Is Your Portfolio Ready for 2025? Trends and Strategies for 2025; Jarvis® Update January 8, 2025

Are you positioned well for 2025? We got some of our thoughts of how you can ready yourself for next year on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain and also an investment advisor, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. I'm hoping for a big warm-up, uh, here in Chicago. The, uh, the temperatures reads single digits, so hoping for a warm-up as we end the year.

Well, Nolan, I'm just going to move south, so that's the way we're going to deal with that. Good to be with you in our new studio. This is our conference room here at Left Brain HQ, and, uh, this is our first time we're going to be, uh, coming to you live with brand new, uh, with a brand new format delighted and very excited to be with you today. A quick preview in today's video. So we do expect some changes coming into 2025 with the new, with the new administration taking hold in Washington. But our expectations are that one thing will remain, and that's this current bull market. We've got two topics for you as we usually do. The first one is preparing for a new administration. And the second one is talking about talking more about interest rates. No, just a quick question before we get started. A lot of questions that we keep continue to get from investors is how should we reorient and reposition the portfolio for the incoming Trump administration? Nolan, what have you been telling clients who ask you this, and are you surprised to be hearing this question this much?

[LAUGHTER] I am surprised to be hearing the question this much because as most of the viewers know, I've been doing this for a very long time. I don't really take new clients, so most of my relationships are existing clients, which means these investors have been with me for a very long time. And if they've been with me a long time, they know the left-brain view on politics and money, that they shouldn't mix. And very unlikely, given an election, that would make us change our mind or do anything different. So in answer to your question, Brian, does it surprise me? Yes, it surprises me because there's a lot of clients that have been with me a long time. We've been through many election cycles. So the fact that the questions come up now surprises me a little. But my answer really never changes. It surprises me as well because for this president and this administration, if some of the goals— they're able to accomplish some of the goals they set out for, I think it could be very good for investors. So there's a lot of concern among investors, but I don't hear a lot of excitement. So that kind of surprises me a little bit. Excellent.

Well, it's a great start, Nolan. We're going to jump right into our topics. So the first is topic 1. So topic 1 is preparing for a new administration. And as power changes hands in Washington, historically there have been changes in the market regime on a sector-to-sector basis. That's because there are new priorities for Congress and new priorities for the new White House. Can you tell us about a sector that you expect to perform well in the context of a new governmental focus?

So there are some things that I like, I think that investors should pay attention to, that we have highlighted here at the firm, but I don't think they have much to do with a, you know, with the new Congress. So if you think about it, Brian, with this new administration, basically the calling card is, you know, low taxes, a lot less regulation. And we really want to— pardon the pun— trump up growth in GDP. You know, we try to get— we have to get that GDP to accelerate from 2 or 3% to something like 4 or 5. We have a big national deficit problem, growing national debt. There's really only one way out. And this administration says we have to grow, not cut. We have to grow our way out of this. And I think that can be, um, really good for investors. So with that as a backdrop, with growth as a backdrop, with the goal of low regulation, low taxes, uh, a couple things stick out to me. One of them is we've been talking for the last few years about this certain small and mid-cap group. These are stocks between the sizes, I'd say, $10 billion and $100 billion, who have been really left behind, starved for capital, ignored overregulated, and they've been kind of left for dead. So I think that's one area with this new administration coming in that should get a jolt. It started to happen since the election. I expect that to accelerate in 2025. And then in another category, I think will benefit, not necessarily having to do with the Trump administration, but we like software. We've been talking about this for a while. You know, here at the firm, we did a lot of work on software right up and through COVID. And through the end of COVID But the last couple of years, as people looked at the market and said the market's been good, tech's been good, it's primarily been semiconductors driven by the AI, artificial intelligence story. And, you know, that's all hardware, right? After you get the hardware installed, you got to make it go and you make it go and increase your productivity with software. Yeah. Now that the hardware tracks have been laid down, I expect software to pick up the mantle. Again, it overlaps with the Trump administration, but it's not necessarily caused by it. So those are the two areas I think at this point look really interesting for 2025.

