2025 Outlook
2025 Outlook
Transcript:
Introduction & Housekeeping
Let's get started. Get started. Good afternoon everyone, and thanks for joining us here for our presentation of the 2025 economic Outlook as prepared by our broker dealer, LPL Financial. There's quite a bit to unpack here over the next hour or so, and we'll get started in just a moment. But first, a few housekeeping items, please. Of course, as you've heard, my operations manager, Lisa, Michael Whitney are on the call today. So if you are not in the meeting already, you have any questions or difficulties with today's presentation, you can call us at seven eight six thirty three hundred extension 2 4 2, or, I'm sorry, no, not my extension. 2 2 9
So please be mindful of the recording. And lastly, so as everyone is quite aware, the current administration is no stranger to controversy. So I'd like to avoid political topics tonight if we can, and keep our conversation this afternoon to the economy and the financial markets. Okay, let's get started.
What “Pragmatic” Means
So, I was a little curious myself about the title of this presentation, so I double checked just so I could be sure on the meaning of the word pragmatic. And the Merriam Dictionary defines the word pragmatic as relating to matters of fact or practical affairs, often to the exclusion of intellectual or artistic matters, practical as opposed to idealistic or realistic versus theoretical. So I thought that was appropriate, and I'm always up for a good pragmatic conversation at any time.
Presentation Overview
So today we're gonna take a look at four different segments of the economy and financial markets for this coming year with a special bonus discussion, if you will, on tariffs. So I'll also try to lighten things up as we go from time to time, as well as well as, you know, try to bring some humor into the presentation. And we're gonna again, include some short videos, like this one.
Capital Expenditures & Business Outlook
But now on to things a little bit more serious than that. So in 2024, business owners said they were waiting to ramp up capital expenditures or what we call CapEx until after the election. Capital expenditures, of course, are those expenditures made for long-term assets such as property, buildings, equipment, and technology. The market seems ripe for a resurgence of CapEx in 2025 due to the declining interest rates over the last year. Remember, low interest rates make it easier for companies to borrow money to expand their operations. The demand for power and communication structures are also on the rise, as well as research and development. All of this suggests an upside to the business spending in 2025.
Consumer Spending & GDP
The consumer remains the largest driver of our economy. Accounting for 80% of the growth in our gross domestic product are GDP. Now remember, GDP is the total monetary value of all goods and services produced within a country's border over a specific time period, typically quarterly or annually. This chart illustrates that the economy continues to remain on stable footing as we enter the new year with a gradual return to normal across many fronts. Of course, I'm putting giant air quotes around that word normal. Even though the economic expansion is expected to continue, volatility should be expected.
Inflation & Federal Reserve Policy
Inflation is decelerating, but not nearly as fast as the Federal Reserve would like. Barring any supply shocks and extreme tariff policies, we don't expect inflation to re-accelerate. But the path to the idealistic 2% is slow and arduous. Complicating things is the inflation stickiness of certain segments of the economy, like medical care services, insurance, and food prices that have kept inflation rates elevated. The slow and sluggish path to the fed's target of 2% means the Fed will likely take a cut and pause cadence this year with a total of perhaps 4 25 basis point cuts throughout the year. I would expect this pause to last longer than expected, though due to the fur flurry of policies that have been proposed by the current administration, a measured approach. Indeed.
Market Behavior & Investor Emotions
Again, though we are strong believers in the value of long-term investing, many short-term movements in the stock market are based on current topical events. We'll address this some more later in our discussion, but first, another video. I think we've all felt like this guy at one time or another while investing in the stock market,
Huh?
We probably all felt it like this person at some times, right? In our investing careers.
Bull Market Performance
Well, believe it or not, the bull market has entered its third year having celebrated its second anniversary on October 12th of last year. The s and p 500 is up nearly 70% since the move began with the booming year two of 32% following a below average, but very respectable year, one of 21%. A surprising, resilient economy, unwavering trends in technology moderating inflation, the start of the fed's rate cutting cycle, and a strong earnings recovery after the earnings recession ended in 2023 have driven much of the gains. History suggests, however, that this bull market has a good chance to celebrate a third anniversary in the absence of recession, which seems low at this point.
