Transcript:
A good group here to get started. So, we’re gonna go ahead and, jump into the deck. So, welcome everybody again, to the q one, market outlook webinar twenty twenty five. So my name is Tyson Walker. I’m the director of portfolio strategy here at OCIO.
I wanna welcome everyone. We’re gonna have a pretty good call for you today. We’ll go through the agenda here in just a moment. But joining us, we’ve got Ryan Dressler, who’s the senior portfolio strategist with OCIO, Tim Holland, CIO, for for, Ryan, not just OCIO.
And then we have Taylor Acevedo as well who heads up the fixed income team. And, like I said, we’ve got a pretty stacked, agenda here. If you wanna go to the next slide, Ryan will go through that.
So we’re gonna start off. I’m gonna talk to you a little bit about a look back of twenty twenty four, what happened in the markets, what we like, what we didn’t like within that, year. And then, we’re gonna move it over to Tim to go over what we’re looking forward to in twenty twenty five.
We are going to, jump over to the bonds, what to expect from the bond market where Taylor’s gonna talk to us there.
Ryan will talk through, Trump administration, what Trump two point o means, what could trip us up potentially as we go through twenty twenty five. I’ll come back on, and we’ll do some what we like and don’t like overall, looking forward, and then we’ll we’ll jump over to question and answers. So feel free to to message in any questions you have as we go through the deck.
We are going to turn cameras off as we go through the deck just to hopefully not distract from the presentation, and then we’ll come back on at the end. Alright. So we wanna go, here looking at twenty twenty four. So if you wanna go to the next slide, Ryan.
So it was a better year for stocks. We’re coming off of another great year. S and P five hundred was up twenty five percent in twenty twenty four. That’s following the year in twenty twenty three where we are up, twenty six percent.
An interesting, stat from the years of the S and P was a little bit lower on volatility than historical averages. So we had no drawdowns, peak to trough of more than ten percent. The average for any given year is fourteen percent, and our largest drawdown, as you can see on that left left side graph, was from July to August, and it was, eight point four five percent in the drawdown.
Looking on the right side, we have the Nasdaq. That was up just shy of thirty percent for the year. Stocks were helped through the year by a resilient US economy and consumer. We saw better than expected US corporate profit growth.
Rate cuts from the Fed fueled optimism and continued improvements in inflation metrics helped sentiment about the future direction of rates. Obviously, we’ve seen some repricing around rates, and and switch up on that matter, which, Taylor’s gonna go through a little bit more here in just a moment. But, latter half of the year, we had the decisive election, which gave us more certainty around what to expect from a policy standpoint, which was very beneficial for, stocks moving into the latter half of the year. If you wanna go to the next slide there.
So the magnificent seven, they led the way through the year. So magnificent seven for those that hear that all the time, it’s Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta, and Tesla.
As a collective group, they are up just over sixty seven percent on the year. So a very good year for them. A lot of optimism around the theme of AI and how it eventually permeates markets. That was propping up their relatively high valuation.
Obviously, we had a news release yesterday that came out that maybe put some of that valuation into question, and I think, some more reasonable expectations for valuations and revenues moving forward for some of those names is probably healthy for the overall market, but we can have more on that later in the deck as well.
Looking at the second half of the year, we did see breadth expand within the market, so it wasn’t only the Mag seven pushing things up in the latter half of the year. On the right side here, you see the Russell two thousand, which is the benchmark for small cap stocks, and it, outperformed in the second half of the year versus the S and P five hundred.
We also saw value outperform, growth in the second half of the year, which was showing some catch up to those red hot large cap growth names.
If you wanna go to the next slide. So it was a relatively tough year for bonds. Bonds struggled through the year behind choppy yields. The ag was up just over one percent overall for the year.
Markets in the latter portion of the year started repricing expectations for rate cuts, and that drove prices lower. And like I said, Taylor’s gonna go over a lot more detail on this later, so I’m not gonna cover too much right here if you wanna jump to the next slide.
Okay. So twenty twenty four started off with some elevated concerns around the potential for a recession.
As we know, that recession never came. The Fed seemed to be threading the needle between, a no landing situation and a soft landing.
As we mentioned before, a lot of this was helped by the resilient consumer, helping to stave it off. Earnings had a great year. Unemployment rate remained solid overall. So it was a really good year for the consumer. Now if you wanna go to the next slide, we’ll go dig into that a little bit more.
So the backdrop of a higher home and asset prices helped, as the wealth effect is, it’s called, improved sentiment and help people feel more confident in spending money.
Some concern has started popping up as credit card delinquency rates are on the rise, and and twenty four saw much of the COVID era spending, being worked through and spent down.
If you wanna go to the next one. So Powell, when it comes to inflation and the Fed, the big story of twenty four, of course, was still the Fed’s battle with inflation. We saw the first rate cuts come through in September. Overall, direction of inflation is moving in the right direction.
