President Trump has swiftly assembled his cabinet, implementing numerous policy changes. What lies ahead for investors in 2025? How will tariffs impact the economy? Which economic trends will shape the year?
These are just some of the questions we hear from clients and business partners. In this web seminar we will break down the post-election landscape and share our market outlook, including the investment themes that matter most right now.
DISCLAIMER
This presentation has been prepared for informational and educational purposes only by First Long Island Investors, LLC (“FLI”). This presentation should only be considered current as of March 6,2025 (or as otherwise indicated in the presentation) without regard to the date on which it was received or accessed. As a consequence, events may transpire subsequent to the date of this presentation that can render the contents inaccurate or obsolete. FLI believes the information contained in this presentation to be reliable as of the presentation date but does not warrant its accuracy or completeness. No party is obligated to update the contents of this presentation. However, FLI maintains the right to delete, modify or supplement this presentation without prior notice.
The contents of this presentation are not intended to provide investment advice and under no circumstances does anything contained in this presentation represent a recommendation to buy or sell any particular security or to invest in any particular product. Nothing set forth herein shall constitute an offer to sell any securities or constitute a solicitation of an offer to purchase any securities. Past performance is not indicative of future results. Investment returns will fluctuate over time and may be volatile.
The names “First Long Island”, “FLI”, and all derivations thereof are the property of their respective owners and may not be used or copied without prior authorization. You acquire no rights or licenses to download, upload, post, transmit, publish, or distribute this presentation or any other material in any way that infringes or otherwise contravenes the rights of FLI or any third party, including any copyright, trademark, patent, rights of privacy or publicity or any other proprietary right.
In no event shall FLI be liable to any party for any damages, costs, fees, expenses, or losses of any kind in connection with any use of the contents of this presentation even if advised of the possibility of such damages.
2025: CAUTIOUS OPTIMISM WITH SOME UNUSUAL UNCERTAINTY
For years, we have been guided by the direction of corporate earnings (especially those of the companies we invest in) and real-estate cash flows, in conjunction with the level and direction of interest rates. The values of companies and real estate are primarily measured by two factors: earnings/cash flows and the impact of changes in interest rates. This could not have been more evident over the past three years. During this period, we experienced the benefits of declining interest rates coupled with rising earnings, and the challenges of significant interest rate increases as the Federal Reserve worked to control inflation. This heightened inflation emerged from two main sources: the economic aftermath of the COVID-19 pandemic and excessive federal spending, which not only fueled inflationary pressures but also contributed to mounting national debt. Chart 1 shows inflation, S&P 500® index earnings growth (or decline), and the federal funds rate over the past ten years:
Financial markets experienced noteworthy volatility in 2022, marked by multiple increases in short-term interest rates (four 75-basis-point increases, two 50-basis-point increases, and one 25-basis-point increase). This led to a dramatic decline across all asset classes: the stock market plummeted, bond holders faced significant paper losses due to rising 10-year U.S. Treasury rates, and the commercial real-estate market faced liquidity challenges and office vacancies. Adding to market turbulence was the unprovoked invasion of Ukraine by Russia. Only a few times in recent history did both stocks and bonds decline simultaneously by more than 10%. The volatility created an illiquid financing environment for real estate, a sector already weakened by COVID-19’s impact on attendance in offices. However, 2023 saw a turnaround with significant gains in the stock market, especially fueled by technology-oriented growth companies and the surging interest in artificial intelligence (AI). NVIDIA emerged as a standout performer, with its chips becoming essential for data centers and AI. At the same time, as you can see in Chart 1, inflation gradually moved down towards the Federal Reserve’s 2% target, though not quite reaching it. This year was also marked by geopolitical turmoil, including the Hamas attack on Israel leading to more than a thousand deaths, barbarism not seen since al Qaeda, and over 200 hostages forcefully taken into Gaza, where some live and many perished. Now we as investors were digesting two regional wars as Hezbollah and the Houthis joined in attacking Israel with daily missiles and drones. The U.S. provided military support to both Ukraine and Israel, boosting domestic defense spending and benefiting defense sector stocks throughout 2023 and 2024.
