This past year was, as usual, eventful for investors and beneficial for equity owners. In a Presidential election year, it can often be difficult to measure the true tone of economic optimism within this country. Voters generally feel more optimistic when their party is in power and less so when their candidate is challenging an incumbent. Leading into the election, it was clear that the economy was a primary concern.
According to Statista Research in late October 2024, 24% of polled voters identified inflation as their primary concern, while 11% cited the economy. Noting that these are two of the top three issues listed by voters, many of these same people have been surprised by strong equity market performance co-occurring. We must remember that optimism over the economy is not the same as optimism as an investor. According to Gallup in 2024, 62% of U.S. adults own stock, while 38% do not. Although the 62% level is the highest ownership rate we have seen since 2002, a large contingent of adults in this country have no exposure to the markets. Economic optimism is often linked to the everyday experiences of consumers. A high grocery bill or an $80 fill-up at the gas station can be particularly distressing, especially for those who do not own stocks to boost their confidence.
With the election behind us, there are numerous opinions on where the markets and economy will go from here. As previously noted, historical evidence does not associate any political party with better economic growth or market returns. Most comparisons of this nature are inherently flawed. A newly inaugurated President may inherit a thriving economy or a crisis, both of which likely began long before their term started. While the political backdrop is a consideration in decision-making, we believe it should not be a highly influential one.
We have our eye on two primary issues: federal debt and market valuations. There is a ubiquitous understanding that this country has more debt than it should. The debate, however, is around the strategies related to reducing the debt (or even slowing down the growth of debt). According to the US Bureau of Economic Analysis, 36.44% of our GDP is attributable to government spending. If spending cuts are implemented to reduce budget deficits, there is a valid concern that this shift could have a meaningfully negative impact on US growth. However, if we continue to run budget deficits, the debt will only grow. This is a Rubik’s Cube of a problem that this next administration and those who follow will need to face head-on.
We believe that markets, particularly certain segments, experience cycles of over-optimism and over-pessimism. When this occurs, the values of certain asset classes will shift to being relatively expensive or good value. As asset allocators, our role is to identify market trends, mitigate overexposure to areas we consider expensive, and seek opportunities in undervalued sectors. In our regular portfolio team meetings, this is often the primary subject of conversation. We celebrate the great returns in asset classes we own for clients but never want to be complacent in the level of exposure we maintain.
If there’s anything we can do or any questions we can answer, please don’t hesitate to reach out.