Interest Rates & Stock Market Impact
After one of its longest pauses in history. The federal reserve cut interest rates in September and November of last year. Now the question is how much support additional cuts may provide for stocks in the year ahead, and why, however, are stocks influenced it all by interest rates? So that's a common question, and there are three main reasons. Number one, the cost of borrowing for companies when interest rates are lower allows expanding operations and possibly higher profit margins. Number two, consumer spending increases with low interest rates adding to corporate profits. And number three, alternative investments such as bonds do not appear as attractive when rates are low.
Volatility & Market Corrections
Again, prospects for solid returns in 2025 are favorable. If the economy avoids recession, that does not however mean we should not expect volatility. In fact, even in a non-res recession periods of 19 84, 19 89 and 1995, the s and p 500 experienced pullbacks of between five and 10% along the way to double digit 12 month returns after the initial fed rate cut with positive stock market sentiment at record highs. By some measures, risks may be growing for a near term correction. In fact, US households are confident as they have ever been that stocks will continue to move higher in the year ahead. Though some sentiment readings such as those taken from the options market are more subdued. Any signs of exuberance call for discipline, I don't know if you remember the phrase irrational exuberance used by then Federal Reserve Chairman and Alan Greenspan just before the.com bubble burst in the late 1990s. Remember, remember that market corrections are normal and part of the economic economic cycle and cannot be timed with any consistent accuracy.
Bonds & Fixed Income Basics
Of course, no conversation about the financial markets would be complete without discussing bonds. Remember, when owning stocks or equities, you actually have ownership in that company. Well, with bonds, your role is as a creditor to the company or government entity. You see, you lend the institution money and they will pay you interest and return your principle if you hold that particular bond until maturity. Also, remember that bonds have a heavily dependent relationship upon interest rates and they have this special, unique relationship called an inverse relationship. As interest rates go up, the value of a bond goes down and vice versa. I have to tell you, it's been very difficult finding a goofy video on bonds fixed income. But again, I tried my best. Here goes.
Yield Curve & Economic Signals
So as I mentioned earlier, bonds have a complex relationship with interest rates. So I promise not to crawl too far into the weeds on this, but it is important for you as investors to have a general understanding. The yield curve is a very important indicator of potential future economic growth. The two components are the federal funds rate and the 10 year US treasury bond. The Fed funds rate is the short term interest rate set by the Federal Reserve, influencing borrowing costs for banks and indirectly the entire economy, the fed justice rate to control inflation and economic growth. The 10 year treasury rate or yield is the interest rate paid on US government bonds with a 10 year maturity. It reflects market expectations for future economic growth inflation, and the Fed's policy.
Treasury Debt & Deficits
While economic growth will remain the driver of of interest rates, a secondary risk to rates remains with the amount of treasury debt needed to fill federal budget deficits. And it's expected to stay elevated. Remember our conversation about bonds and your creditor role when you decide to invest in them. Well, the money that you lend to the federal government by perching US Treasury Securities is used to pay not only for government operations, but also to service or pay the interest on existing US treasury security debt. Per the Congressional Budget Office, the US government is expected to run sizable deficits over the next decade to the tune 0.5 to 7% of gross domestic product each year. And to fill those deficits, the Treasury Department will need to issue trillions more in treasury securities. But complicating the math even further for the Treasury Department, it would also need to roll over more than $6 trillion in treasury securities set to mature this year. Thus, the treasury Department will need to find investors for some $8 trillion worth of treasury debt over the next 12 months. But to, despite the mountain of debt and growing interest payments, believe it or not, the US government is not risk at risk of financial collapse. Since treasuries are considered risk-free securities by other countries around the world, there will always be buyers for treasury securities. Of course, we wouldn't operate our household budgets in this fashion, but that's a conversation for another day.
Geopolitics & Market Resilience
So let's move on to geopolitics and the global chess Board. Again, very difficult to find a humorous video on the subject.
