Uncertainty is the only certainty – outlook for the markets in 2025
Jack Meskunas (pictured), of Oppenheimer & Co, looks at why captive insurance companies need to take a careful look at what is emerging from the second Trump administration.
As the memories of the contentious 2024 presidential election recede into the rear-view mirror, the time is nigh to look forward and focus on business and the markets, as well as areas of risks and opportunities which may abound in the coming years under a dramatically different government.
One thing is certain, uncertainty will be the hallmark of the new administration. They are already thinking “outside the box” on virtually everything. If you imagined Trump 2.0 was going to be a reboot of Trump 1.0, you have likely already abandoned that misconception. It appears that no area or agency will escape scrutiny and reconsideration of its needs, costs, operating mandates, and headcount. It is OK to be a little shocked by and perhaps disconcerted with some of the proposed changes. I am reserving judgement until the dust settles.
Trump 1.0 was a work in progress. He was a CEO and real estate developer (and reality TV host known for “shock and awe”) when he jumped into the DC political arena, and it was clear he had a steep learning curve. Many in “institutional DC” did what they could to temper or derail his agenda. The biggest accomplishment (from an investment point of view) was the 2017 Tax Cuts and Jobs Act, which gave every American a tax cut, helped repatriate money that corporations held offshore and reshored some jobs.
Trump 2.0 has already started out very differently. Now familiar with Washington and with a bit of contempt for some of his experiences, Trump’s return is a homecoming with a long list of campaign promises he intends to deliver. Whether you agree with his agenda or not, captive insurance companies and asset managers must be fully aware of the big changes coming to help manage their portfolios. Let’s visit some of the main points and analyse how they might affect stock and bond valuations. See Table 1.
A top priority is to make permanent the tax cuts from the 2017 bill and reduce the tax rate on corporations. This could also include elimination of taxation on overtime, tips, and social security payments. Lower taxes mean higher corporate profits, and more disposable income. Look for growth in stock repurchase plans and consumer discretionary.
Regulation and DOGE
The administration is looking to cut regulations across the board and remove or limit the amount of regulations that can be created and enforced by unelected officials at government agencies. There will also likely be a lighter touch on proposed M&A activity, generally very good for equity valuations.
Immigration
A controversial issue if millions are deported, they have started by focusing on deporting only illegal immigrants convicted of crimes and have standing (but not enforced) removal orders. Massive deportations could limit the availability of ultra-low-cost labour used primarily in agriculture and food service. Higher minimum wages in some states have caused job losses by citizens that it appears are being picked up by undocumented workers. This is not a good solution for businesses and could cause stock declines in those sectors. Massive deportations could be inflationary.
Tariffs and trade
Many in the press have already declared we are in the beginning of a “trade war.” I think that while that is a bit premature, it is clear that the new President is willing to make direct threats to both friendly and adversarial nations alike to further his agenda. As such it is important to know that the primary (stated) goals of Trump 2.0 are (in no particular order); returning manufacturing jobs to the USA, creating pathways for US companies to make inroads into foreign countries, eliminating illegal immigration, having legal immigration become merit-based, erasing DEI mandates in the US government, US military, and if possible US private and public businesses, reducing government waste, ending the funding of international organisations that don’t meet his “standards” or operate contrary to the interests of the USA.
Monetary Policy
This is unlikely to be affected by the new administration as it is controlled by the FED. Expect the FED to continue cutting rates as needed, but at a slower pace than originally expected. Look to the “DOT PLOT” for clues as to how the FED sees the direction of rates. The plot is published every quarter, with the next one due in March. Captives should look to the plot to see if the FED is as worried about the potential for re-inflation, which would be negative for both stocks and bonds. See Chart 1.
International Relations and Tariffs
It is clear that while tariff may not be the most beautiful word in the dictionary, tariffs will be weaponised to change policies with both friendly and adversarial countries. So far under “2.0” the threat of high tariffs has changed policies in Colombia, Mexico, and Canada. Look for more blunt force to be applied in an attempt to level playing fields globally and more directly benefit the USA. High tariffs, and tariffs that increase annually can increase inflation so captive portfolio managers much watch this closely as well.
Tariffs and Factory Jobs
The year 2019 was the first full year of very targeted tariffs imposed on China. The US lost approximately 43,000 factory jobs, and both industrial production and business investment contracted.
Tariffs and Consumer Earnings
The official Federal Reserve’s Summary of Economic Projections estimates of economic growth were revised downward in 2019 in response to the tariffs put – and later increased – against China. The tariffs effect was to reduce the real median household income in the US for the first time in five years with the estimated cost to be $8 billion. See Chart 2.
Trump 2.0
President Trump has come back into office stronger and more focused than his first term. He won a decisive majority of the vote, as well as the electoral college. This mandate has empowered him to act strongly in the first few days of office on multiple fronts, including the threat of imposing tariffs of 25 per cent on Canada and Mexico, and 10 per cent on China, now suspended temporarily. These tariffs are broader and higher than the first time and, in my opinion, more likely to generate knee-jerk reactions from the targets with both positive and negative effects possible.
Immediate estimates of the tariffs set to go into effect in February is that they will reduce GDP by -1.5 per cent in 2025, and by -2.1 per cent in 2026.
Volatility is a certainty…and always has been
Every year has pullbacks, however the market has ended with a gain over 75 per cent of the time in the last 53 years. In fact, whether you look at the high inflation years of 1971 through 1989 – where the average annual pullback was over 17.5 per cent, or the lower-inflation and higher-growth years of 1990 through 2024 – where the average pullback was ~14 per cent, the average return of the market (S&P500) was right over 9 per cent per year.
Volatility is not a new thing and it is never going away. Markets – in the short term – are “voting machines” according to investment guru Warren Buffet. But he went on to say that in the long term markets were “weighing machines” in that fundamentals of sales and profitability were what drove stock prices. See Chart 3 for another way to look at volatility.
Volatility is certain, but ignoring the noise and staying the course is critical for obtaining the best results. Stay the course but stay alert while you do.
Timing the markets is near impossible, so the best way to maximise long-term rates of return is to stay the course. We say that time in the market is more important than timing the market, but you need to know what you own, why you own it – and now how it will be affected by Trump 2.0 policies.
There is no question that active management will be favored in 2025, as active managers can respond quickly to changes in government policies, and other factors exogenous to market specifics. In January alone, 60% of active managers outperformed their benchmarks (passive indexes). A professional asset manager with decades of experience can help bring a steady hand and a wealth of historical precedent to bear in captive insurance portfolio management. This guidance can be essential in keeping the captive’s portfolio on course for the short-term and the long-term.
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