Rates are moving in the right direction as well.
You know, we don’t know exactly how fast they’re going to move. That’s the the question that’s up for debate as we’ve moved into twenty five. But we still are confident that they’re they’re moving in the right direction.
And then if you wanna go to the last one here. So the election was the latter half of the or the last part of the year.
We always say that the markets, the what the markets like the least is uncertainty. And so after the decisive election, we were able to price in what policy expectations to have moving into twenty twenty five, and we saw that post election rally, take us into the last part of the year.
With that, I’m gonna toss it over to Tib, and we’ll go over what, we’re looking forward to in twenty twenty five.
Alright. Thanks, Tyson. I hope everyone can hear me okay. I hope twenty twenty five is off to a good start for you all.
And I’ll spend a few minutes, talking about, the New Year. Calendar pages, keep flipping.
So so, ultimately, the stock market and the economy are linked, but they’re distinct. That’s my attempt at at at poetry.
You know, the the market tends to lead the real economy, good or bad, up or down.
So so, ultimately, they’re connected. Right? And so we’re gonna spend a minute talking about the economy, and then we’ll dig into a risk asset. So at a high level, the US economy is on the front foot, as they say, two data points that we call out on the slide, private, payroll employment gains, obviously, the plunge during the pandemic and and up into the right ever since.
If anything, the jobs market is running a little too hot, for for the comfort of Wall Street and sort of what that might mean for inflation and interest rates, but Taylor can talk about that better than I can. So the US economy is is in good shape. The jobs market’s in good shape. On the right hand side, retail sales at an all time high, GDP at an all time high.
And so so, ultimately, if if the consumer’s okay, the economy will be okay because seventy percent of what we do here in the US is consumption driven, consumer driven. And so if the if if the jobs market’s okay, the consumer’s okay. And, again, if the consumer’s okay, the economy is okay. And as of now, the jobs market is in pretty darn, good shape.
So the the economic backdrop is supportive.
If you sort of peel that onion a little bit more as it concerns, the private sector and then also where we spend a lot of our time, you know, looking at stocks and and bonds and alternatives, on the left hand side, side, the private sector’s got more cash on its collective balance sheet than ever before. Now that, you know, makes sense given that the economy is bigger than it’s ever been before in terms of gross domestic product. But still, you know, if if you think back four or five years ago when interest rates went to zero, a lot of folks refied, their mortgages, which was a smart thing to do, and a lot of big companies borrowed money, at next to zero interest rates, which is also a smart thing to do. And then importantly, the fed the Federal Reserve does an annual stress test of the thirty one biggest banks.
It’s an annual exercise. It’s been in place for about fifteen years. The most recent one was over the summer of last year, and all thirty one banks passed with flying colors as they say. And on the right hand side, earnings for the S and P five hundred collectively continue to move up.
We are knee deep in q four earnings right now. If you kind of think all the way back to last week before the deep seek news of yesterday, the AI sort of told up of yesterday, we got fantastic earnings results from the country’s four biggest banks. And as of now, q four earnings are growing about thirteen percent year on year. And for all of twenty twenty five, Wall Street thinks, corporate profits will grow, at about a a comparable clip, twelve, thirteen, fourteen percent, which is a a fantastic, year on year change if it if it were to hold.
So so, again, lots of, good news at at a high level, economy and and market.
And then, animal spirits, optimism, also moving up into the right. So not to get into politics of it all, but if you look on the left hand side, you’ll see the National Federation of Independent Businesses Small Business Optimism Index. So this is essentially how optimistic or pessimistic the folks that own small businesses are at any point in time. And if you go back to twenty sixteen when Donald Trump, won the White House the first time, you saw an historic spike in optimism, and we’ve seen something similar, with recent readings.
And in fact, the most recent reading from the NFIB Small Business Optimism Index, which is not reflected in in the in the deck, it takes a little while for us to update these from a compliance perspective, is even higher. And on the right hand side, you see, the University of Michigan consumer sentiment index. That’s moving up into the right, And and that’s important because optimism, begets optimism or pessimism begets pessimism. If if companies, CEOs, big businesses, small businesses feel more optimistic about the state of the world, they’re more likely to invest in people and equipment and and their companies, and that should drive revenues and earnings down the road, which for at least public companies should drive, stocks, higher and support coupon payments for, bonds that have been issued by those public companies.
So, and I think that Tyson’s point, the markets don’t like uncertainty with the election. We got through we got through it very quickly, very cleanly, and, and that has helped, we think, underpin Wall Street. And even with the volatility over the last twenty four hours or so, you know, the S and P five hundred, at the risk of jinxing, it is up over three percent, year to date. So so markets are off to a great start following, as Tyson noted, two fantastic years in twenty four and twenty three.
Small cap stocks. Tyson talked about the market broadening out. It just wasn’t all about the Magnificent Seven last year.
