Given our experience with the president’s first term, we anticipated haphazard changes heading into 2025. Due to policy changes, an already richly valued stock market, and a necessary reduction of government spending that has propelled growth over the past two years, we expect some volatility and more muted returns than in previous years.
The market is not political. It prices in risk, i.e., what will increase or decrease earnings. While the current administration’s policies influence corporate earnings, they are far from wholly determined by it. Generally, bonds and stocks say that growth (GDP) is slowing not due to volatility but because of ambiguity and gridlock in Washington. When investor and consumer confidence is driven lower, it often leads to inaction, i.e., slower spending, capital investment, and hiring, affecting earnings. Yet pervasive risk is not evident, and the backbone of our economy, the banking sector, is strong.
Investment markets do not rise in a straight line. We view pullbacks in the market as an opportunity to add to sectors and/or markets we like for the long term. As always, a balanced long-term portfolio is the best way to proceed.
While no cycle is identical, our experience across multiple business cycles has equipped us to navigate choppy markets, regardless of the source of volatility. History doesn’t repeat, but it does rhyme.