In the comments below we want to take several steps back.
For sure, we are enormously optimistic about the potential for policy changes that can strengthen the U.S. economy by lowering costs and increasing growth rates. And the potential for the resulting rise in living standards for those who work both hard and smart will be a definite plus.
However, there are a couple of overriding factors that tend to directly affect investment returns that need to be addressed before year-end, so our readers have a realistic understanding of the investment landscape for 2025 and beyond.
Two major factors do NOT go away regardless of which political party holds the reins of power in America. The first factor is the massive pile of debt that must be serviced, not just in the U.S. ($35 trillion) but all around the world. The second factor is directly related to the first factor. It is the “addiction to lower interest rates” that these massive piles of debt produce in the behaviors of all elected officials and dictators.
We will save the lectures on the importance of clean national, state, and local balance sheets as well as the importance of cost-conscious policies, and the inherent wastefulness of bureaucracies. We will also avoid the temptation to offer opinions on political solutions and specific policy choices.
Instead, let’s accept as reality these TWO factors: 1) massive debt to service and 2) the addiction to low interest rates. Once we concede these TWO basic facts, we can counsel you realistically.
The obvious danger of massive national, regional, and local debt is the potential for widespread bankruptcies. The less obvious but more pernicious danger with the problems debt creates is persistent inflation.
In short, governments including the U.S. which has the advantage of hosting the world’s reserve currency (the dollar), have tremendous incentives to keep interest rates low. And if elected officials act as expected, without promoting abundant supplies of everything necessary to produce MORE products and services, inflation will run wild.
So, it is a tricky equation. Supply-side policies mitigate inflation. And yet supply-side policies require guts from politicians for non-economic reasons.
Let’s assume that rates continue to be kept relatively low, as they have been for the last fifteen years or more. “Relatively low” interest rates produce “relatively high” stock and bond price valuations. When compared to bonds, it is important to understand that stock prices are not static. Over time the companies that deliver increasing streams of cash flow for the benefit of stockholders generate superior returns for stockholders. However, the starting point for stock prices during eras featuring relatively low interest rates is relatively high. So, as 2024 winds down, stock prices are not cheap. And stock prices do NOT figure to get significantly “cheaper” anytime soon.This reality puts pressure on stock selection, simply because persistently low interest rates drive up the market values of most assets including stocks and real estate.
So, the number of on-sale bargains in the market for stocks is practically non-existent. And the valuations on truly well managed companies with clean balance sheets, high returns on shareholder equity, low capital spending budgets, and pricing power for their products and services, almost never come “cheap” in relatively-low-interest rate environments.
What is an investor to do?
If you are looking for income, ask your investment advisor about building positions in bonds issued by credit worthy borrowers with the length of the maturity dates spread out.
If you are looking for growth in capital without regard to current income, you need to remain committed to the strategy of owning positions in truly well-managed companies with durable competitive advantages that include, clean balance sheets, high returns on shareholder’s equity, relatively low capital spending budgets, and pricing power for their products and services.
In the interim, improved economic performance by the U.S. economy and the economies on other continents can help create a tailwind for well-selected investments. However, the “addiction to lower interest rates,” that massive piles of debt all around the world produces, means there is less margin for error on stock selection and credit quality analysis.
As usual, competent professional advice is a must for the navigation of this emerging landscape.
Finally, the ongoing development of Generative Artificial Intelligence represents the beginning of a new era in economic history. It produces both glorious investment opportunities and serious obsolescence risks.
These are truly exciting times. We cannot wait to see what happens as 2025 approaches.
Best wishes to you and your family for a Merry Christmas, a healthy, happy, and prosperous 2025.
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