Winter 2025 Quarterly Commentary
Economic Perspective
By now, most of us know that the stock market has rallied quite strongly (20% +) in the last two years. With the election now behind us, investor cash previously sitting on the sidelines has been vigorously redeployed into risk-on areas of the market. The return of ‘animal spirits’ has become an economic tailwind for 2025. The upcoming new administration’s America-first, deregulation and pro-growth policy initiatives have lifted both consumer and business sentiment. As a result, retail sales, ISM Manufacturing& Services Indices and the JOLTs (job openings) survey have all improved. The U.S. dollar, up nearly high single digits since before the election, is usually a good barometer as to the overall health of the economy. The outsized move speaks volumes as to the current strength of our domestic economy relative to the rest of the world.
Market Perspective
The increased optimism in the economy and stock market hasresulted in a change to the short-term trend in interest rates (higher) &also potential future policy action from the Fed. As such, our previouslyinverted U.S. Treasury yield curve has reversed course and normalized (nowupward sloping) with yields on the 2-year U.S. Treasury currently near 4.30%and the 10-year U.S. Treasury near 4.70%. In addition, Jerome Powell and theother FOMC members have pivoted from slightly dovish (possible rate cuts) to slightlyhawkish (neutral on rates / elevated inflation concerns) in recent weeks. Ourinvestment committee believes higher rates are not necessarily a bad thing -especially with inflation range bound and relatively tame. However,historically this can become a headwind to growth equities. With leading growthnames (The Magnificent 7: Microsoft, Meta, Alphabet, Amazon, Apple, Nvidia andTesla) up almost 70% last year (significantly outperforming the market) thiscould certainly lead to some profit-taking over the near-term. Therefore, weexpect to see above-average market rotation & a change in leadership overthe course of the year. With only 19% of all stocks in the S&P 500 Indexoutperforming the market last year, there is ample opportunity for marketreturns to broaden. According to Northern Trust, value stocks currently tradeat a 45% discount to growth stocks – well below the historical average ofaround a 30% discount. Our belief in mean reversion has us opportunisticallyrepositioning client portfolios to take advantage of the valuation gap.
Looking Ahead
There is a lot of good news priced into the stock market.Rightfully so, given that consumers were spending during the holidays, businesssentiment has improved & news on the geopolitical front has been quiet oflate. So, should we leave the party? Or should we stay at the party but danceclose to the door?? Do nothing at all??? Looking back at history, we oftentimesremind our clients that time in the market is much more important than timingthe market. This is the perfect time to remind everyone of this. Our firm haslong believed that taking a company ownership approach to investing, avoidingthe market noise & putting time on your side leads to the best results inthe long run. We stand firmly behind this approach to equity investing. With thatsaid, we believe both bonds and cash are attractive at the present time. Itmakes sense for many of our clients to have a more balanced asset allocationbased on their individual goals and cash flow needs. We take pride in ourcustom approach to managing your money. We look forward to serving you again in2025!