Busy, busy couple of charts on on this slide, but, essentially, what we’re the point we’re trying to make is that small companies are more dependent on shorter term sources of capital. They have smaller balance sheets. They can’t really issue debt or a ton of stock, so they go to banks for lines of credit and the like. So as interest rates go up, their borrowing costs go up.
So now that the Fed has become begun cutting rates, if inflation continues to move sideways to down and interest rates move sideways to down, borrowing costs should improve for small cap companies that should help, after tax profits. And on the right hand side, small companies, because they tend to be more domestic facing, they can’t take advantage of even lower tax regimes overseas, tend to pay a higher tax rate. So if we do get a more pro growth policy construct out of the new administration, and Ryan will talk about this, I e lower tax rates, small cap companies, which have had, great burst of outperformance over the last couple years when nothing really sustained, you know, if you get a more favorable tax, backdrop and interest rate backdrop, small companies could, put together a sustained period of outperformance, and we’ve been overweight small cap companies, and we think that’s coming.
Let’s go to the next slide. So, again, at the risk of jinxing it, you know, the S and P was up twenty percent plus two years in a row. If you go back to the nineteen nineties, the S and P was up twenty percent plus five years in a row. So you can have these extended secular bull markets back then, then being the nineteen nineties.
The Fed was cutting interest rates. We which is what the Fed is doing now as we plot out on the left hand side of the screen.
The economy was able to moderate inflationary pressures without causing a recession, and Wall Street was, extremely interested in a new disruptive technology, the Internet. So now it’s AI, artificial intelligence. Again, there was some volatility around NVIDIA, some of those companies yesterday because of a competing, large language model out of China.
But you’re looking at a pretty similar backdrop today where, knock on wood, inflation is moderating. The Fed is cutting interest rates. We’ve avoided a recession, and you have a particularly disruptive and hopefully, meaningfully additive to pro productivity technology like artificial intelligence. So, again, every every era is different. History doesn’t repeat.
Sometimes it does rhyme, and one could argue that, the twenty twenties that we’re obviously, halfway through or about halfway through now could end up looking like, the mid part of the nineteen nineties from an economic and a market perspective, and that’s something we’re paying a lot of attention to. Beyond that, the bull market that we’re in right now, got going by one definition June of twenty twenty three, so less than two years old.
Most bull markets tend to run three to five years. On the left hand side, we just plot out trough to peak moves in the S and P five hundred and peak to trough, trough to peak being the blue, peak to trough being the burgundy or copper. And and clearly, knock on wood, bull markets run a lot longer than bear markets. And, typically, when you’re at the end of a bull market cycle, there are a number of signposts that present themselves. Valuation is just silly. Evaluation is expensive now for the S and P, but but but nothing too too silly.
Sentiments off the charts. You see a surge in companies coming public, a real misallocation of capital. You see the bond market starting to price in a recession. None of that’s happening right now, and Taylor can speak to that as well.
So, corrections are are normal. Volatility is normal. Pullbacks are normal. We saw some extreme volatility yesterday.
But, again, at the risk of, jinxing it, if history is any guide, we’re still, early days in in this move up into the right, by the S and P five hundred and and US equities broadly speaking more broadly speaking. So I’ll stop there and turn it over to Taylor who will dig into, fixed income. Taylor?
Awesome. Thanks, Tim. If we wanna go ahead and jump to the next slide.
Kind of a recap on what happened to fixed income last year. You know, as of September, around the middle of September, bonds were up five percent for the year. That’s right up until the Fed started cutting rates. And they cut fifty basis points in that first move. And since then, you know, interest rates have really reversed the trend, you know, wiping out most of the gains that had accumulated during the year. Tyson already mentioned it, but finishing at around one percent, total return on the bond at US Ag Index last year.
But, really, since the Fed started cutting, there’s been a fairly significant divergence between market expectations and Fed projections for interest rates. You know, this recent climb in rates are being driven by several factors. This includes persistent inflation concerns, really better than expected economic growth, as we’ve already mentioned, just how strong the economy has been, a very resilient labor market.
And it’s a policy uncertainty under the new administration, just how much spending is gonna happen there and concerns about the long term fiscal health of the US government.
It does seem like that decades long trend of falling interest rates, appears to have ended, and we’re in a in a new, interest rate regime. Wanna jump to the next slide.
Taking a kind of a look at the tenure here. This is zoomed out enough. I think we can get a capture the picture of this near forty year bond rally that we’ve had, where interest rates were continually falling, which is a huge boost for market prices for bonds.
But now in this new environment, you know, since the bond bubble burst in twenty twenty two, rates have been kinda jumping up and down all over the place as they search to try to reprice and find what that equilibrium price is gonna be.
You know, just looking at the volatility of bonds, is it increased a little bit? If you look at the move index, which is a similar measure as the VIX, only this is measuring interest rate volatility rather than equity volatility.