Okay. And I want to add a couple as well. Financials is one that comes to mind. So we are expecting a little bit of an easier regulatory environment, particularly for the financial sector. And then also with a new incoming federal trade commissioner replacing Lina Khan at some point here in the next few months, Mergers and acquisitions activity has been quite low over the last few years, and with a new FTC commissioner and new regulatory regime, we do expect a little bit more M&A activity as well. So that should be good for financial firms. And also interest rates. Interest rates may stay high, and the reason for that is because what we're expecting is an expansionary fiscal policy from the new administration. So that may be in the form of lower taxes or maybe increase spending in certain areas. And from that perspective, that's going to put the Fed potentially on pause, leaving interest rates a little bit higher than what we may have expected in a different sort of administration. So financials is something that will benefit from a little bit of higher interest rate policy and also from a little bit more M&A and a lower, easier regulatory environment. Also want to mention consumers. Now consumers is something that we've been looking at and certainly, you know, with consumers being 60 or 70% of the economy, this is really important. We do think this is potentially a mixed bag for consumers. So consumers may have a little bit more money in their pocket if there are tax cuts, depending on how those tax cuts fall within the economic strata. But that is a bit of a mixed bag because we also have the potential for tariffs coming into the, coming into the policy as well. So it's hard to say exactly where it's going to be for consumers. We will look at those two twin engines of potentially lower taxes and also higher tariffs and see how that plays out for the consumer over the next few months. With that being said, Nolan, what sectors may struggle, uh, with the Trump administration?

You know, I thought about this a little bit. Uh, interest rates are on the, uh, on the move, but I don't think that's going to be enough to drive REITs. So a couple of, um, areas that we're still weary on as we head to 2025. One is real estate, and real estate was hurt for a lot of reasons, but commercial real estate particularly, especially as interest rates rose sharply and quickly. It's leading to a lot of distress. And with interest rates having settled down, maybe it looks like the stress has crested, but only for a bit. Rates don't look to be falling anymore. You know, real estate— for commercial real estate to get bailed out at this point, we need rates to fall aggressively. And because growth rates have held up, we haven't had a big fall-off in interest rates recently. And so Real estate going into next year, we question how many interest rate cuts we're going to get. It could be a headwind for real estate. So that's one I'm a little bit more wary on. The other sector is consumer staples. Okay. Not a lot of exciting things happening at the grocery store outside of Walmart.

Right.

So staples is one a little bit more suspect on. We know energy, energy could be a fallen soldier. And the new administration, if the drill baby drill mantra takes over, more supply, demand doesn't go up so much, you could get a weakening in the, in the energy price. We'll see what happens. And then the other two areas that I'm looking at and questioning a little bit more is international.

Sure.

You know, in our industry, it's common for investors with other firms to have a good chunk of their allocation dedicated to money outside the US, whether it's in developed markets like Europe or Japan. Or emerging markets like China, Brazil, Russia, or India. I think we're still giving them the cold shoulder at this point. We're certainly America first, and we're making an argument for pretty much 90-something percent of a client portfolio, close to 98, 99, being US-based. So an area that I think still may struggle may be international, particularly if you mentioned if the tariffs from the Trump administration become hostile.

Right.

That could be another headwind for international. And then finally, the last one is utilities. Utilities have run up a lot this year.

Sure.

On the back of the AI increasing needs for power demand.

Yes.

And fortifying the grid. And the question is whether they've come too far too fast and whether that momentum can continue into 2025. Excellent.

And there are a couple of things I wanted to mention. So we do at least have some data points, which is there was a Trump administration back between 2017 and 2021. So something at least we can look back on. You know, the conventional wisdom is, as you mentioned, energy is going to do well in a Trump administration because they seem to be a lot more friendly to energy companies on that side of the aisle. Which is interesting because if you look back at the sectors, sector performance back during the Trump administration, energy by far was the worst performing sector during Trump. So one other thing I wanted to mention is healthcare. So Healthcare stocks, and specifically drug stocks, really tanked quite precipitously after we found out Trump was elected to be president, and specifically after he nominated RFK Jr., Robert Kennedy Jr., to be HHS Secretary, with the thought being they're very hostile to, or he's very hostile to drug companies. Back in the Trump administration 1.0, healthcare actually did quite well during that period. So what that tells me is, uh, we got to be careful with the level one thinking, reading through between the— from the political situation to the economic situation in the stock market. The things you may expect may not happen. So let's be a little careful and cautious before we make these big pronouncements based on, uh, situations like RFK Jr. becoming HHS Secretary. Finally, let's, let's finish out topic one with this question, Nolan. For next year, where are you expecting outperformance and where expecting underperformance?