As 2024 began, corporate earnings continued their upward trajectory as shown in Chart 1, while 10-year U.S. Treasury rates increased late in the year. Departing from recent history, however, equity markets faltered in December. The stock market rally was dominated by the Magnificent Seven – Amazon.com, Tesla, Microsoft, Alphabet, Apple, Meta Platforms, and NVIDIA. In an almost unprecedented manner, these seven stocks make up 33% of the S&P 500® Index and were responsible for 54% of this past year’s stock market gain. This concentration led to the S&P 500® Index (market-cap weighted) price-earnings ratio of 21.6x on 2025 projected earnings compared to the S&P 500® Equal Weighted Index price-earnings ratio at a more modest 16.4x. Of course, the projected 2025 earnings growth for the Magnificent Seven is 18%, while the other 493 companies are projected to grow 11%. Herein lies the dilemma for investors: does one continue overweighting those companies whose stocks increased between 13% and 171% or begin to broaden one’s portfolio to reflect the cheaper valuation for the majority of companies in the S&P 500® Index? Meanwhile, mid-cap, small-cap and international indices underperformed the S&P 500® Equal Weighted Index. Perhaps at some point mid-cap and small-cap will have their day (and we do include them in our most diversified strategy). The international indices have trailed domestic indices cumulatively since 2008, influencing our decision to maintain minimal international exposure in some of our strategies, while still adhering to diversification requirements.
So, market despair in 2022 for basically all investors; happiness in 2023 as we rebounded from the ugliness of higher interest rates and inflation, while coping with two worsening wars and even Russia threatening a nuclear attack; and, once again in 2024, growth stocks continuing to dramatically outpace value stocks. However, interest rates for the 10-year U.S. Treasury rose again to 4.6% by year-end reflecting a more cautious Federal Reserve seeking to attain its elusive goal of 2% inflation. In our opinion, this negatively impacted equity markets at the end of the year, but there was still happiness as the equity markets mostly recovered the losses of 2022. Bitcoin surged along with gold to new highs reflecting, in our opinion, the growing national debt and inflation concerns as well as domestic political uncertainty (more on that shortly).
Entering 2025, investors face a complex landscape: projected corporate earnings growth of 14.6%; inflation seemingly hovering between 2.5% and 3% (again, not quite at the Fed’s goal of 2%); the 10-year U.S. Treasury yield at 4.6%; ongoing conflicts in Ukraine and the Middle East, including a hostage situation going on its second year; and a new sheriff in Washington, D.C., President-elect Trump. Market valuations have become more attractive following the year-end volatility.
The recent U.S. election resulted in Republican control of the House, Senate, and Presidency. The new administration’s agenda includes ending wars, reducing inflation, stimulating economic growth, cutting taxes, implementing immigration reform, reducing crime, and curtailing government waste. We as investors need to handicap President-elect Trump’s ability to accomplish any of the above, and try to determine how this impacts the different investments that we make, but always through the lens of long-term investing. However, the Republicans hold one of the smallest House majorities in history, with extreme factions in both parties potentially impeding progress. This political dynamic could affect the extension of Trump’s 2017 Tax Cuts and Jobs Act, which has significant estate and income tax provisions sunsetting at yearend. Additionally, any expectations of a “peace dividend” boosting price-earnings ratios through globalization have diminished amid the ongoing global conflicts.
Our Investment Strategy View for 2025
The past three years remind us that investment markets respond primarily to three factors: earnings growth (or decline), inflation levels, and Federal Reserve policy in pursuit of its dual mandate of low inflation and full employment. Recent trends in gold and bitcoin prices suggest growing concerns about national debt and inflation. FLI does not currently recommend either asset class to clients. Here is why we remain cautiously optimistic while acknowledging certain concerns:
1. Corporate Earnings Growth
Analysts project corporate earnings growth of 14.6%. We believe the Information Technology sector and select other companies will continue to lead this growth. President-elect Trump’s pro-business agenda, including tax and regulatory reforms, could support this growth – though implementation remains uncertain given political realities. While we believe current growth projections are ambitious, overall market valuations remain reasonable.
