The Post-Election World
March 2025 - The fourth quarter of 2024 was particularly volatile in both equites and fixed income markets. U.S. equities finished a strong year, with the S&P closing above 6,000 for the first time in early December. The S&P index was up 23% for the year and the Nasdaq 100 was up 28%. But as the quarter ended, bond yields were rising, and equity markets were under pressure. The FED (FOMC) lowered rates in November and December. Bond yields continued to rise, causing foreign investments in U. S. bonds to thrive. The dollar continued to climb and affect foreign exchange rates. For example, the Euro/USD exchange rate was $1.05-$1.12 (per EURO) for most of 2023 and 2024. But now the rate is $1.03. This trend continued through February 2025.
In the wake of Trump’s victory, the potential for tariffs on Canada, Mexico, and China will be a major driver of foreign exchange investments. The up and down movements of the equity markets starting late December will likely be a precursor of what is to come in 2025. The markets are primarily priced by expected economic growth, but we now have the uncertainty of U. S. policy and how it will affect the markets. As the Trump administration’s policies are adapted, modified, and ultimately put into place, the markets will adjust. With the equity market’s strong performance in 2024, equities were priced fairly. So, in this period of uncertainty, it will be easy to have those values tested as new policies are implemented that differ significantly from the old policies.
President Trump will address Congress on Tuesday, March 4th, and the debate over federal spending will be one of the primary points he will address. The U. S. government has been running budget deficits for almost 25 years. Simply put, we are spending more than we are taking in, from all sources. The federal budget deficit in 2024 was $1.2 trillion. Measured in non-inflation adjusted dollars, government spending increased from $3.7 trillion in 2015 to $6.8 trillion in 2024. After adjusting for inflation and population growth, spending is still climbing, but not as much as it might seem. The biggest spending is on Social Security and Medicare. These expenditures increase with the aging of our population, benefit increases, and rising health care costs. The fastest growing category is the net interest payments on our debt. The pandemic drove up spending, and the high interest rates have driven payments higher. There are other spending categories, such as the Obamacare provision for individuals that has the U. S. paying a bigger share of costs in the federal-state program. Another expenditure is running the federal agencies, which historically do not make up much of the budget. Veterans’ programs are driven by how many people qualify for, and how much they are paid per benefit. These payments are up 47% from 2015. The next FED (FMOC) meeting will be March 18-19. With interest rates at 4.8%, they will be under pressure to reduce rates. One third of the U. S. debt rolls over (renews) this year. Hopefully, lower rates will come down and the debt payments will go down.
The U.S. trade deficit is another animal. The trade deficit is simply the result of a country that consumes more than it produces. In 2024, the trade deficit for the U. S. was $1.8 trillion. Historically, tariffs do little to reduce the trade deficit. But with high interest rates and inflation above the FED’s 2% target, one solution would be to reduce interest rates. This would lower inflation and bring in private investments and exports. High interest rates discourage private investment and exports. We will have to wait and see if the FED will choose this approach. If they do, tariffs could be mitigated and the ugly “tit for tat” tariff game could be avoided. One thing is certain; the publicly held federal debt, the sum of all annual deficits, is about to exceed 100% of GDP. So, budget deficits must come down. This could also reduce trade deficits. Hopefully, the FED, Congress, and the President can work together and have the wisdom to represent the best interests of us and our country.
Although volatility will be inherent in this environment, some existing trends will continue to dominate the financial markets, AI will continue to drive technology companies to build out data centers. The next wave of AI growth, beyond building the data centers, will be rule-based systems, context awareness and retention systems, Domain-specific mastery systems, thinking and reasoning systems, Artificial General Intelligence (AGI), artificial superintelligence (when AI is smarter than humans), AI singularity (when technological growth becomes uncontrollable and irreversible, leading to unknown changes to civilization). That is a lot to think about! No one knows how fast this will progress, or if at some point regulators will try to control the development or speed of development without constraints. The only point I am trying to make is that we are incredibly early in the development of AI and that it will dominate technology expenditures and investment for the next decade and beyond. Additionally, the U.S. needs to stay at the forefront of AI development. In this race for dominance, the winner will control. The benefits of AI are far reaching, but at this point, we cannot even imagine the benefits and the dangers of this technology.
Another developing market is cryptocurrencies. President Trump is scheduled to host and speak at the first-ever cryptocurrency summit on Friday, March 7th. Cryptocurrencies are not new, and much of the infrastructure to use them has been in development for years and is ready for real time. One major obstacle is how cryptocurrencies are valued, and whether they are backed by a tangible asset, such as gold or silver. Without an asset to back the value, the regulators do not want them to be recognized in the marketplace. They are currently unregulated currencies, and the SEC and Treasury do not want them in the marketplace. Janet Yellen was to deliver a report on the adaptation of cryptocurrency under Obama, but it was delayed. The U. S. government currently holds about $18 billion of bitcoin. As regulators define the acceptable parameters on value, exchange processes for merchants, and how transactions are processed and documented, more opportunities in crypto will appear.
My view for the balance of 2025 into 2026 is hopeful. It is difficult to author this article without being “political” or appearing to be. In my 45 years in this business, I have been fortunate to collaborate with people of diverse genders, races, religions, and political views. But in those 45 years, I have never witnessed such polarization. Polarization is not healthy. It is divisive and leads nowhere. Respecting everyone as an individual of equal value who has a right to their values and opinions is what makes relationships interesting and allows us to learn and even change.
We live in a different world today, from Chet Huntley and David Brinkley bringing the daily news in 1956-1970. And from 1962-1981, Walter Cronkite giving us the first opinion of the news with “That’s the way it is.” We live in a flood of information on social media, entertainment media, and news that is mostly commentary, and we must find the truth. I encourage us all to be diligent in accepting information from unaccredited news sources as fact.
I do believe we will avoid a recession from the disruption the Trump administration has brought early in 2025. I do not think we will be at war in 2025. I believe we will have a positive year in the financial markets and make money. I believe that we will have audited financials of government agencies, congressmen, and congresswomen that will be enlightening. I believe the resiliency of our economic system will be tested and survive, even improved. Disruptions to any business, process, and political environment eventually bring about positive changes for stability and improvement.
Disruption is eventually positive, but it is what it is, disruptive to families, careers, and lifestyles. It is hard to say “It will all work out” or “It will be fine” when it is us, a family member, a friend, or our business that is affected. I hope that the disruption and pain being felt by so many will soon end, and that a better, more efficient system will be realized. Without a crystal ball, it is impossible to say when or what will happen. My crystal ball is broken, but I have faith.
Thank you for allowing me to be personal. Most of all, thank you for the trust you place in us. Your trust is truly our most valuable asset. We welcome your questions regarding your investments and encourage you to contact us if a “life event” requires you to reassess your risk tolerance or financial objectives. We look forward to visiting with you.
Harold Grubbs, President of FMI
Financial Management, Inc. is a CEFEX®-certified Registered Investment Advisor