That move index has remained, slightly elevated recently.
As a result, it’s been just simply harder to, forecast rate expectations.
Wanna jump to the next one.
Looking forward, the Fed has started to, really decrease its projections of interest rate cuts in the near in the future.
Previously, there were more cuts priced in for twenty twenty five, and currently, there’s only one rate cut priced in for twenty twenty five.
And on the next slide here, inflation is gonna be really important. Keep a close eye here, to get a sense of which direction interest rates are gonna go.
They’ve been trending inflation has been trending lower, which is great news.
If we continue to see that, that could be a significant tailwind for bonds.
If we see any reversal in those trends, or inflation is really stickier than the market anticipates, it could be it could be harmful for the bond market.
Really credit. Riskier credit sectors performed really well in twenty twenty four.
Strong economic conditions really helped companies maintain solid balance sheets. Fundamentals for corporates in the US are historically strong in most sectors and most ratings categories.
Even triple c rated companies, which are, you know, expected to have significantly higher default risk, have have actually performed pretty well recently.
Despite this, though, credit spreads remains very tight.
I’ll get into this more a little bit later, but we like investment grade corporate credit over high yield corporate credit. If you look at the spreads, you know, between investment grade corporate credit and high yield credit, that spread is just getting smaller and smaller.
And then the spreads just between, US treasuries and, any other bond that carries credit risk, that spread has gotten lower and lower. So valuations are really rich, for these bonds.
The incremental yield you’re getting for taking additional credit risk is just historically small, but some of this is justified. As I mentioned, corporate fundamentals are really strong right now, supporting these tight valuations or these tight spreads.
Also, there just is a lot of investor appetite for the all in yield as as all in yield for, most bond sectors still remains above, you know, average historical levels.
Muni bonds are particularly attractive right now.
You know, for clients in higher tax brackets, investors are often getting a higher tax equivalent yield in munis than in similar rated corporate bonds.
And, inherently, muni bonds tend to have a stronger credit profile than corporate bonds even at similar ratings levels. So, again, munis, are pretty attractive for those clients who are in higher tax brackets. There’s also been an increased supply of muni bond issuance, in the past year or so, which has really boosted that attract that relative value of muni bonds over corporates.
Looking at our strategies, the Orion fixed income strategies, and and kinda where yields are sitting right now, we still really like investment grade corporate bonds. You know, we’re able to get an all in yield of greater than five percent, with some pretty strong companies.
Is very attractive. As I mentioned, going from investment grade corporate to high yield corporate bonds is less attractive.
Again, just not as much incremental yield for that additional credit risk that you’re taking.
And then as I mentioned, munis are attractive for the right clients. So this is another, strategy where we’ve been seeing, a lot of our recent allocations going to clients in higher tax brackets.
Munis have been, really critical there.
And when we dig a little deeper into the relative value between the strategies, kind of a lot going on here. But, basically, if we can use the, you know, estimated default rates, we look at historical default rates for these different types of bonds, and we calculate the spread or the additional yield that you’re getting, for the credit risk, all else equal defaults equalized.
You can see which of these strategies, are more attractive relative to the others. So the highlight investment grade corporate bond SMA, that column in the far right, that point seven percent excess spread to treasury, this kinda shows how much more attractive that is relative to some of the other taxable bond allocations.
And then looking at the muni side, the on the bottom half of this graphic, this is showing, you know, a national muni bond portfolio at different federal tax brackets, twenty four, thirty two, thirty five, and thirty seven percent.
You can see that the higher the tax bracket, the more attractive that is from a risk reward standpoint. So clients in higher tax brackets, are able to take on less credit risk and more tax equivalent yield than, you know, similar rated corporate bonds.
Turning to some of the effects that the California wildfires have had on on the different, bond sectors.
Fortunately, we haven’t seen, any real effect on California municipalities.
Just anecdotally to talking to a broker last week, he hasn’t seen they mentioned they hadn’t seen a very much pickup in in anyone selling any of these bonds.
We can jump to the next slide, and I can go into it a little more.
There are some sectors, so, like, private activity, private housing bonds, and concentrated areas that, you know, could be at risk here.
But, historically, natural disasters have actually had pretty little very little impact on municipal bonds and their credit quality.
And then, fortunately, we don’t have any exposure, in our Orion fixed income portfolios.
Some insurers are, at risk. Think like some of the large national brands who have exposure in that area. You might see some short term, some short terms, adjustments there in in price.
But, overall, the effects should be fairly contained. One other item worth mentioning is utility bonds. You know, if certain utilities, get blamed for any of these fires, that could be, could be a pretty big headwind for those corporations.
And then just lastly here on the bond market, with everything going on, interest rates, higher, kinda repricing spreads tighter, This is still bonds are still serving as, you know, a diversifier and a volatility reducer for a portfolio.