2. Inflation Dynamics
Inflation persists between 2.5% and 3%. It remains to be seen if President-elect Trump’s tariff policies will put upward pressure on inflation. Also, the President-elect has strongly suggested he will reduce inflation through an aggressive energy drilling agenda, as well as reduced regulations. Yet the impact remains uncertain given current robust domestic oil and gas production levels and the typical lag time for new production.
3. Federal Reserve Policy
The Federal Reserve is rightly data-dependent. Employment is still quite strong with unemployment hovering around 4%. Achieving the Fed’s 2% inflation target without triggering a recession presents a challenge, and that has tempered the Fed’s appetite for reducing short-term rates over the next year, as seen in its most recent dot plot released in December. We do not anticipate a recession in 2025 unless there is some exogenous shock to the economy as suggested by Fed Chair Powell at the December meeting.
4. Credit Market Health
Current high-yield bond spreads compared to U.S. Treasuries remain narrow, suggesting minimal stress in the economy.
5. Consumer Strength
Consumer spending, representing nearly 70% of U.S. economic activity, is reasonably strong as wage gains outpace inflation, housing values appreciate, and wealth increases from stock market gains. We expect these factors to continue supporting consumer spending.
6. AI Innovation Impact
The widespread adoption of artificial intelligence across industries and consumers promises enhanced productivity and innovation. This trend drives substantial corporate investment, particularly in geographically dispersed data centers.
Investment Implications
The factors above support our cautiously optimistic outlook. Projected earnings growth should more than mitigate any potential degradation of price-earnings multiples, leading to modest equity gains in 2025; however, not all companies will be treated alike.
That is why we strongly encourage our two-pronged investment approach:
· Growth-oriented strategies focusing on large-cap companies with above-average earnings growth.
· Financially strong dividend growers that are typically somewhat dominant in their industries.
The expected 7%+ growth in annual dividends for our Dividend Growth strategy offers valuable protection, particularly if inflation remains between 2.5% and 3%, or even moves somewhat higher. This strategic combination should help insulate our clients from potential surprises in inflation while the rate on the 10-year U.S. Treasury remains in the 4% to 5% range.
For many clients, it is prudent to have some exposure to fixed income where after-tax rates for medium-term maturities should deliver a slight gain above inflation. Thus, a fixed income allocation serves as a buffer against market volatility. We do not anticipate a repeat of 2022’s aggressive Federal Reserve actions that caused significant losses for bond holders.
Our uncertainty comes from the concern that while the new administration’s policies could enhance the business environment, they might also fuel higher inflation. Higher inflation would, in our opinion, force the Federal Reserve to maintain or even increase short-term rates rather than implement expected reductions. Additionally, we hope the two regional wars do not become greater global conflicts, noting President-elect Trump’s campaign promise to resolve both conflicts and secure the release of hostages, including American citizens.
Looking ahead to 2025, we see potential for investor gains based on several factors:
· Interest rates remaining within a stable range, reflecting controlled inflation;
· Improving corporate earnings;
· Possible de-escalation of global hostilities in Ukraine and the Middle East along with the release of the remaining hostages;
· Pragmatic immigration policy implementation;
· Extension/modification of the income and estate tax provisions of Trump’s signature legislation, the 2017 Tax Cuts and Jobs Act. A modification of the SALT deduction cap would benefit many of our clients significantly.
As investors, we need a diversified asset allocation plan that achieves one’s long-term investment goals, despite the current uncertainty. We expect considerable market volatility driven by domestic political developments and their potential impact on inflation and tax policy. In addition, unpredictable geopolitical strife, including possible cyberattacks and terrorism, adds another layer of uncertainty and volatility. In our opinion, as stated earlier, one’s plan should consist of modest fixed-income exposure, strategic investment in growth companies, and dividend-growing companies as well as select real estate and alternative strategies, where appropriate.