Somehow you gotta break up a conversation about economics. So I reverted to my pals and obviously a propaganda piece from the 1940s. So let's take a look at geopolitics. Markets have navigated successfully a series of high risk scenarios throughout history, even significant market downturns caused by recession, external shocks, liquidity meltdowns. They've ultimately led to a stronger, more resilient market with attractive valuations. I can almost draw an analogy of our bodies fighting off and building up immunity against an illness naturally, of course, without drugs, which thereby makes us more resilient to future illnesses.
So let's take a close look at this chart. Does everybody remember the panic of the early days of the pandemic and how quickly markets were affected? How about the fear surrounding the presidential election of last year? And when Hamas Atta attacked Israel in such a brutal fashion, I certainly thought there were the makings of a war in the Middle East, yet the stock market remains resilient and forged ahead to drive home.
This point, I found another chart that demonstrates the same story I find, particularly the JFK assassination and September 11th of particular interest. Now, I was only eight months old when President Kennedy was assassinated, but I know enough about that time period one, which was filled with hope and optimism about the future. That outlook was clearly shattered on that fateful day. How did the stock market react? There was a one day correction of almost 3%. That's it.
I was certainly old enough to experience the trauma of September 11 and the inevitable call to war that followed. How did the stock market react to that? Well, the market was down a pretty significant 5% the next trading day, and 11.6% over just an 11 day period. And it took only 31 days to post a recovery. So the obvious point here is that throughout history, there have been events like this, and it's up to us to react without emotion and stay resilient.
Tariffs Discussion
And finally, our last topic of the afternoon. So tariffs have been the topic of discussion this week. So let's take a closer look and make no mistake, tariffs are essentially taxes and regressive taxes at that since they tend to affect lower income folks more than those with higher incomes. But first, let's learn a little bit about the chicken wars.
Hello, and welcome to the heart of the Donald Trump economic plan.
We should talk about the chicken war.
The chicken war is a cut and good story.
In post World War 2, west Germany, people started eating a lot of chicken, specifically American chicken. Midway through 1962, US farmers were on track to sell more than $50 million worth, half a billion in today's money. This made European farmers mad. So the organization that later became the European Union put a tariff on chicken, a five pound chicken that started as a dollar 60 became 2 25. Imports quickly dropped. US chicken farmers and politicians were furious.
And we thought Germany's our big market changed their mind on chicken.
So the US put a 25% tariff on trucks like Germany's Volkswagen, and it worked. Their truck sell in the US fell by half, and they never really recovered. Meanwhile, Germans paid more for their chicken, and Americans had fewer truck options.
Now there's much more to that video, and I would suggest that if you get a chance to watch it, it's a very, very informative video on this whole process of applying tariffs.
Who Pays Tariffs?
So a couple slides here. First of all, who pays the tariffs? Who pays the tariffs? So I'm gonna use the example of avocados as I walk you through this. Who pays the tariff scenario?
So let's suppose Mexican farmers sell avocados to price chopper for a dollar each. The US government slaps a 25% tariff on that transaction, and now price chopper has to pay a dollar 25 for the same avocado.
Now, price chopper can pass that cost along to consumers by charging maybe a dollar 50 for each avocado. And you can slowly see how inflation can creep its way in.
Alternatively, the Mexican farmers can agree to lower their sale price to price chopper in order to foster a good relationship and maintain their business ties. Of course, American farmers may decide to start growing avocados here in the US. Those avocados probably would be more expensive, mainly due to labor costs, but most likely US jobs would be created here as well.
So this is a simplified example, but hopefully you get the idea.
Products & Industries Affected by Tariffs
Now, here are some examples of the many products that may be affected by US tariffs. Vehicles and auto parts supplied by Mexico and Canada, gasoline and energy products coming from Canada, smartphones and electronics coming from China, lumber and construction materials from up north, fresh food such as avocados, tomatoes, and tequila from Mexico.
How many of you knew that in some instances, in some sources, 80% of the frozen french fries we eat in this country come from Canada? I did not know that. But frozen french fries from Canada could be affected. Toys and consumer goods, and honestly, many, many things that we use on a daily basis from China could be affected.