Fortunately, that part of the bond market is working. So if you look at, just what happened yesterday with, you know, the big sell off in equities, bonds held in really well and actually performed really well yesterday as you would expect. So keeping, you know, individual bonds in a client portfolio with the intent to hold to maturity, are are gonna do a pretty good job of reducing volatility.
Yeah. If I if I could chime in quickly, sorry, Ryan, to to Taylor’s point. We were talking about this before we hopped on.
Right, great volatility in the equity market yesterday. NVIDIA, some of the mag, seven stocks hit by concerns around AI spending on a go forward basis and good old fashioned high quality US fixed income caught a bid. So to Taylor’s point, just, you know, classic diversifying asset class and also, at the risk of overdoing it, with all of our country’s challenges, and we have them. It’s always nice to see US government bonds catch a meaningful bid during days when, volatility spikes and people become a bit concerned about the state of the world. I think it’s a huge vote of confidence in our markets, in our economy, and in our country. So I just wanted to add that, Ryan. I’ll turn it back to you.
You got it. Well said, Tim and well said, Taylor. There’s a lot going on right now in the bond market and for conservative investors. So, again, if you have any questions for conservative clients, or portfolios, feel free to reach out to us and and unpack that a bit further.
So I’m gonna spend the next five or so minutes covering what to expect from the second Trump administration.
So we spent a considerable amount of time during the summer and the fall months kind of previewing what to expect from the upcoming November election at the time.
As it turns out, the thing markets and the polls turned out to be the most favorable indicators in predicting the result. So as as you can see here, we landed a very Republican favored setup for twenty twenty five and twenty twenty six. We’ll see how the midterms go. But for the time being, Republicans control both ends of Pennsylvania Avenue, and that is, really important just to note that, you know, some of the Republican or conservative issues are gonna be, in focus for the next couple years while they have controlled power.
The balance in the House of Representatives is much, much, much closer than the, the Senate or, the result of the vote there. So I think it’s important to point out that while they do have a majority, the margin there is super tight. So they really have to get all members of the house on board if they’re gonna pass something meaningful, and that that’ll put pressure on some of the swing state representatives that might have, more pressure on them to to act for their constituents in a in a manner that might not line up with, party initiatives there. So, we landed it in a conservative, front for DC, and that setup bodes well for historical stock returns.
I circled the different outcomes you can get between, you know, who controls the White House and Congress. And if you look at that that circled area, that’s the setup that we have now. And, historically, the twelve point nine percent annual return gaining back almost a hundred years or so is in fact favorable for stock market returns. It’s better than average.
So, that that setup bodes well for future stock returns.
And then if you unpack what we’re looking at for the the Trump administration for the next four years or so, it’s really important to point out that when we look at things, we’re looking at it from a Wall Street perspective and what could impact risk assets and your portfolios. We’re not necessarily trying to call out the, the hot button debatable partisan issue of the day that might be grabbing headlines.
So it’s just I’d just like to point that out before we unpack some of the bullet points here. But if you do look at the the administration, what they’re trying to cover and and read the tea leaves a bit, it’s really comes down to, pro growth and pro business focus for Wall Street.
Deregulation, tax cuts, domestic investment, those are some of the areas that Wall Street’s really excited about. There are some lingering uncertainties, however, about tariffs, immigration, inflation, the direction of rates, and the national debt. So there’s a lot lot more moving tailwinds in that second column of of uncertainty there, but we can we can kinda project, with a little bit more confidence that areas of deregulation and a at least an extension of the twenty seventeen tax cuts are more likely to play out. What’ll be more interesting though is if the Republicans try to expand the tax cuts to try to bundle some more initiatives in there and make that a more broad of comp broad comprehensive package. So that’s something that we’re watching, but I think, a reasonable expectation is that at at a minimum, the twenty seventeen, cat excuse me, tax cuts will get extended.
Other areas of focus would be just kinda US versus ex US. I think there’s a lot of headwinds in international stocks right now. And if you look at how they reacted, and I’ll show you on the next slide, you know, the tariffs are a big deal for ex US companies and, you know, market participants doing business with the United States. So we’re watching that area.
Again, some of the the ideas around tariffs and and immigration could be inflationary, and that could cause headwinds for interest rates and, you know, slower slower slower growth than expected. So those are some areas we’re watching as well. Tim covered some some notable differences between small caps and large caps. That’s another area we’re watching to see how, small caps could react if we we do get lower taxes.
And then finally, I put in there the, the Elon Musk x factor. So some unpredictability both good and bad from, Elon Musk in, in good favor with the White House.
So what might the market might be telling us? So this is a really important slide, I think, because this is just a snapshot of sector returns the first day after Trump was elected back in November.