The areas I think will do well next year, um, are things that are going to thrive in a thriving economy and in a bull market. So again, back to your question, before I get to the under and overperformance, you mentioned Trump, right, and the changes that we've been making because of it. And I mentioned that we don't really make any changes because of a new incoming president, but what we do do is we take our lens and we look at a few areas to see how they look. One of them is what's happening with interest rates. Number 2 is oil prices. And number 3 is inflation. Since the beginning and the founding of the firm, we've always looked at those 3 metrics at the beginning of the year. We do it every year and we crystallize them in Nolan's Notes. So you can go to our homepage now, click on the About Us and you'll see the Nolan's Notes tab and you can see the every year Nolan's Notes for the last 10 years where we chronicle these 3 categories and give you our outlook for the year through this lens. That's the lens we'll continue to view, um, our potential returns or opportunities through, and not the presidency.

So let's take a look.

Uh, as far as the interest rates, interest rates are steady to falling slightly. I would say that's a positive, uh, environment. Oil prices are trending lower and heading much lower. I'd say that's positive. And then the fast— the last one that we look at is inflation. And inflation was a big 2023, 2022 story, but it's not a 2024 story, which is why interest rates are down. So I'd say all three are in positive territory. Okay. So I think the backdrop is positive. What you do well with a positive backdrop, companies that are growing and doing very well. Again, smaller and mid-cap, these companies between $2 and $100 billion. And I like the stuff either in consumer discretionary or in the technology sector, particularly on the software side. And again, the things that I think that are going to struggle are the safety trade. Sure. Last couple of years, people have been hiding in safety. Sometimes they cloak it as if they're stocks like the Mag 7.

Right.

But in every case, consumers have been worried and concerned. They've been buying everything from, you know, Bitcoin and other things in order to mask it. And I think not Bitcoin is going to struggle, but I think things that people have been hiding in— consumer staples, REITs, utilities, cash— other things that don't return much, that are perceived to be just a store of value. Keep me out of the fray.

Right.

I think that's likely to be left behind. Okay. Animal spirits get cooking. Finally, growth kicks in. All of these people that were on the sidelines worried, I can't make any decisions, I can't do any investing. Right. Because the person I elected didn't get into office. I think that's likely to give way. Sure.

I'm glad you quickly mentioned crypto too, Nolan. Crypto, Bitcoin's up about 40% since the night of the election. So pretty huge move there. There are some reasons why. There's some thoughts that, for instance, the person that's been nominated to become the SEC head is a little more friendly to crypto than Gary Gensler was, for instance. So there's some reasons for optimism with crypto, but also a huge move's already occurred. Um, we certainly urge caution there, but it's definitely something we're going to keep an eye on over the next few months and see, see where, uh, crypto and Bitcoin go from here. With that, let's move on to topic 2. So topic 2 is interest rates. We've been talking interest rates, Nolan, for the last few months. It's been a topic of conversation with the Fed starting to move lower with the interest rates, with the federal funds rate. On the screen, we're going to put a few of the various interest rates that are available to folks out there, which which would be high-yield money markets, the 10-year Treasury, and a number of other interest rates which we'll put on the screen. And also, Nolan, you did want me to put up this rate, which is the actual amount of money that you can have by putting your money in a savings account at one of the big banks like Bank of America or JPMorgan Chase, which is quite a bit lower than what you're gonna get out of a high-yield money market. With that all being said, Nolan, with the interest rates starting to fall, What are your thoughts on interest rates, especially in the context of the changes that we expect with the new administration?

Yeah, you're right. Interest rates haven't changed very much at the banking level. So if you have a local bank, a banking account, you'll notice rates aren't that great. They're still in the 0.0-something range. You can move your money out and get a high-yield money market or buy a CD and tie it up and do some other things with. But on the margins, banks aren't jumping out of their chair to pay us more money on— to pay us more interest on money they're keeping. Sure. So it's all profit for them. I think the interest rate environment looks like it's pretty steady.

