As a multi-asset portfolio builder, what are your biggest takeaways from the election results and what you’ve heard as it relates to potential policy?
Prior to the election, there was some concern and apprehension surrounding the uncertainty of the outcome. How long would we have to wait for the results? Would there be some contention? In the end, the outcome of the election was determined quickly and decisively, and this really helped markets. Markets were drawn to the pro- business regime of the incoming administration. Uncertainty about the tax code, which was a big question mark for investors coming into the election, should be cleared as we expect the tax rates to be extended. Deregulation and greater energy production also gave markets a boost.
How do you see the recent threats of tariffs impacting the markets, inflation, and currency dynamics?
Tariffs and trade policy was one negative wild card hanging over the election outcome. We’ll have to understand whether tariffs are a negotiating tactic or a real sticking point for the administration. Next, you have to consider whether they will be broad-based or targeted. Broad-based tariffs could result in widespread implications for markets, while targeted tariffs will impact markets and inflation differently.
This is the second time around for this administration. In the first term, we actually saw that the tariffs were not necessarily inflationary, which contradicts what’s been built out in the popular press. Just how serious these tariffs will be and what the potential global impacts will be are things that we’ll be monitoring over the coming months and years. I think the one thing you can point to with a high degree of certainty is tariffs will be a positive for the U.S. dollar.
The S&P 500 was up 26% in 2023, and it’s up 27% so far this year; where do stocks go from here?
When you look back to the end of 2022, the S&P 500 is up about 75% when you include dividends. So, it’s been a very phenomenal bull market. Where do we go from here? I think we’re seeing a preview of it. Recession risks have certainly diminished as we’ve moved through 2024, but since the election, we’ve seen markets broaden out. Small caps have done better. Other areas of the market that had been left behind over the last couple of years have also started to pick up. We continue to think the stock market is a good place to be in 2025, but investors should pay attention to valuations. We like areas that do not have considerable valuation premiums. We also like select areas down the market cap spectrum and away from those mega cap stocks that carried the market over the last couple of years. Further, I think it will become much more of a stock picker’s market, where you have to be active and focus on the risks you are taking.
Within fixed income, credit spreads remain tight, but recession risks have dropped. Where are you finding opportunities within the fixed income market?
Within bonds, credit spreads are tight, so corporate bonds may be suffering from the same valuation problem as stocks. But when you look at the absolute yields on bonds, we still see a great opportunity, even in a broad-based aggregate benchmark. You can still get 4.5% to 5% on a broad bond portfolio without taking much risk. So, relative to some areas of the stock market, this does look attractive to us, especially considering where yields were three years ago—near zero.
Any final thoughts on asset allocation as we close out the year?
As we enter 2025 with a bold, optimistic sentiment, there are certainly some cautionary signs. That could mean we see turbulence in the market, but overall, we still think 2025 will be a positive year for stocks. The bigger deal for us is on the interest rate side. The market still expects sizable interest rate cuts, and if the economy continues to chug along, it may be difficult for the Fed to meet the market’s expectations. It will be up to the labor market to guide the Fed’s policy. We don’t think the Fed will cut interest rates to the extent the market is pricing in, and that could provide some opportunities throughout 2025 to increase equity exposure if we do get some turbulent periods.