Two Key Thoughts:

1. My How the World Has Changed
2. Trump’s Second Act

My How the World Has Changed

The first step I take before beginning to write this quarterly missive is to re-read the last few quarters’ publications. In doing so this time, I was struck by how much has changed in just a few short months. The most obvious change, here at home, is the election of Donald Trump to another term and the coincident shift in control of the Senate to the Republicans. Not only does this result portend major changes in environmental, social, economic and geopolitical policies, but it introduces a higher level of uncertainty around the future course of those policies. For now, the markets are focused on the prospect of higher inflation resulting from lower taxes and stricter immigration policies. That has left stocks stalled and long-term interest rates rising.

The bigger changes seem to be happening outside the US though. Israel’s apparent defeat of Hamas and Hezbollah and its repelling of Iran, despite US protestations along the way, have set the stage for even more change. The sudden collapse of the Assad regime in Syria, while Iran and Russia stood helplessly by, was stunning. While many had expected that the Russia/Ukraine war had seriously diminished Russia’s military, the complete lack of support for Syria was a concrete demonstration of the degradation. With the return of Trump to the Oval Office, Iran can expect his harsh policies to be reinstated, likely diminishing their influence in the region for some time.

Meanwhile, China finds itself in a deflationary spiral, as optimism about the future has waned and its citizens value savings over spending. As we expected, the government’s minimal stimulus efforts have fallen woefully short of changing the course of their economy. The rally in their stock market after the most recent round of stimulus announcements has now faded. Perhaps more striking is that the yield on 10-year Chinese government debt has now fallen below the comparable level of Japanese government debt!

The political change isn’t limited to our adversaries. Our allies across the globe -- South Korea, Canada, Germany and France -- are seeing new faces at the top of government.

Trump’s Second Act

In contrast to Donald Trump’s first term as president, this transition process is proceeding in a much more orderly fashion, with key appointments announced and in process, important directives already being prepared, and regulatory changes being queued up. That doesn’t mean it is without controversy – some cabinet posts are likely to be challenged and some priorities seem to come out of the blue (Greenland, really?). But fundamentally, Trump is likely better prepared and, knowing that he only has four years in office, will likely be more expansive in his priorities than previously.

It is certainly hard to handicap exactly what that will mean but we believe there are at least three main domestic policy takeaways: the 2017 tax cuts will be revamped and renewed; immigration enforcement will be much more stringent; and the regulatory environment will be more business-friendly. While two of these should clearly keep the economy growing, immigration is more of a wild card. If, as the saying goes, demographics are destiny, then we need a comprehensive immigration policy that provides for the flow of new people into our economy. Absent that flow, future growth will be dramatically limited. Such a policy has escaped our grasp for decades.

More difficult to predict, however, is where Trump will land on foreign policy. As noted above, we expect he will return to tough policies on Iran but other hot spots are more problematic. With North Korea now actively helping Russia with troops on the ground, Trump’s past overtures to President Kim seem like a distant memory. While it is clear that Trump understands the threat that Russia poses to eastern Europe, he hasn’t made clear how he sees the US role vis-à-vis our allies in the region. This is further complicated by the political changes taking place in France and Germany, the traditional leaders in the European bloc. Isn’t it ironic that southern Europe, led by Italy, now seems to be the source of stability? And, lest we forget, Trump spent much of his first term negotiating on trade with China – that will certainly continue to be a high priority. Tariffs have been bandied about but how they would actually apply is unknown.

To summarize: Trump’s domestic priorities are pretty clear but he faces a difficult geopolitical scene with his priorities unknown.

Investment Implications

Bolstered by unprecedented deficit spending and higher productivity from technology investments, we expect the economy to keep growing at a solid pace. Inflation is at a cross- roads, with equal pressure up and down. The direction of inflation will be an important driver of the stock and bond markets in 2025. We continue to believe that well-diversified portfolios with substantial amounts of liquidity are most appropriate for this environment.