Okay.

So I think the job of investors is the same as it's always been. I have this excess cash and what should I do with it? If it's longer-term excess cash, meaning something that you're going to not need for at least the next 12 to 18 months, then it's a normal long-term investment. And you have to ask yourself, is getting— even if you're getting in a high-yield money market right now, 4% pre-tax. Is that acceptable? Is that the best I can do?

Right.

You know, if an investor is in the 25% tax bracket, they're getting 4% pre-tax, is 3% after tax.

Exactly.

Is that a needle mover? You know, we've seen inflation over the last 2 years. 2 years ago, inflation ran to 8%, right? Couple years, and then last year it was back down to the 5%, 6% range. Now we're back in— we're not back down to 2% yet, but we're probably in the 3s, right?

Okay.

So if I'm getting 3 net and inflation is 3 net, I'm not getting ahead.

Treading water.

I'm treading water.

That's right.

And the 3 is adding to my income tax rate because it's generally— it's ordinary taxable, right? So I like to say for all those investors, as we enter 2025, a lot of the unknown uncertainty is behind us. It's time to make long-term decisions. And I think probably 3%, we can do much better than 3% longer term, right? So income securities is something that we've been a bigger focus of ours. Uh, clients need income, they need alternatives to cash and money markets at the bank. Well, we need a bigger economic return, something that's going to get us ahead over time. So we have been looking at these income securities. We think that they're very attractive. A few characteristics make them attractive. One, we get interest and income payments from these income securities more often, generally quarterly, some cases monthly. We talk about a couple securities, it's monthly. The income streams typically high and attractive. We look at income securities that are in the 7 to 10% range. And a lot of the income characteristics, the income that's paid is not all 100% taxable. Some of it is tax advantaged, some of it is return of capital and other components that reduces the tax bill. So I think those things will make a lot of sense in 2025. For investors to start to look for ways to put a little bit more offense with the cash.

Definitely like income securities as a cash alternative, Nolan, but also good old stocks may not be a bad place to take a look at. I know some people have been hiding out for, it seems like, years, but you know, the bull market's 2 years old or so, and the average bull market's usually around 4 or 5 years. So if that— if we have an average bull market here, it might be a good time even to continue to invest money if you have cash on the sidelines, not only in income securities, but also in good old stocks. So if you're interested in that, if you, if you've got cash on the sidelines, we'd love to discuss with you. We'll put our information on the bottom of the screen and let us know. We'd love to have a conversation. Nolan, we're going to close out today from here, but I do want to say a couple of things. We're going to tell everybody, since we're going into the new year, expect some changes from us in 2025. Of course, we've got a new change in format here for our videos. We're going to have more podcasts, we're going to be on more podcasts outside of Left Brain, and an emphasis on distributing our own research. We do put our own research out and our own investment research out, so we're going to be more aggressive to put that out to the public. And model portfolios— we've got 5 model portfolios that we keep on a quarterly basis, and these are really the way that we build client portfolios from these model portfolios. We're going to be making those available to the public as well. Finally, a couple of changes to the websites, to the website, and then for clients, we've got software changes coming in the next month or so. So stay tuned to that if you're a client. And we've got a couple of other things, non-market related Zooms. We're going to talk about cybersecurity and a couple of other topics, both for our clients and for friends of Left Brain. So keep an eye out for all of that. Nolan, any comments on where we're headed for 2025?

Yeah, I think, um, northwestern, uh, up into the right, I think, is where the charts are going to go.

Maybe that's northeast, Nolan.

Is it northeast? All right, oh, we want to go up. We want our angles going up, showing us good profits next year. Um, what we would encourage you to do, the way that you can help, is subscribe. Hit the button below, subscribe to the YouTube, subscribe to our podcast so you can get them in wherever we're out and tune in to us for 2025. A lot of good programming to throw your way and a lot of investment ideas to bring your way as well.

Thanks, Lorne. We're going to cut it off here. I'm getting a little hot under these lights and we'll see you again next time.