By Arthur G. Swalley, CIMA®, Partner, Chief Investment Officer

2024 has provided historic shifts on many fronts – economic, political, and societal. We make every possible effort to think about the long term implications of major change rather than focusing on the markets’ short term bounces of the ball, while recognizing that short term swings can represent powerful psychological markers that must be addressed.

Leading up to the election, economic indicators have been broadly positive. Employment growth has been steady, excepting the noisy November 1 result due to hurricanes and the Boeing strike. Wage growth has also been strong, outstripping the inflation rate since the COVID-19 vaccines came online at the end of 2020. Inflation has fallen towards the Fed’s 2% target, close enough to allow the Fed to reduce the overnight lending rate from 5.25% to 4.5%.

The most widely forecast recession in memory has not materialized; with 10-year Treasury bond rates moving up towards 4.5% and a flat yield curve, markets are forecasting “no landing” over a “soft landing”. The recession that wasn’t, has been recast as a “vibecession” with profound election impacts. There will be a recession in the future, but the economic conditions we have been enjoying makes forecasting the time and nature of its arrival impractical.

The recent election result – the “red wave” – has sparked a broad stock market rally on top of an already very strong year. Smaller companies are significantly cheaper than large companies, with a broad base of potential earnings growth in place to provide a catch up in performance. Historically, the US economy enjoying solid GDP growth in the 3% range coupled with Fed funds rates in the 3-5% range has delivered smaller and value oriented companies a performance advantage over high-priced growth stocks.

The prospect of lower taxes and less regulation has “trumped” concerns about the potential for higher deficits and borrowing costs, as well as the historically negative long-term economic impacts of tariffs and trade restrictions.

We forecast that the new administration’s campaign promises and threats (if even partially fulfilled), coupled with its track record of unpredictable management and volatility, will result in greater long-term economic uncertainty and variability of outcomes. We are now enjoying the short-term benefits of American economic strength and resilience while contemplating the potential impacts of expanding deficits, debt, and global volatility.

It is easy to make forecasts of better US equity performance versus foreign and emerging markets under current circumstances. However, we believe that there is elevated risk in buying expensive large cap US companies, versus considering foreign companies which have already experienced poor returns and are relatively historically cheap. None other than Warren Buffett has sold off massive amounts of US large cap stock this year, to a point where his cash holdings ($325 billion!) far outstrip his US common stock holdings. We are confident that there will come a day when proper asset allocation and diversification away from expensive large-cap US stocks will amply reward patient investors.