Welcome to 2025. We’re at the mid-point of a remarkably wacky decade. Think about it:
- A global pandemic, lockdown and supply chain chaos;
- Hyper-inflation, the worst bout since the 1970s;
- The January 6th ugly debacle –a riot or an insurrection?;
- A major (Russia-Ukraine) war;
- Roe-Wade Supreme Court abortion ruling summarily over-turned;
- The emergence of Artificial Intelligence and tech stock boom;
- Unchecked illegal immigration on the Mexico border;
- Trump is convicted of felony crimes, is charged with many more, is nearly assassinated and then is decisively re-elected!
What, pray tell, will 2025 bring? Let’s start and end with Trump 2.0, coming to America this week.
Candidly, I didn’t foresee Trump’s astonishing re-election win given his serious legal entanglements and another polemic campaign of trolling and promised chaos.
The election outcome seemed a manifestation about how disaffected working-class folks had become with Biden-Harris, the economic damage the recent inflation crisis had wrought and legitimate concerns about Biden’s unguarded southern border policy.
So here we are. Since we manage wealth apolitically, my personal opinions will be suppressed as I share our 2025 outlook and discuss how Trump could toss it out the window in a matter of weeks.
First, let’s call a spade a spade: Trump is inheriting a decent economy. The Fed Reserve has partially redeemed itself since 2022 after its inexplicable delay in raising interest rates to squelch the inflation inferno raging in 2021. It appears they have effectively engineered an economic soft landing, avoiding a nasty recession that was all but assumed to occur.
Heading into 2025, the economy is growing at a steady clip, unemployment remains low, corporate profits are posting record highs, US interest rates have normalized and stocks are trading at/near all-time record highs. Huzzah.
If current economic conditions are decent, why are so many folks anxious about serious trouble coming in 2025? Here’s two reasons:
Clickbait on social media and cable news is poison. A common scheme has “pundits” bombarding media channels that the US dollar is so weak (it’s actually the strongest it’s been in decades) that its collapse is imminent. They beseech you to dump your investments and buy precious metals, cryptocurrency and store canned food in your basement. Tune it out.
The corrosive impact of the recent hyper-inflation that has created an unequal “K” shaped economy. The rich are unfazed by four-dollar carton of eggs while lower social-economic classes are anxious as they struggle to pay for groceries and afford housing. Income inequality is a legitimate problem that needs policy attention.
We don’t discount the multitude of risks facing the economy / markets but focus our time on measuring conventional or “knowable” ones.
Now, here comes Trump and his wrecking ball to upend the status quo. It’s clear that he will endeavor to usher in sweeping new changes in regulatory, trade and tax policies that could significantly affect economic growth, inflation and investment expectations.
Love him or hate him, Trump talks a lot, often without forethought. Is he going to end the Russia-Ukraine this month as promised? Is he going to immediately lower grocery prices, as promised? Is he going to slap massive tariffs on Mexico if they don’t arrest drug cartel members?
While much of this rhetoric is cartoonish, what happens if Trump does start a global trade war? Tariffs can be a dangerous policy weapon. These days I’m reminding clients about the Smoot-Hawley Tariff Act of 1930, the last ill-advised major global tariff event. It created a disastrous global trade war that was a chief cause of the Great Depression.
Strategic tariffs to bring critical industries (prescriptions and medical equipment) back onshore and fending off export dumping by China would be good trade policy. Levying widespread tariffs for geo-political reasons, however, could lead to adverse retaliatory tariffs. We’ll know soon enough the extent of Trump’s tariff rhetoric is genuine or tactical.
Turning to Trump’s mass immigration deportation goals, it’s an inconvenient fact that the US doesn’t have enough citizens to fill job openings across many skill sets. It’s risen to crisis level in the agriculture, construction and hospitality industries. Fixing our porous continental borders is a priority but so is creating an orderly legal immigration system to keep our economy working.
