Some Thoughts for the New Year
Meet the new boss, same as the old boss
President Trump yes, but also Jay Powell (Federal Reserve) and Mike Johnson (Speaker of theHouse). The euphoria post-election seems to have come to a screeching halt, as all three of these characters reminded us this week that we have seen this movie before. The markets were very happy with the prospect of unified government, a hawkish Fed cutting rates, and DOGE stepping into trim the size of Washington. All of this as the President-elect seemed calm and pleased. But I think deep down we knew it couldn’t last.
First, the Fed seemed to walk back the expectation of many cuts (maybe only two now) for 2025.The markets didn’t seem to enjoy that news. Second came the annual mad dash from Congress to keep the government open, and the resolution landed in Mara Lago with a thud. President (not actually quite yet) Trump and Elon rejected the big spending plan on X (and Truth Social), which then sent all of Washington into what looked like code red. All’s well that ends well, but we got reminded of the chaos and confusion Trump can deliver to the Swamp, which has no real desire to do anything but to stay the same.
The Markets are speaking
The stock and bond markets seem to be reacting to the new regime – some good, and some not so good.
When the Fed cut interest rates in September by 50 basis points , the bond market moved in the opposite direction, with the 10-year Treasury going from roughly 3.6% to today’s 4.5%. Jay Powell is trying his best to lower interest rates, which would in turn encourage more lending with lower rates, and hopefully not spark more inflation. And so far, it is definitely not working. The bond market is saying back to Jay and the Fed, “Stop before you make things worse, or even cause a recession. I know you have your standard playbook, but inflation is moving on the right track, and if you keep this up, it’ll come back to haunt us again.” Maybe DOGE can eliminate the FederalReserve and replace it with AI. And Trump hasn’t even begun to demand lower interest rates. Expect the fun level to elevate quickly after January 20, and in the meantime, be wary of the bond market.
Stocks have responded quite well to the promise of America First, with small caps out performing everything in sight (except Bitcoin of course), peaking around Thanksgiving. The hope of fewer regulations, lower taxes, and an end to the ongoing wars gave willing investors an actual tailwind to put money to work, especially in American companies.
However, the tailwind also included a silent promise of four to five rate cuts in 2025, which the Fed reduced to maybe two. This caused confusion to say the least, and the volatility in the stock market that has been missing for nearly two years is back. And just for kicks, throw in Republicans fighting over spending, and P/E ratios in the nosebleed section. I think uncomfortable volatility is back. For long-term investors, this is a good thing.
So what play do we run now?
Yes, I am watching the college football playoffs with regular confusion as I cheer for Big 10 stalwart Oregon, or is that SEC favorite Texas? To make it fun, I normally try to guess out loud what play a team will run next – screen left, throw deep, and never punt. My wife has stopped wondering why I am yelling at the TV.
Anyway, as it goes for us, what is the play, given this seemingly new environment?
I think the Fed has completely flipped the script, and higher interest rates for longer than expected have made stock investors realize that the landscape has changed, and that lower P/E ratios are required to make any money. But finally, volatility may give us a chance to allocate more to stocks. We will endeavor to stay nimble, so stay tuned.
Also, higher for longer interest rates should assist our Real Assets portfolios nicely, so we will continue the overweight. Bonds continue to struggle until rates go much higher.
Oak City update
I am very happy to tell you that Daniel Ward and Brett Danforth have both agreed to become partners at Oak City Consulting LLC, along with Melissa Smith and me. I believe this makes our future even brighter as we grow and work to pursue Redemptive Institutional Investing for you. I am not planning to go anywhere, and am excited to see how God will use Oak City and you in the years to come.
We hope you are planning to be at the Cove again this coming year (February 24-26), as our team is hard at work getting ready.
Merry Christmas and Happy New Year!
“And the angel said to them, “Fear not, for behold, I bring you good news of great joy that will be for all people. For unto you is born this day in the city of David a Savior who is Christ the Lord.” Luke2:10-11
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