Businesses Impacted
What businesses will feel the impact? Retailers and manufacturers that rely on imported raw materials. Small businesses that depend on affordable goods from Mexico, Canada, and China. Tech companies like Apple, which previously had exemptions under Trump's first term, may no longer qualify for those exemptions this time around. US construction industry due to higher costs from Canadian lumber.
In short, many products that we use on a daily basis could be affected by the mismanagement of tariff policy.
Tariff Summary & Economic Effects
So in summary, fundamentals of tariffs. The overall impact, to be completely honest in my research for this topic, it's been very difficult to find any credible economists that are in favor of an aggressive tariff policy.
Again, tariffs will likely raise prices for American consumers on everyday goods, increase uncertainty for businesses that rely on cross border trade, disrupt supply chains, and create incentives to shift production elsewhere. Strain US relationships with trade partners, potentially impacting broader economic policies, impossible stagflation, which is a combination of high inflation, stagnant economic growth and elevated unemployment.
Now, some potential positives, maybe an incentive for foreign governments to change their policies towards the US and the possibility of increasing jobs here in America.
So that's our fairly quick run through of our presentation this afternoon, and hopefully this little crash course on economics, the stock and bond markets, geopolitics and tariffs had shed some light on some very complicated subjects.
Q&A Session
Okay, so Lisa, at this point, let's open up the Florida questions. Any questions out there, folks? I think Mike's going to unmute those folks that are looking for question to be answered.
Yeah, Eldon, you're unmuted so you can go.
Okay. Well, I like the presentation and there is a lot of uncertainty and I suppose the real question is what should we do? And I'm willing to bet that you're gonna say stay, say stay the course, because that's what you always say. But, you know, is there anything in particular that we should, as investors should be looking out for?
Well, first of all, so a good question, Eldon and very appropriate, we're all concerned about our investment portfolios and, you know, how do we react to all of this? So I would say a couple different things. First of all, please realize and remember that your portfolios are built for this type of volatility, okay? You're built for this. So you folks are exposed, folks that have accounts with us to 13, 15 different asset classes, okay? In the interest of diversification, all doing something different at different times, okay? So the portfolios are built to handle this type of volatility.
The second thing I would say would be that, as I mentioned in one of the slides, it's just nearly impossible to do any timing of the markets. Again, we have the yield curve as a foreseer, we have prognostications by economists. We have a lot of different inputs here, but there's no reliable source to tell us when or if there's a recession on the horizon.
So you're right, Eldon, you're gonna hear the same story from me time and time again. And I'm not gonna stray from that. I feel confident in the way we've invested folks retirement savings, and I'm gonna stand on that till the very last day
So now there's uncertainty that's clear. What is it we're looking for? And the example of now the tariffs. Oops, they're on, they're off. Oops, maybe they're gonna be on again. Where are we going with that? Are there any things in specific, you know, you showed those curves and we can look at those all in hindsight and see what the timeframes were and all that. But if you had to put your finger on one or two or three indicators, what would we be looking at?
Well, first of all, let me start by saying this is just my personal opinion. So it may be a popular thought out there, but I feel strongly that Donald Trump is using tariff policy to influence countries to make changes in the way they treat our country. So he's using tariffs as a tool to bargain with. And you can see that.
As far as indicators are concerned, I think you've gotta always go back to corporate profits earnings. Throughout time, there's been events like this, and companies find a way to work through the system to become profitable. Sometimes they pass those expenses onto the consumer, but they work the system.
So I'm always gonna go back to quarterly earnings reports and how earnings are showing up from all of these different segments of the economy. If we see earnings start to take a hit because of tariff implications, then that could be an indicator that the economy is slowing down.
I'm looking at corporate earnings. If earnings are below expectations, that could trigger a domino effect that may lead to a correction in the markets. Again, completely normal. It's part of the economic cycle.
So again, Steve, that was a long-winded answer, but I'm gonna go back to corporate earnings.
Yeah, I think that's a good answer. Thank you.
Thank you. Thanks for the question. And listen, I understand it's not easy. I have my own investment accounts like the rest of you folks. So it's not easy. And I get it. I stick to the basics. I stick through what has worked throughout history and these are the things that drive me and help me and my staff to make decisions on that front.