Of course, careful tax planning is essential, particularly given accumulated unrealized capital gains. We encourage all clients to engage with our wealth management team for tax optimization strategies and to schedule regular reviews with our investment professionals to fine tune asset allocations where appropriate.
On behalf of the entire FLI team, we trust these insights will prove valuable as we navigate the year ahead. More importantly, we wish you and your families a healthy, happy, and prosperous new year. We remain dedicated to serving your investment and wealth management needs!
Wishing you a healthy, happy, and prosperous New Year!
Robert D. Rosenthal
Chairman, Chief Executive Officer,
and Chief Investment Officer
DISCLAIMER
The views expressed herein are those of Robert D. Rosenthal or First Long Island Investors, LLC (“FLI”), are for informational purposes, and are based on facts, assumptions, and understandings as of January 15, 2025 (the “Publication Date”). This information is subject to change at any time based on market and other conditions. This communication is not an offer to sell any securities or a solicitation of an offer to purchase or sell any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Nothing herein should be construed as a recommendation to purchase any particular security. The companies and securities described herein may not be held in every (or any) FLI strategy at any given time. Investment returns will fluctuate over time, and past performance is not a guarantee of future results.
This communication may not be reproduced, distributed, or transmitted, in whole or in part, by any means, without written permission from FLI.
All performance data presented throughout this communication is net of fees, expenses, and incentive allocations through or as of December 31, 2024, as the case may be, unless otherwise noted. Past performance of FLI and its affiliates, including any strategies or funds mentioned herein, is not indicative of future results. Any forecasts included in this communication are based on the reasonable beliefs of Mr. Rosenthal or FLI as of the Publication Date and are not a guarantee of future performance. This communication may contain forward-looking statements, including observations about markets and industry and regulatory trends. Forward-looking statements may be identified by, among other things, the use of words such as “expects,” “anticipates,” “believes,” or “estimates,” or the negatives of these terms, and similar expressions. Forward-looking statements reflect the views of the author as of the Publication Date with respect to possible future events. Actual results may differ materially.
FLI believes the information contained herein to be reliable as of the Publication Date but does not warrant its accuracy or completeness. This communication is subject to modification, change, or supplement without prior notice to you. Some of the data presented in and relied upon in this document are based upon data and information provided by unaffiliated third-parties and is subject to change without notice.
NO ASSURANCE CAN BE MADE THAT PROFITS WILL BE ACHIEVED OR THAT SUBSTANTIAL LOSSES WILL NOT BE INCURRED.
With Republicans sweeping control of the White House, House, and Senate, investors are asking the hard questions: What’s next for the markets? Where are interest rates headed? And is the inflation fight really over?
These are just some of the questions we hear from clients and business partners. In this web seminar we will break down the post-election landscape and share our market outlook, including the investment themes that matter most right now.
DISCLAIMER
This presentation has been prepared for informational and educational purposes only by First Long Island Investors, LLC (“FLI”). This presentation should only be considered current as of November 20, 2024 (or as otherwise indicated in the presentation) without regard to the date on which it was received or accessed. As a consequence, events may transpire subsequent to the date of this presentation that can render the contents inaccurate or obsolete. FLI believes the information contained in this presentation to be reliable as of the presentation date but does not warrant its accuracy or completeness. No party is obligated to update the contents of this presentation. However, FLI maintains the right to delete, modify or supplement this presentation without prior notice.
The contents of this presentation are not intended to provide investment advice and under no circumstances does anything contained in this presentation represent a recommendation to buy or sell any particular security or to invest in any particular product. Nothing set forth herein shall constitute an offer to sell any securities or constitute a solicitation of an offer to purchase any securities. Past performance is not indicative of future results. Investment returns will fluctuate over time and may be volatile.
The names “First Long Island”, “FLI”, and all derivations thereof are the property of their respective owners and may not be used or copied without prior authorization. You acquire no rights or licenses to download, upload, post, transmit, publish, or distribute this presentation or any other material in any way that infringes or otherwise contravenes the rights of FLI or any third party, including any copyright, trademark, patent, rights of privacy or publicity or any other proprietary right.
