Higher-for-Longer: Early-Year Catalysts and Risks

Newsletter — February 2025

Dear Clients and Friends,

I hope the new year is treating all of you well thus far. Winter has finally announced its arrival in central Texas, and we have all gone through our closets to pull out sweaters and jackets.

Last month, we were excited to announce that Mallory Warnock has joined our Boyce & Associates team as Director of Client Engagement. Mallory will be responsible for several key initiatives, including helping us enhance client experience, business retention and growth, as well as helping to coordinate event management and community outreach. In addition, she will also help cultivate new client and referral relationships and execute client education opportunities which we’d like to increase this year. We look forward to introducing you to Mallory, and we are excited for her to get to know each of you.

Shifting to the markets, we still see catalysts on both sides heading into the middle of the first quarter (see Charts of the Week for January 20th). On the one hand, the potential for trade conflict, geopolitical hot spots, unexpected interest rate increases borne out of stubborn inflation and the risk that Fed policy shifts to tightening all present risks to the current environment. In addition, we will most certainly face another debt ceiling impasse with the new Congress over the next few months, which will likely be tied to any continuing resolution legislation to fund the federal government.

On the other hand, the potential for resolution in Ukraine and the Middle East, coupled with the prospect of increased corporate margins, profits and earnings, could provide a meaningful offset. Notwithstanding, as AI moves further into the business mainstream, I would expect productivity to continue to increase, which in turn should have a dampening effect on inflation. The Chinese economy remains a wildcard, though, and this has implications for the pace of global growth and emerging markets. Other international markets, especially Europe, are expected to witness economic expansion this year, which could improve the prospects for foreign stocks in general in 2025.

The US economy remains on solid footing, with retail sales strong, labor stable and manufacturing showing recent signs of improvement. The Fed’s Beige Book and other regional and national surveys seem to be trending in the right direction.

At this point, we see continued earnings expansion for US stocks, although I think a 15% gain this year may be a little optimistic. Even if that is the case, however, there should be room for risk-based investments to grow in 2025, albeit with some volatility, recognizing that valuations in some areas are indeed a bit stretched. On a positive note, we do see increased breadth and participation across the broader market, as growth for the remaining stocks catches up with and eventually passes the magnificent 7 tech stocks which have led for some time.

With all that being said, the inauguration is now behind us, and we will soon begin to witness the scope and texture of proposed policy initiatives by the new administration. Accordingly, we will analyze its potential impact on near term inflation, medium term growth, federal deficits, and even perhaps what the Federal Reserve does with monetary policy. I think they will be reluctant to lower rates for a while as a result of this uncertainty, thereby implying higher interest rates for longer (which is good for savers).

I hope all of you have a very enjoyable February, with plenty of hot chocolate to keep you warm. We appreciate the opportunity to serve you, and please do not hesitate to reach out if we can be of service!

Sincerely,

Eric C. Boyce, CFA

President & CEO