Lastly, government budget deficits. As a populist politician, Trump is at once a tax-cutter and a spender. His first term ran up eight trillion(!) in budget deficits and he’s prepping to again spend unchecked, at least for the next two years. The government is already running deficits higher than six-percent of the US economy, the worst ever during peacetime. That’s an ugly statistic and Trump has never expressed concerns about budget deficits; in fact, he just tried to have the debt ceiling limit abolished by Congress.
Collectively, tariffs, deportations and budget deficits all pose real inflationary risks and could undo the good monetary policy work by the Fed to tamp down inflation. Stagflation is a real concern if Trump goes whole hog on tariffs, deportations and spending.
What will happen once Trump returns? That is the great unknown. As my colleague Jake regularly reminds me, take his rhetoric seriously, not literally.
With respect to equity markets, the US remains the undisputed leader. US stock markets set multiple records in 2024 and has since settled down post-election awaiting Trump. Not only were valuation records set, so were concentration levels of the S&P500 Index. Seven large tech mega cap stocks - referred to as the “Magnificent 7” – produced a whopping 53% of the S&P 500 Index’s 25.0% total investment return in 2024 – staggering. These handful of stocks now make up 31% of the SP500 Index, the worst concentration ever recorded, even more so than 1999.
A great company doesn’t necessarily make for a good stock investment, especially when they are priced for perfection at nosebleed valuations. The old saying about the fastest way to get rich – and broke – is to invest in momentum stocks.
Case in point: The share prices of the four leading quantum computing tech stocks each dropped more than 35% this month triggered by negative comments about the technology by NVIDIA’s CEO. Talk about fragile.
If we sound like a broken record fretting about over-valued tech stocks, we are. We refuse to chase past returns and one of these days we’ll look smart.
That’s not to say that we’re not enthused about AI. We’re already seeing real life applications and productivity benefits from AI. Instead of chasing down momentum stocks we’re investing in AI via venture capital, private equity, energy and infrastructure stocks.
To be sure, Trump’s de-regulation agenda and a saner energy policy should bode well for industrial, energy and financial stocks starting in 2025. This is welcome news for small and mid-sized stocks and value stocks of all shapes.
Bond investors are on edge as Trump 2.0 approaches, chiefly due to renewed inflation jitters and concerns about ballooning government budget deficits. Since the November election, the ten-year Treasury Yield – the most important interest rate in the world – has jumped to nearly 5% this month, signaling that bond investors are worried about bloated US government deficits getting even bigger.
The good news is that after the worst three-year stretch for bonds since the 1840s, interest rates are now back within normal ranges. More good news: The economy appears to have finally adjusted to the normalized rates.
As mentioned before, an inflation resurgence could upset the equilibrium and kneecap the Trump agenda via rising interest rates. Importantly, the stock market will not take kindly to sustained higher interest rates. Always keep your eye on the direction of the ten-year Treasury yield to get a directional read on the stock market.
Credit spreads are squeaky tight, which means be selective when investing in non-investment grade credit since prices can only trade in one direction from here.
The overvalued US dollar heading into 2025 is causing global economic / financial distortions. Despite the doomsdayers, there is no other currency that could replace the US dollar as the reserve currency – at least not yet. Our major trading partners are now scrambling to prop up their currencies. It’s a wonderful time to take a trip to Europe or purchase something in another currency, like international stocks, bonds or real estate.
Speaking of real estate, 2025 should see a rebound in US commercial estate values. The historic spike in inflation and short-term rates absolutely devastated the real estate sector. It won’t be a V-shaped recovery or occur evenly across all sectors, but there are enticing real estate investing opportunities as the recovery accelerates.
We like the trajectory of natural gas given the AI-driven growth in power demand; crude oil has too many cross currents to get enthused about in 2025.
Our investment strategy remains active, shying away from duration bonds and momentum stocks and leaning hard on theme equities and alternative investments to manage risk.
That should cover the investment waterfront entering 2025; time to get some popcorn and watch the Trump 2.0 spectacle unfold.
Until next time, all the best for an outstanding 2025…Tim