In no event shall FLI be liable to any party for any damages, costs, fees, expenses, or losses of any kind in connection with any use of the contents of this presentation even if advised of the possibility of such damages.
First Long Island Investors, LLC was honored to host Dr. Meena Bose, Chair of Presidential Studies at Hofstra University, at the Garden City Hotel on October 30th for our semi-annual Thought Leadership Breakfast. Dr. Bose is the author of “Shaping and Signaling Presidential Policy: The National Security Decision Making of Eisenhower and Kennedy”, and the editor of several volumes in presidential studies.
The discussion, which focused on the 2024 U.S. presidential election, began with Dr. Bose providing context surrounding the current political climate of the United States. She discussed how the country is more divided than ever and faces a multitude of challenges, making the 2024 election highly consequential. Dr. Bose noted that it is not just the presidential election that will impact America; the House and Senate elections will also shape the future of our country. The composition of these two legislative branches will be crucial in determining policy moving forward.
Dr. Bose drew parallels to the 2016 election and compared former President Trump’s positions then and now. Although former President Trump was considered an underdog in both the 2016 and 2020 elections, Dr. Bose emphasized that the 2016 race offered a more apt comparison for 2024 due to the significant impact the COVID-19 pandemic had on the 2020 election.
At the time of the 2016 election, various factors seemed to point to Hillary Clinton’s victory, including national polls, the candidates perceived political leadership qualities, party support, fundraising success, and overall public opinion. However, Dr. Bose pointed out that a crucial shift in voter support within Democratic-leaning states like Pennsylvania, Michigan, and Wisconsin was not adequately recognized. This oversight contributed to Trump’s ultimate victory in 2016, despite Clinton’s favorability by many metrics.
Looking ahead to the 2024 election, Dr. Bose underscored that the outcome will hinge on the performance of the swing states: Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin. The deciding factor for voters in these battleground states, she suggested, will be the issues they prioritize most – namely the economy, immigration, foreign policy, and reproductive rights.
Dr. Bose pointed out that former President Trump seems to be performing better in polls compared to his previous campaigns against Clinton and Biden, despite being behind nationally in those races. Dr. Bose referenced two methods for predicting the election winner that historically have had very high success rates. The first method is Nate Silver’s data-driven approach, which at the time pointed to former President Trump having a slight edge over Vice President Harris. The second method was created by Allan Lichtman, who has correctly predicted nine of the last ten presidential elections using his “13 keys” system. This approach focuses on the political landscape and the incumbent party’s performance rather than on polling or other conventional metrics. According to Lichtman’s model, the candidate who wins the majority of the thirteen keys is likely to prevail in the election. Lichtman’s method predicted Vice President Harris as the winner. The voters have since spoken, and we now know the outcome of the election. Hopefully, the country can come together and work towards a brighter future.
“Our portfolio doesn’t depend on our being right about the twists and turns of the economy. It depends on our understanding the prospects for our companies and what is discounted in their share prices.”
Bill Miller
Our investment strategies delivered positive returns in the third quarter, with all of our Security, Defensive, and Traditional Equity strategies posting gains. Our flagship Dividend Growth strategy led the way during the quarter, advancing 10.1% net of fees and expenses. Year-to-date, all of these strategies have generated meaningful positive returns.
We are also seeing promising traction with our exposure to specific real estate lending investments primarily in the Lehigh Valley, Pennsylvania; Austin, Texas; and parts of Florida. These gains have been achieved despite difficult geopolitical and domestic political environments.
The ongoing conflict in Ukraine and escalating tensions in the Middle East continue to impact markets. Domestically, the political climate has grown increasingly heated, with contentious Presidential, Senate, and House races between Democrats and Republicans. The rhetoric from all levels of the federal government has intensified, with debates, a bombardment of media campaigns, and rallies targeting voters nationwide.
