI. This suggests a long runway for productivity gains and profit increases in the broader S&P 500 as AI adoption spreads beyond the tech creators to the tech users.
Quotes
- At 0:28 - "Certainly he [Warsh] likes a lot of Trump's policy, but he's not going to be a lackey. He's not going to be a toady... I think he picked the most responsible, qualified man here, and I think that's a very positive for Wall Street and and the dollar." - explaining why the market reacted positively to the Fed Chair pick, viewing it as a move toward stability rather than political subservience.
- At 2:08 - "Those were parabolic moves... If silver and gold's advance is taking a pause, this is a good thing for other risk assets... that was a juggernaut trade that I think in many ways was like a vortex sucking risk appetite from everything else into those two trades." - clarifying that the crash in metals isn't necessarily a bearish signal for the economy, but rather a healthy rotation of capital back into other assets.
- At 5:08 - "I wouldn't be surprised if the S&P only did 5 to 10% this year, but the non-Mag 7, the rest, did 10 to 15 or even more... The non-Mag 7 are still selling at 18-19 forward earnings... that's extremely reasonable." - teaching that investors should look beyond the headline index numbers to find value in the broader market, which is priced more attractively than the tech giants.
Takeaways
- Treat sharp pullbacks in commodities like gold and silver as a potential normalization of "parabolic" trends rather than an immediate signal of economic failure; use these corrections to assess if capital is rotating into broader equities.
- Prepare for potential volatility or a "drawdown" period in the near term without panic, viewing it as the second phase of a predictable market cycle that may offer buying opportunities before a year-end rally.
- Evaluate portfolio exposure to ensure it isn't solely concentrated in mega-cap tech; consider diversifying into industrials, financials, and small caps, which are currently showing signs of a "broadening" market rally and trading at more reasonable valuations.
