Diversification opportunities, tax changes and the wisdom in wearing a parachute.
Last week, my oldest son was accepted to the college of his dreams. He wants to pursue a career in sports journalism and is both an avid writer and the play-by-play commentator for his high school, à la Jim Nantz. He is a good student and a good kid, but in these competitive times that does not always mean your dreams play out as hoped. He was ecstatic and called me at work shortly after learning he was accepted. His friends at school later sent me the video they took of the moment live as it happened. Watching him jump up from the chair and seeing the fist bumps and cheers all around was exhilarating, funny and sweet.
It was an example of pure hope and optimism for the future that took my breath away.
As we get older and experience makes us wiser, we often forget that feeling of hope and the purity of joyful optimism. We worry about what could go wrong, instead of considering what could go right. This is especially true when we are investors, as we try to protect and grow what we have worked hard to accumulate.
Of course, there is a lot of good that comes from caution, skepticism and critical thinking. I always loved the George Bernard Shaw quote that encapsulates the benefits of both ways of thinking: “Both optimists and pessimists contribute to society. The optimist invents the aeroplane, the pessimist the parachute.”
As I consider 2025, I urge you to take the “airplane and the parachute” approach to your portfolio strategy and planning. At the moment, there is consensus for strong U.S. economic growth, which is expected to push stocks higher while policies from the Trump administration drive another year of U.S. exceptionalism. But inflation remains above the Federal Reserve’s 2% target and as Fed Chairman Jay Powell indicated last week, this will keep rates higher for longer. Trump’s deportation and tariff proposals may also complicate the inflation picture.
Notably, some strategists are pointing to Europe for an emergent investment opportunity if tariffs are not as widespread or punishing as feared—and if conflict between Russia and Ukraine deescalates. Many of the overstretched metrics in the U.S. are the opposite in areas like Europe, where stocks are seen as undervalued.
There is also growing evidence that, in the face of tariffs, China will take drastic measures to encourage consumption, as evidenced by announcements this week from its Ministry of Finance on fiscal work in 2025. Chinese leaders are setting an annual growth goal of about 5% for next year and raising the budget deficit to 4% of GDP from 3% this year. The new growth goal would match this year’s target, which officials are on track to hit after unleashing a slew of stimulus since September including rate cuts and more cash for banks. In addition, the finance ministry vowed to step up support for a consumer product trade-in program and to expand government investment.
While investments in overseas markets have not worked well on a relative basis in a long time, diversification into these unloved areas might be just the right kind of parachute if the U.S. economy doesn’t blow past expectations for the first time since the Covid-19 outbreak. Especially with the dollar trading at these high levels, holding a measure of international exposure in your portfolio may be a hedge worth having in 2025.
Likewise, taking another look at small and mid-sized companies is worth the effort. In 2024, U.S. mega-cap technology companies accounted for about 70% of the U.S. equity market’s profit growth. Next year it’s forecast to be 50%—still high, but a narrowing difference.
As investors seek value, they may rotate to the less loved sectors: Regional banks that benefit from a steep yield curve; infrastructure and energy-related companies that will benefit from the electricity need created by the continued adoption of AI; and consumer discretionary companies that will benefit from the shift in consumer preferences resulting from the massive number of people taking GLP-1 drugs.
I hope 2025 is a year of optimism for you and your families, and that financial markets across all segments deliver on the promise of an improved future. I also recommend we all pack a parachute, just in case. Happy New Year!
2025 Changes to Retirement Plan Catch-up Contributions
The Secure Act 2.0 of 2022 introduced a number of changes to the rules pertaining to retirement plan contributions and distributions. The implementation of several of these provisions was delayed but, starting in 2025, we will see many of those changes go into effect. To learn more, please click here. You can also read our November newsletter article detailing the super-sized catch-up rule going into effect next year.
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