Despite the angst fueled by ongoing wars and domestic political drama, we believe earnings and interest rates played key roles in the gains mentioned above. Declining inflation (Chart 1), growing gross domestic product (Chart 2), and declining short-term interest rates (Chart 3) also were, in large part, responsible for these strong results.
The previous charts illustrate what some describe as a “soft landing,” where inflation continues to ease while economic activity sustains growth with a moderate slowdown. We do not, however, see a recession in the foreseeable future. Also, in our opinion, declining inflation and lower interest rates contribute to stock market valuations remaining at reasonable, although not cheap, levels. Chart 4 depicts what we believe are reasonable levels for the stock market, as represented by both the S&P 500 Index (market-cap weighted) and the S&P 500 Equal Weighted Index:
For the soft landing to occur and valuations for equities to remain at reasonable levels, corporate earnings must continue to grow. We believe this to be the case with large-capitalization, mid-cap, and small-cap companies. As an aside, our suggestion in the last quarterly letter that small-cap and more value-oriented strategies would rally played out in the third quarter. International investments also demonstrated impressive signs of life.
Chart 5 reflects Wall Street consensus expectations for earnings growth of the S&P 500 Index in the coming year. If the earnings come in as forecast, this is particularly noteworthy as it suggests that the market, as a whole, is not overvalued in our opinion:
Chart 5 shows consensus projections for strong earnings growth in 2025 compared to 2024. While we anticipate earnings growth next year, we believe this projected gain is overly optimistic. In our view, this projection will come down over time, reflecting factors such as decreased consumer demand, uncertainty from a new administration as well as continued geopolitical strife, but we still expect reasonable earnings growth next year. This will require more scrutiny on a company-by-company basis, making it a stock picker’s market across all market capitalizations. In our view, the performance of individual companies, driven by their specific earnings growth, will be the primary differentiator. The rising tide probably will not lift all companies equally.
The backdrop to cautious optimism in our Security, Defensive, and Traditional Equity strategies is a slowly growing economy, decreasing inflation, falling short-term interest rates, and the absence of an imminent recession (which we do not foresee until late 2025 or later). We anticipate that companies delivering earnings growth in a declining interest rate environment should appreciate in line with their earnings growth. In the case of our Dividend Growth strategy, we anticipate appreciation in line with projected dividend growth of at least 7%, which should be well above the anticipated inflation rate. That being said, it is difficult to fully predict the impact of AI on numerous companies, including those that have less obvious ties to technology.
The charts above support our cautious optimism, which is justified by this dynamic combination of earnings growth and a supportive environment that will benefit equities, as well as real estate. We believe real estate will particularly benefit from a slower-growing economy accompanied by declining short-term interest rates.
A final piece of the economic growth puzzle is employment. It is clear to us that employment has somewhat weakened this year. While still relatively strong with an unemployment rate of 4.1%, this does reflect an increase from the recent low of 3.4% in April 2023. There is a theory (the so-called Sahm rule), which states that when the three-month moving average of the unemployment rate rises by 0.5% or more from the lowest three-month average over the previous twelve months, the economy is entering a recession. Although this rule was recently triggered, we, and the rule’s namesake, do not believe it necessarily applies given the current unique economic situation we are facing. Currently, consumers continue to spend more on average, with wage gains for many outpacing inflation. The following two charts illustrate the recent record on unemployment and consumer spending:
Considering various economic factors (including earnings, employment, inflation, and interest rates), we believe that investing for the long term is still reasonable although not inexpensive. That said, there has been a notable rotation within the equity markets. Value-oriented companies such as our dividend growers, rallied in the third quarter as did small-cap companies across both growth and value. The Magnificent Seven had comparatively mixed results in the third quarter despite putting up by and large strong earnings. We anticipate these trends might continue in the fourth quarter. This reinforces our longstanding view that our clients should maintain diversified portfolios with exposure extending well beyond the Magnificent Seven.
