4th Quarter Newsletter 2024

  “You can’t make this stuff up!” This is a phrase which came to mind for us often throughout 2024. Wiktionary.org defines the phrase as describing a reality “so bizarre, ironic, or comically coincidental, as to be unbelievable.” In fact, in the face of such realities, many refuse to believe it. One thing is certain; when this phrase is evoked, most who predicted the way events would unfold are proven wrong. This is the time of year when market analysts, economists, and investment advisory companies present their outlooks for the year ahead. Whether their predictions for the previous year were spot on, out in left field, or somewhere in the middle, the prognosticators are stepping up with their views of what 2025 will hold.

  The 1/6/25 article from First Trust, “A Year of Promise and Paybacks,” offers as an example of how difficult predicting last year proved. It was a year with unexpected and seemingly nonsensical events bringing unusual results. In sports: “College Football Playoffs included 12 teams this year, and all five automatic berth teams (because they won their conference championships) are now OUT, including the top two rated teams, Oregon and Georgia.” On the financial front, the S&P closed out 2024 significantly better than most expected. First Trust notes, “not a single Wall Street firm” came close to predicting the 2024 gain realized. The Fed had to shift gears in their outlook for 2025 rate cuts late in the year, as inflation, which had been slowly improving, suddenly reversed. “The sharp slowdown in growth, or even recession, that we forecast, did not come true.” [1]

  The 2024 Presidential Campaign took one dramatic turn after another. Weeks before the Conventions, at least the identities of the two major candidates appeared certain. But then came the assassination attempt on Donald Trump, the dramatic reversal of Joe Biden, who had adamantly insisted he was staying in the race, Kamala Harris taking his spot and running in what appeared to be a close race, and the stunning outcome as results came in on Election night, revealing a major and unpredicted shift “in nearly all demographic groups, even in blue states, toward Donald Trump. . . .All of this,” they admit, “makes forecasting 2025 another significant challenge.” The new administration hopes to cut government spending significantly. Over the past 2 years, the budget deficit has run nearly 2 trillion dollars, and ‘half of all job growth has been in government and healthcare jobs.” The Trump Administration is proposing some dramatic policies to reduce the size of government and cut taxes. In addition, tariffs are in the picture. [2]

  Less regulation is great for long-term growth, but reduced deficits are a short-term headwind. On the international front, they see Trump’s victory positively affecting politics in several countries, noting if the U.S. gets its fiscal house in order and “projects power and not appeasement” there is less chance of a wider war breaking out. The First Trust forecast warns the COVID lockdowns were a significant negative for growth, and massive government spending, “masked the pain, like morphine.” As it wears off, they feel a recession is likely; “not a deep recession, but one that causes real GDP to decline 0.5-1%, and corporate profits to disappoint for the first time in years.”[3]

  Franklin Templeton’s Chief Investment Officer for Fixed Income, Sonal Desai Ph.D., offered her outlook for the economy, stating it is “both very promising and highly uncertain.” She notes the new administration has floated several significant changes in economic policy, “some are unambiguously good -a more business friendly regulatory environment would boost investment and economic growth. Others are potentially damaging depending on how and in what measure they will be implemented.” Overall, she sees the U.S. Economy maintaining strong growth momentum given consumer confidence and the prospect of more business-friendly reforms. While policy uncertainty is significant, she sees it mostly as the risk of a temporary rebound in inflation, and overall, not lasting damage to growth.[4]

  Typically, a change in administration in Washington will generate new year predictions about certain industries whose stock prices may benefit from a major shift in focus. Experience has shown that in the long run demand and profits drive higher stock prices, not political mandates. Trump has used the phrase “drill baby drill” on the campaign trail and in his Inaugural Speech. His Administration’s focus is on increasing oil and gas production in the U.S. This has caught the attention of many investors. Natixis Investment Managers put out an interesting piece recently, addressing their thoughts on the impact “drill, baby drill” may have on the sector. Their take is that the U.S. is already the largest oil producer and biggest exporter of natural gas. Energy companies are focused on growth, meeting demand, and avoiding debt. Jim Nolan, the author of the report, notes that thousands of leases to drill on private land in the U.S. already exist and are not being used, so, making more public lands available will not help growth.[5]

  The Kansas City Federal Reserve’s 4^th quarter survey indicates drilling new wells is profitable beginning at US$62/bbl. At current prices, drilling a new well is modestly profitable. Nolan points out that “drill, baby drill” inherently means more supply, which would drive prices down. In theory, lower prices for heating oil and gas reduce inflation, putting more money in consumers’ pockets, which is a win. But he points out oil companies will not continue to produce if prices fall, “to the point where they are a loss-making endeavor.” He concludes the slogan is great, but the plan faces a lot of hurdles, “profitability being one.” So, looking for market opportunities based on political mandates of the new administration may not be the most helpful to investors.[6]

  We can all look back on 2024 as a year when many unlikely and even bizarre events had us saying to ourselves, “you can’t make this stuff up!” And with all the significant changes in Administration, we can agree forecasting the Economy and Investment Markets in 2025 is a daunting task. We are glad it isn’t our job to make those predictions!

  We continue to believe in long-term opportunities for growth in equities, and to expect the unexpected. Our strategy is to combine opportunities for growth with a desire to avoid significant losses. In the year ahead we will be vigilant in watching events play out and markets move. We will take advantage of moments to add promising positions to our portfolios, and to sell those which show more near-term risk than we see wise. Our business goals for 2025 include continuing education for the three of us; and Katie continues her progress in obtaining professional investment management licenses. We look forward to attending Cambridge’s Annual Conference later this year. We hope to see as many of you face to face as we can this year for annual reviews, and to schedule telephone or Zoom meetings for those who cannot. Thank you all for your continued confidence and trust. May 2025 prove to be a happy and productive year for everyone.

Sincerely,

The Galarneau Group