Chief Investment Officer Stephen Galli presents financial market and portfolio updates for Q1. This client webinar was produced by Wealthspring Financial Partners in partnership with Nisivoccia Wealth Advisors.
Executive summary:
- The U.S. equity markets are trading at all-time highs due to the optimism surrounding the new administration’s pro-business policies and the potential for AI to drive profits/earnings higher.
- Inflation remains a problem, and recent numbers did not support Fed rate cuts, which will keep mid/long-term interest rates from moving much lower.
- The U.S. consumer remains healthy, and households now hold more of their wealth in equity compared to any time in recent history.
Much of the post-election commentary could be summed up by the observation that the Democratic Party forgot about the importance of the price of eggs. But given that inflation remains well above the Federal Reserve’s 2% target, and prices for most goods (and especially services) are uncomfortably high, it will be very difficult for the Fed to cut interest rates this year. Even without the prospect of less restrictive monetary policy, the equity market continues to trade near all-time highs.
I’m getting a strong sense of déjà-vu, since this is what was happening at this time last year: the equity market was trading at all-time highs (and continued to set new all-time highs throughout 2024) and the Fed was expected to cut rates much more than they actually did. We thought it would be wise to demonstrate caution back then, and so we think it’s an even better idea to be cautious now.
Bulls will trumpet that because the new administration is pro-business, company earnings and profits stand to benefit, coupled with less regulation, lower taxes, and the looming Artificial Intelligence revolution, U.S. companies are where you should place your bets. Bond traders (who our readers know we think are very good at sniffing out market problems) also seem to be squarely in the Bulls camp, since corporate bond spreads are at very tight levels. Perhaps they deserve to be, since BB-rated (“junk”) bonds experienced ZERO defaults in 2024 – a rare feat.
Bears say that inflation is not going down (recent Feb. 12 numbers went up!), which means the Fed will have a hard time lowering interest rates, and stocks will struggle without the winds of rate cuts at their back. The current administration can fairly be described as unpredictable, and mistakes are likely to happen which could roil the markets. It’s also a fact that much of the U.S. equity market is trading at very high valuations, raising the specter of the dot-com bubble when tech stocks were all the rage.
With that in mind, updates to portfolios in Q1 include:
- We are neutral to slightly under-weight equity overall, removing our under-weight to developed international equities due to more attractive valuations.
- We are reducing our over-weight to fixed income since rate cuts are less likely, and adding to duration.
- Where possible we are favoring “equal-weight” equity market exposure due to overconcentration in market cap weighted indexes and better valuations away from mega-caps.
We will continue to carefully monitor market developments and welcome the opportunity to speak with clients in more detail about portfolio strategies.
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