First months of new year could be a wild ride
Ah, a New Year. While from a financial market perspective 2024 was hard not to like, I for one am looking forward to 2025 with both positive anticipation as well as a healthy level of nervousness.
I believe the re-election of Donald Trump heralds a once in a multiple generation societal shift. Trump, whether you love him or hate him, to me represents the true intention for change and disruption on a national scale, and unlike last time when I believe Trump thought his election in 2016 was mostly about his own charm, this time I think he actually understands and embraces the intent of those who support him.
The nation wants change, and having learned the hard way just how the system he seeks to govern can resist, his incoming administration has developed strategies to deliver more effective results in the upcoming second round. Ready or not, disruption is coming and at the very least it will be entertaining.
In my experience however, financial markets struggle with disruption. So, my expectations for 2025 are a bit back-end loaded as I believe the Trump administration seeks to come in with a bang. Here are some of the investment themes I will be working off this year, which are primarily dominated by inflation.
The Biden administration is clearly blamed for the rampant inflation experienced over the three years, but reality is rarely this simple. The government has mismanaged its finances and the monetary base for decades, and while Biden's economic philosophy of driving federal dollars towards preferred industries and zero accountability when it comes to federal operational spending is no doubt a cherry on the mismanagement sundae, I believe when it comes to inflation, President Biden is more a victim of bad timing than anything else.
A number of long-term trends involving demographics, public and private debt and globalism, coupled with a radical financial response to the COVID crisis, are manifesting in higher inflation, which won't be easily offset by anything the Trump administration is able or willing to do, especially in the short term. In the short term the snickering lefties online, blaming the re-election of Donald Trump on grocery prices, are likely to be validated; groceries prices aren't going down, inflation will not be easy to control and I believe investors are just coming to realize this reality. It is this realization that I believe will drive markets in the early part of 2025.
In the short term, I do not believe investors really care about inflation, but what they do care about is interest rates, which they are expecting, maybe even demanding, to go lower. I believe this expectation will be the first investing challenge of the new year, as inflation continues to stay above the Fed's target level and the central bank continues to forecast a slower pace of rate cuts, or maybe even an early pause to the rate cutting cycle, only this time with a new wild card: Donald Trump.
The Washington establishment believes in the independence of the Federal Reserve. The politicians have talked themselves into the supremacy of the Fed policy process, letting the experts at the Fed run the economy. I believe Donald Trump believes none of this. Listening to his rhetoric, Donald Trump believes in growing the economic pie, believes people who are working hard and making money have less time and energy to fight with each other politically, and believes the way to make America rich is lower taxes, lower regulations and yes, lower interest rates -- and he isn't interested in the independence of the Fed.
From this perspective, it's not hard to see the predicament we could end up in. With inflation rates not dropping, or even rising, the Fed attempting its standard policy response of holding interest rates steady or even raising them, and President Trump pounding away on Truth Social about what he wants to see -- forget the playoffs, this could be the most exciting game ever, all playing out by springtime.
What would the financial markets look like in this scenario? Well, I would expect longer term interest rates to move higher as bond investors begin to price in higher permanent inflation rates, and I would expect complete confusion with the short end of the rate curve, driving an already overheated stock market toward much increased volatility.
With these possibilities in mind, I am going into the New Year prepared for a wild ride. The silver lining is, I do believe the lower tax, smaller government philosophy of the incoming administration promotes stronger growth over time, even if this growth comes with a dose of higher inflation.
Eventually I believe the new normal of a more rambunctious monetary policy process settles in, and the prospects of higher growth and higher inflation drive long interest rates and stock prices higher, both of which are ultimately good for investors by year end. We may just have to survive long enough to enjoy them. Happy New Year.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