The Election
One cannot avoid the vitriol of this election cycle. It is unique in American politics to see a sitting President well into the election cycle bow out. It appears, in our opinion, that concerns over his mental acuity and negative polling contributed to his decision. The Vice President was anointed to replace President Biden without a primary process. Her opponent is former President Trump who has contested the outcome of the previous election.
The country seems equally divided, suggesting this could be a very close election. Additionally, both the Senate and the House are contested, with the outcome of these races carrying significant implications. The views articulated by Vice President Harris and former President Trump on tax, economic, social, and foreign policy issues are quite divergent. The party in control of both houses, if any, will dictate the trajectory of legislation. Otherwise they will be forced to “play” in the same sandbox.
Several tax proposals are critical to our clients, particularly those impacting income tax and estate planning. The changes to individual income tax rates and estate tax exemptions that were part of the Tax Cuts and Jobs Act of 2017 enacted by former President Trump are set to expire at the end of 2025, which will affect both tax and estate planning. Clarity is needed to reduce confusion and allow taxpayers to plan for the future.
Vice President Harris has proposed increasing taxes on certain tax payers (both corporate and individual) on income, estates, capital gains, and corporate earnings. She has also floated the concept of tax on “unrealized capital gains.” We view these proposals as potentially negative to long-term investors.
Former President Trump, on the other hand, has proposed a series of tax reductions. While they sound appealing (no federal income tax on tips or social security, liberalization of the SALT deduction, and reduced corporate tax), implementing all of them could lead to large federal deficits and increase our already high national debt.
All of these proposals are speculative and contingent on the outcomes of the Presidential, House, and Senate elections. These elections are extremely consequential given the divergence in economic ideology. Long-term investors should pay close attention, and we will keep you apprised.
Adding to this complexity is the expected increase in liquidity coming from both fiscal and monetary policy in early 2025. This could be positive for equity markets and the economy in general. The Fed may stop its quantitative tapering, and funds in the government’s general account may be released. We will continue to monitor these developments and their potential impact on our investment strategies.
What to do?
As stated, we delivered very good results in the third quarter, and year-to-date performance is quite solid. We have almost made up all the loss from 2022 and then some, depending on the strategy. Being patient and focusing on long-term investing has paid off. Our continued guidance to maintain diversification still makes sense. The recent outperformance by value stocks and small-cap stocks, while the Magnificent Seven have slowed, has brought happiness to a larger segment of investors. This recent appreciation in value stocks has helped our Dividend Growth strategy, while the improvement in smaller-capitalization stocks and international strategies have helped other strategies, which have meaningful allocations to both value and smaller-caps along with allocations to more growth-oriented strategies.
We continue to advise clients to maintain allocations to our “bookend” strategy of rapidly growing companies on one hand and dividend growing companies on the other hand, as well as exposure to small and mid-cap companies. At the same time, our allocation to high-quality, slightly longer duration fixed income, implemented over the last year, is also appropriate for clients. We also continue to recommend select alternative strategies where appropriate.
Given the world we live in as investors, some volatility should be expected. The potential for a lengthy longshoreman strike at major ports in 2025 could be consequential and disruptive, following a short strike the first few days of October. Ongoing foreign wars and the acrimony surrounding the upcoming election (where roughly 51% will be happy and 49% unhappy) could cause investor angst as we wait to see what this all means for the future.
At FLI, our approach is to examine each investment through the lens of earnings growth, dividend growth, valuation, and for our alternative investments, economic opportunity. This disciplined course will help us navigate any twists and turns the economy, geopolitics, and domestic politics may throw at us! This approach has served us well for 41 years and is reflected in the opening quote.
Of course, despite our cautious optimism, we encourage you to call upon any of the members of our investment and wealth management committees should you have questions or concerns.
Finally, please join us at our next Thought Leadership Breakfast seminar on Wednesday, October 30th. Our keynote speaker is Meena Bose, a renowned political science professor at Hofstra University, who will provide an insightful assessment of the 2024 U.S. Presidential election.
Also, be on the lookout for our revamped website later this year, and please come visit us to see our newly renovated offices.
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