As you can see, the the financials, industrials, discretionary, energy, and tech stocks all really surged higher. And then on the other end of the spectrum, utilities, staples, and real estate did not do all that well. Some important factors to consider there, but I think this is kind of a a great preview as to what Wall Street is thinking some of the direct Trump admin impacts could be for market participants.
Financials is especially notable because if you deregulate some of the, the red tape that is involved in the banking industry, the the managed fund industry, the wealth management industry, etcetera, that could really bode well for better lending, more expansive growth in the the general economy. And then industrials is another big one. You know, we talked about tariffs there being potentially inflationary. But for the industrial sector, if you get a a boost in domestic production in companies at home, that could be a nice tailwind for that sector as well. I think energy is well known, with Trump and Republicans being more favorable to opening up land and drilling rights. So I think, the the the tailwinds there are a little bit more transparent.
A little bit more convoluted and and uncertain around things like IT, whether it be crypto or intellectual property protections there. In health care, we still have not seen the confirmation yet of RFK Junior.
So potential headwinds if some of those ideas come to fruition.
Also, anything related to the federal government, and managed care around, Medicare, Medicaid, any of those health care companies could potentially face some headwinds there as well. Lastly, real estate might come as a surprise to some. I think the idea here in the reaction is that some of these things that are inflationary might prove difficult for rates, and real estate sector of the S and P five hundred is a bit more sensitive to interest rates than these other sectors.
But when you add it all up, we think the the pro growth sentiment and reaction there is appropriate.
If you look three months and six months out from elections, the returns tend to be positive, and we kinda fit into that column as well on the table on the left. So box check there. And then on the right, the first year of a presidential cycle is also favorable for market returns in the stocks stock market.
Beyond year two, year three, and year four, the further out you get, the more uncertainty you have to pencil in, but certainly a good start to the year as Tim pointed out. Year two is a little bit more concerning for the presidential cycle just because if major legislation does pass with party control, or partisan control, it tends to land in the second year of an administration, and markets have to recalibrate expectations as a result of some some legislation passing. So we think that’s worth pointing out.
The next section here is what could trip us up. And I think important things that I jotted down with you just summarize the next few slides are inflation, interest rates, valuation levels, and then lofty expectations.
So I I just covered some of the the Trump admin expectations. I think the bar is lofty there. It’s also pretty lofty on Wall Street. As, you know, Tim pointed out, we’re in the peak earning season right now with big tech set to re report. I think Netflix already did. But, you know, the bar is already pretty darn high for some of these companies to to keep beating analyst expectations and, driving earnings and driving growth. So if you, if you trip up or have a a misstep there, that could weigh on stocks.
I think for the year, analysts are hoping for somewhere between twelve and fifteen percent year on year growth for corporate earnings. That would be the best since twenty twenty one. So, again, the bar is set pretty high. And then, on the second slide here, the expectations for the Trump administration are also high. So some of these things around deregulation and a tax cut package are pretty much baked into happening over the next couple years. We’ll see if they do.
Also, valuations are elevated especially in tech. So I think the the PE ratio of the Nasdaq is considerably higher than the S and P five hundred or even some of the smaller sectors within the S and P, but the Nasdaq PE sits close to thirty times forward earnings. And if you look at this chart here, it only goes back to twenty fifteen. But, if you look in nineteen ninety nine or two thousand when the quote, unquote bubble popped for stocks, valuations were sitting closer to about forty times, forward earnings.
So they’re not necessarily at extremes, but we’re we’re certainly well below I’m sorry, well above levels that we saw over the past ten years or so. If you unpack that a bit further, the S and P five hundred, if you go beyond big tech, valuations are much more reasonable there. So that kinda gives us, you know, some confidence and a fallback to pin our, our hats on for twenty twenty five and beyond because, you know, returns in the MAG seven has has been so concentrated that you could see breadth expansion kinda bring some of those, back in line with with longer term averages.
Finally, on the inflation front, so we pointed out in Taylor’s section that inflation is coming down over a multiyear period, from a peak in twenty twenty two. I think we had CPI reading about nine percent year over year.
We’re we’ve got that down to about two point nine percent year over year, but we’re not out of the woods yet. And the concern there, which, you know, Taylor covered a bit of, but some of the concern here is you could have a nineteen seventies style multi period I’m sorry, multi year period where inflation just cannot get back under the two percent threshold that the Federal Reserve is looking to, maintain. So, the law the longer that CPI and inflation hovers above that two percent threshold, the more concern Wall Street will get and the higher the interest rates could potentially move in response to that.
So I’m gonna kick it over once more to Tyson to cover what we like and what we don’t like. But in terms of what could what could trip us up, look for inflation rates, valuations, and potentially lofty expectations to cause some some short term choppiness.
Perfect. Yep. And, so on this page, we like to just go through a summary of what we talked through in the deck.
When it comes to what we like and don’t like, what we like is on the left side, for there to be more bullet points than on the right side. That generally means that overall, we’re more optimistic about the market.
