Looking Past the Election, a Continuing Bull Market in2025, and a Goldilocks Economy
The US presidential election has now passed and along with it, investment scenarios that weeks ago seemed endless. Ironically few, if any, market prognosticators predicted the outcome or the upside volatility that immediately ensued after the results were announced – much of which has now been retracted. However, going forward, this new administration will likely reshape sectors of the economy – and, regardless of your politics, it will be an important element to our investment thesis of 2025 and beyond. This change in political winds, coupled with the fact that we are still in the early phase of this new business cycle, presents interesting and exciting opportunities for investors. Let’s dig in to some of these important themes.
Incoming Administration Reshapes Economy
For the purpose of this writing, we will focus solely on the incoming administration’s potential effect on economies and markets. In that spirit it could be best described as US economic energization with a protectionist bias.The pro-growth elements include many factors that tend to stimulate the economy such as deregulation, lower taxes, and infrastructure and energy projects. The protectionist bias includes policies such as higher tariffs on imports and immigration changes. It’s a mixed bag at this point, but each of these factor swill likely change the dynamics of parts of the economy and ultimately affect stock prices in some sectors. Our team has already begun making some adjustments to your portfolio along these lines. For example, we have reduced our foreign exposure (tariff risk) and enhanced your position in both financials (deregulation) and energy (infrastructure). As the incoming administration’s agenda becomes clearer, we stand ready to make further adjustments if necessary. This is not the era to “set and forget” an investment portfolio.
The Early Stages of the Business Cycle and Bull Market
Ultimately, the business cycle is the most powerful force that drives corporate profits, economic confidence, and stock markets. We are now in the second year of this new business cycle which is still in excellent health. The economy is growing at a 2.8% annual rate – “not too hot” – while inflation and unemployment are at modest levels – “not too cold.” This combination – often referred to as a “Goldilocks” economy – is an excellent set up for stock prices since it keeps the Federal Reserve in a neutral, accommodative stance, while allowing pent up demand from consumers and corporations to drive corporate earnings higher. This business cycle has the added benefit of Artificial Intelligence (AI) – the transformational technology which will likely provide enhanced productivity growth for companies and the economy as a whole. We have only witnessed a handful of business cycles boosted by technological transformation and each has created above-average economic growth and stock price performance. In our view this new tech-led business cycle and bull market will not be an exception. Hence our expectations that this cycle can last another 6-7 years and that the historical annual returns of stocks may be exceeded during this era. It is with these projections, along with other data points, that we arrive at a target for the Dow Jones Industrial Average of 100k (now43k) and for the Nasdaq of 50k (now 19k).
Importance of Sector and Stock Selection
The bulk of stock market returns are predicated on sector exposure and stock selection – as the recent years of performance of the AI’s Magnificent Seven can attest. As we journey forward in this business cycle it is imperative that we strive to embrace the leading companies in the sectors that may demonstrate above-average profit growth. In our view this includes the first and second derivative AI companies – think Nvidia, Meta, or Oracle. It also includes telecommunication companies, such as Arista Networks, that build the infrastructure which enables these AI servers to communicate. However, this business cycle is not just about AI. There are other great companies that will benefit from deregulation and AI in the financial sector, as well as industrial and energy companies expanding our electrical grid to accommodate the overwhelming demand from AI and EVs. It's an interesting new business cycle with many attractive opportunities for investors, and our team is hard at work researching these new ideas.
The Bond Market, Federal Reserve, and Interest Rates
In our opinion, the Federal Reserve has the economy right where it wants it –solid growth with tempered inflation. It is likely that interest rates will stay in a trading range for the next year or so, which is great for bond investors like us who have already locked in attractive yields over short-,intermediate-, and long-term maturities. After a few years of “Fed-centric”attention, it is quite possible that the Fed will take a back seat to more important issues affecting economies and markets...a well-deserved rest in our opinion.
Risks to Our Bullish Outlook
We always strive to be cognizant that economies and markets can change from good to bad based on a number of factors – as well as things that are just unknowable. Though we believe this business cycle is in its early phase, it could be derailed by a number of concerns that come to mind: US debt levels, geopolitical unrest, and a reacceleration of inflation. Therefore, we remain flexible in our strategy and employ our Active Risk Management process. This process allows us to reduce your allocation to stock exposure, adjust your sector exposure to a more defensive posture, and employ the use of carefully placed stop loss orders to mitigate the risk of a catastrophic loss in one stock, a specific sector, or the portfolio as a whole. This process has served our team well in past bear markets and we anticipate it will again in the future.
We hope you find this update helpful – if you have any questions about your portfolio or have experienced a significant change in your finances, please let us know.
If you have a family member, friend, or colleague who might benefit from this update, please feel free to forward it to them or let them know how to contact our team.
Thank you again for your continued vote of confidence.
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Disclosures: https://bit.ly/3TCc78H