Similar to the end of 2023, we again find ourselves coming out of a surprising year in the market. With a change of leadership forthcoming, a slightly dovish Federal Reserve, status quo in Russia/Ukraine and the Israel conflict, and corporate profits that have held steady, we find ourselves pondering what 2025 holds for the markets. Currently, there is a debt ceiling issue and the unknowns of what a change of leadership will bring. President Elect Trump has a strong penchant for low interest rates as well as lower taxes but the country also has a big debt problem. While the new administration may want lower interest rates and lower tax rates, it remains to be seen if inflation, the Fed and/or Congress will ultimately dictate that course. We also have a market with a current Shiller Cyclically Adjusted PE Ratio of 37.74 (price earnings ratio which is based on average inflation-adjusted earnings from the previous 10 years). In layman’s terms, that means the current market is the 2nd most expensive we’ve ever seen (the ‘dotcom’ era is 1st ).
What does all this mean for markets? In our view, it means that we need to pay particular attention to what we pay for securities and which ones we buy. At some point, if history repeats itself (and it usually does), there will a reversion to a more normalized price earnings ratio. As we have mentioned in the past, chasing the popular stocks normally does not end well once the brakes are applied to the market’s momentum. To the extent that we may own stocks with higher valuations that have benefited from the momentum, it behooves us to occasionally take gains and reallocate to better valued securities for the long-term health of each client’s portfolio.
With many moving parts to come in the next 12 months, our key is to focus on companies with future earnings, which ultimately drive markets and dividend payouts. The effect of whatever direction inflation takes along with future government policies (ie. interest rate direction, taxes) going forward will help determine those earnings. In Buffett’s quote, the “playing field” is good prices, future earnings, disruptive companies, etc. which ultimately will lead to a long-term scoreboard that should not disappoint. Market volatility is merely noise.