I don’t wanna read all of these word for word, so I’ll try to summarize these a little bit. But, on the left side, what we like, inflation and rates are moving in the right direction. Or we’re in the early stages of a bull market, that seems to have legs and is just getting going.
Valuations, still look good. Like Ryan was saying inside tech, they are a little bit extended.
And as I mentioned, that’s coming down a little bit as we start to see, some changes within the the landscape of AI.
The US consumer and the labor market have both been, continue to be resilient, and then earning strong dollar AI and increased certainty post election, are all tailwinds for risk assets.
Moving over to the right side, what we don’t like, bond yields have been putting pressure on equities.
Inflation battle is still there, so it’s not over and needs to continue to be monitored.
We have that k shaped US consumption pattern, meaning more pain on the lower income side of the economy.
We still have ongoing geopolitical issues abroad, policies that could go multiple directions as far as if they’re inflationary or not.
And then tech has been a major driver of returns, and we could see strands picking up there.
We’re hopeful to see the leadership expand outside of the Magnificent Seven moving forward.
And then finally, US economic growth has been great, but it’s starting to cool off. And then internationally, growth has been sluggish and may continue to be sluggish. So, that sums up the slides. So we appreciate everyone joining us for those.
And to finish this off, we wanted to toss it over to the group for questions and answers. So if you have any questions, feel free to write them in. I think we had a couple that have come in so far, and so we’ll start pulling those up. And let’s see.
Maybe, Tim, if you wanted to see if we’ve got a kind of a long do you see that first one there?
Yeah. No. It’s a we’ve got two great questions so far into Tyson’s point. If there are others, please, type them in. We’ll do our best to answer them.
First one to summarize, you know, asks about growth and productivity in twenty twenty five, rates of change or trend, impact of tariff policies or potential tariff, tariffs on inflation and and rates, the potential deportation of millions of of folks that are currently in the workforce, what that might mean for rates, how it might all impact stocks and bonds, and and and underneath that, you know, what would find favor if some of those things came to pass? Those are all the right questions. That’s what we’re trying to figure out, to be honest with you, on a day to day basis as well.
We’re still, what, eight days, I think, on from, you know, a ration of Donald Trump and JD Vance as president and vice president, respectively. It seems like, some of the early moves on, the tariff, and their expected, tariff end of things has been a bit more benign. Lots of talk around twenty five percent tariffs on Mexico and Canada, but it’s now February first as opposed to day one. So how much, we’ll get? How much of the rhetoric is is is going to lead or precede, real tariffs, and how much is a negotiating tactic, at the risk of being of no value to you all, I don’t know. And and no one really knows right now, but that’s what we’re paying attention to, in terms of deportation and and immigration policy.
That seems to have accelerated or started, but it seems like, at least based on what I read in the paper, that focuses on folks with criminal, records and and and the like, and nothing beyond that at this point, though that I could be, a bit, bit off on that point. So, again, sort of echoing what you’ve already heard from several folks on the team, the thinking is and and and I am very much in this camp, that you are likely to get a very pro growth policy construct out of Washington DC in terms of taxes and deregulation and making it easier for businesses to do business business and buy each other and consolidate and the like. But there are aspects of policy coming that are likely inflationary including, tariffs, and and immigration in terms of, cost of goods coming into the country and and labor force.
How all that settles out is the sixty four thousand dollar question. Based on Donald Trump’s first term, I think it’s gonna be much more in the growth end of things than the inflation, end end of things. But that’s something that we’re gonna pay close attention to and and allocate the portfolios that we’re responsible for based on how we see, things playing out.
And then the second question, and I’ll let other folks weigh in on the first answer, is around international stocks. What’s interesting is, developed markets, at least year to date, are beating the S and P five hundred by a little bit.
Emerging markets are are are on balance, struggling. It’s a big world out there. Lots of countries, lots of markets, like, lots of companies. We like to use active managers, active strategies when we go outside the US because you can find, companies that can outperform even in maybe some some challenged economies.
One thing I do think about, and you’ve seen some reporting on this, and and I promise I’ll stop in a second, is if you do get a very pro growth policy construct here at home and maybe you get a much more contentious trade backdrop as well, does that cause some countries around the world developed and emerging to maybe adopt much more pro growth policies as well? Germany’s in a recession.
Big chunks of Western Europe are struggling. Big chunks of Latin America are struggling.
And if Donald Trump, maybe because of tariffs, makes life even a bit harder for some of those more export oriented economies, do they look to reform themselves internally in terms of consumption and taxes and regulation? So I do think, and it’s pure speculation, that some of the policy proposals that are coming here at home might actually be the catalyst for some really important countries around the world to rethink how they do business. And I think, ultimately, that would accrue to their benefits economically and from a risk asset or investment perspective. So I’ll stop there, see if anyone has anything to add to those two answers. Then we got a question about duration, risk, which, we can punt to to Taylor. But Tyson, Ryan, Taylor, anything to add to those those comments?
Yeah. Tim, I’ll I’ll just add in a couple things on the inflation perspective as it pertains to tariffs and immigration there. I think there’s an interesting dynamic in that. You know, in Trump’s first term, inflation was really benign. We, it took a long time to heal the wounds of the global financial crisis from, you know, two thousand seven through two thousand eleven from, an economic perspective. So it was really hard for that decade to even generate inflation above, one percent even. And anytime we dig it above two percent, it was short lived.
If you contrast that versus the current environment, we’re really trying to come down from, you know, inflation that’s really difficult to put back in, in the the good checkbox column. And when Trump and and his administration is looking at policies related to immigration and tariffs, they have to they’re probably gonna be very, very mindful of that dynamic, and they may go a little bit slower or may calibrate that in a more gradual fashion than they initially laid out.
Some of what that would look like could be creative and and different than what I’m gonna throw out there. But a couple ideas on immigration could be, you know, you could take it from step one from just closing the border.
You could take it from just deporting criminals. You could take it to deporting every single illegal immigrant, etcetera, etcetera. So there’s a varying degree as to how far the Trump administration will might wanna go, just based on how sensitive that could play out in immigration. If you’re reducing, the workforce at a level that’s already fully employed, just on basic math. If you’re if you reduce the supply of labor, that could potentially be inflationary.
Same thing with the tariffs. Like, right? So if you target, you know, full widespread tariffs of twenty percent or higher for every single country, that would be a stark contrast to targeting just a couple of countries that you might wanna isolate.
Again, he could he could start gradual. He could go all at once, but, I think the the dynamic is completely different given how sensitive economies are right now to the supply of money and coming down from inflation. So I’ll just add a couple of those things as we look for, for clarity around those two important subjects.
Alright. Tyson Taylor, anything to add?
Nothing to add there. I’m happy to take the lead on that next question we got about Alright.
You know? Tyson?
Yeah. No. I think some do it pretty well. Yeah. Taylor, you can take that next one.
Taylor, take it away. I will have one quick comment. Productivity is running above trend the last four to six quarters. That was part of the first question. And GDP ran above trend last year. The Fed thinks our economy can grow about two percent give or take given its size and demographics.
It’s been running above that, and productivity is up meaningfully over the last, again, four to six quarters relative to the prior several years. So if that’s sustainable, boy, that’s that’s pretty darn good because that gets you economic growth with muted inflationary impact. So if we are early in a productivity upcycle, that’s a fantastic development for our economy and and the market. So I’ll stop there and turn it over to Taylor, to answer, the question about, duration and and, zero and and treasure and the treasury market today.
Yeah. So we had a good question. Is now the time to extend duration go on and on longer duration?
I do think it’s difficult to say because I feel like in the last year or so, there may have been I mean, it seems like just at the at face value, there are other great entry points to extend duration, and those didn’t turn out, to be great moves if you extend the duration a year ago or even a few months ago.
There’s just so much pressure, if inflation picks up, or some of the fiscal policies that that could lead to more inflation as well, that keep, I think, rates kinda range bound a little bit in in this current regime. If you zoom out a little bit, you know, this big bond bull rally we had for forty years going back to the eighties, you know, a lot of pressure to keep rates going lower and lower. But now since, you know, that bubble burst, if you will, I think rates are still trying to kind of find that equilibrium price and are gonna be bouncing up and down a little bit. So I think it’s hard to definitively say now is the time to extend or shorten duration.
And, also looking at previous cutting cycles, there is often a a period of time that can be rather extended for multiple years of when rates, are rather range bound, rather than trending in one direction lower. So I think that makes it hard to go all in a longer duration despite, you know, an environment where credit spreads are really tight and rates are at, you know, above average levels or yields are at all in yields are at above average levels.
I think that’s more a testament to I think tighter credit spreads are more a testament to strong fundamentals in the system and to strong, investor appetite for all in yield.
So, personally, I think it’s gonna be range bound a little bit, and I think maybe a more balanced approach, even a a laddered approach, not to talk the book too much, just makes a lot of sense to kinda have that natural interest rate hedge.
Alright. Good stuff, Taylor.
Any other questions?
Alright. I think that’s it for now. Tyson, I’ll throw it back to you to take us home as they say.
Good. Alright. Well, yeah, thanks everyone, and thanks for the questions. If you do have any follow-up questions from the call, feel free to reach out to us, myself, Tim, Ryan, Taylor, anyone on our team. We’re always happy to to answer those questions. Shoot us an email or a call.
And we appreciate everyone for spending some time with us this afternoon. We’ll give you a few minutes back in the afternoon. And, again, just thank you everyone, and thanks to the panelists for participating today.