Rather than writing one long Q4/Year end letter, I am going to do a 2025 market preview of the macro environment, and a 2024 review of best and worst decisions and lessons learned (published Friday or Monday), and then a Q4 2024 letter (published between Monday and Wednesday of next week).

2024 was an extraordinary year in the markets. The S&P 500 finished the year up over 23%. The Nasdaq finished up nearly 30%. The lagging Russell 2000 still returned around 10% (all returns before reinvested dividends). This will be the 2^nd consecutive year of such magnitude returns.

This is not unique, but it is still extraordinary. Those are big numbers. Investors who had any piece of that pie saw their net wealth rise considerably.

Such back-to-back performance has happened before, and recently. 2019 saw 20%+ returns on all major indices, with 35% for the Nasdaq. The Nasdaq then topped that in 2020, while other indices also maintained high teens returns.

2020 was an election year, as was 2024. The incumbent president was voted out in both years. At least in theory, the new president comes with a very different set of policies. While I prefer to research individual stocks, I think it’s worth thinking about how things might change in the next four years. Those changes should not (I hope) provide reason to uproot our fundamental investing process. But it’s worth being mindful. Especially given how much markets have risen in these two years.

I’ve already written that I did not think former President Trump was the right choice for the 2024 election on a purely economic basis (let alone many other reasons that are not an investment letter’s focus). I’ve also written that markets tend to supersede politics, and that we would continue to invest constructively.

I repeat that to make clear my biases and the framework for the analysis below. The U.S. economy is, for the most part, self-propelled. Fiscal and monetary policy matters, but I believe it does at a secondary level, or as a reaction to the economic momentum. It’s certainly possible that the changes coming from the new administration will have a deeper impact, but, historically, it’s more likely it will matter on the margins. Those margins still matter, especially in markets.

There are three main things I’m watching for in the coming years.

The Return of Volatility

From October 2022 through the end of 2024, we’ve had pretty clean sailing. The S&P 500 has been up in 8 of those 9 quarters – Q3 2023 is the only down quarter – and will have a 65%+ return over that period.

That’s our baseline for entering 2025. I mentioned above that the market went from strength to strength in 2019 and 2020 as well. 2021 continued the run with another 20%+ return year. 2021 was also marked by strong returns and bull market excess – crypto, SPACs, frauds – and 2022 brought a reckoning. It’s not unreasonable to imagine 2025 echoing 2021, and then 2026 echoing 2022. 2022, of course, was a bear market in many indices.

Volatility may be returning either way. A lot of people use volatility as a synonym or euphemism for bear markets, and I don’t mean that. The U.S. stock market is likely to continue to rise in some sort of longer-term horizon.

Photo by Daniel J. Schwarz on Unsplash

The baseline policies of the Republican party and of President Elect Trump (with a cabinet potentially staffed with at least 13 billionaires) should favor corporations. Lower taxes, less regulation, less scrutiny of market power. But, there are crosswinds. Tariffs, deportation of undocumented citizens, and a track record of turning on specific out of favor people or companies – big tech remains controversial on the right – could all gum up the efficiency of the economy and thus stock market returns.

On top of this, we have to take the President’s tweets (whatever the platform) into account again. I mean that specifically about Trump’s posts, which regularly moved stocks and markets in his first term, and generally about his style of governance. The recent near government shutdown was a preview (and rerun) of what is to come¹. It’s possible the Republican party will muster its slim house majority and the remaining old guard in the Senate to do everything they hope to do. But it seems likely to be a roller coaster ride to get from proposal to approved plan to implementation.

I expect there to be a lot more lurches in the market in the coming two years, at least. The stock market as a whole trades at expensive valuations and has had two strong years of growth. The post-election trade has been mostly one way, and market participants may be wishing away the less favorable Trump policies. The pandemic recovery has played out. The AI boom has to prove itself in tangible economic benefits. There are many other worries I could mention (China’s wobbles, for example). Having a baseline of cash to both ride out and take advantage of these lurches, and investing in companies with strong balance sheets seems to me to be an essential approach.

Nobody ‘knows’ anything

One proposed Trump administration appointment has been received quite negatively: Robert F. Kennedy Jr. as Secretary of Health and Human Services (HHS). Look at this chart:

Data by YCharts

The S&P 500 has been up 5% over that time, for comparison. I don’t follow every stock listed there closely, and there may be other issues – the backlash around health care post United Health Care CEO assassination; cocoa prices for Mondelez – but the environment for pharmaceuticals, ‘junk food’, and ‘unhealthy’ living as branded by Mr. Kennedy has not been great.

I am no expert on the confirmation battle, nor the full powers and purview of the Department of HHS. But there are two things I’m holding onto that I think can be generalized:

1. We don’t yet know whether what we expect to happen will happen.
   
   The broader Trump administration’s policies and plans contradict each other. Trump is not completely unconstrained. He may nominate RFK for a Cabinet Secretary position. RFK is a former Democrat who has controversial (and yes, bad) views on vaccines, among other things. The issues he’s fighting for are not ‘core’ to Trump’s worldview (see the McDonald’s on the airplane photo), and Trump is only ‘loyal’ to him insofar as RFK joined the campaign a few months ago.  I’m not a political handicapper; I am just not sure RFK gets confirmed in this role or that Trump fights so hard for him.
   
2. The government can’t change everything

This is the more important point. Whatever people voted for in electing Trump, I don’t think it was to change their habits around what they buy from the supermarket or which fast food restaurants they eat out at. I’m not sure how the government would legitimately affect dining preferences. The economy and the day-to-day will of the people should be stronger than that².

Volatility will rise, and unpredictability will rise. There will be a range of probability we’ll have to take into account for both what the Trump administration implements and what its direct effects are on the economy. In the RFK case, I would not be enthusiastic about vaccine makers, for example, but I would be more cautious about downgrading consumer staples.

Jeff Bezos famously said that he built Amazon around the idea of ‘what won’t change in the next 10 years,’ instead of trying to guess what will. I think that’s a useful idea to keep in mind for the coming period.

The path of least resistance

How different the second Trump administration will be in substance from previous Republican administrations, including his own, is for smarter, more politically focused people to judge.

There are some things we know he cares about, and some things we know the Republican party cares about, that we can align around as loosely held strong beliefs.

• Corporate power will go up, which means mergers and acquisitions should go up. The market is clearly anticipating this on a general level, but it hasn’t yet played out with specific deals, creating opportunity.
• Tariffs will go up, causing uneven levels of disruption and testing management teams as far as whether they’ve prepared for it.
• Corporate taxes will be maintained at current levels or cut, to offset some of the disruption at the corporate level, but this will be a general offset and not help specific companies

How these things often ‘end’

Bull markets that take on increasing ebullience often blow out and blow up (see 2021-2022). One-sided deregulation often engenders corporate and market problems that lead to major problems (most dramatically, 2008). The Trump administration may on the margin either cause the economy and inflation to run hot or struggle to deal with surprises, leading to a Federal Reserve reaction (see 2018) or another particular crisis like Covid.

I never make market calls. I used to joke that the market has felt expensive to me since about late 2014. The S&P 500 has nearly tripled in the decade since. I just want to be prepared for when things turn down, as they always do, while continuing to invest so we benefit from the growth of the U.S. and global economy over the years ahead.

I recently watched the TV series Lost for the first time start to finish. There’s a point (mild spoiler warning) that Jacob, one of the two key mythical like characters in the background, makes to his adversary or brother. The brother points out that Jacob always brings people to the island and:

Brother: They come. They fight. They destroy. They corrupt. It always ends the same.

Jacob: It only ends once. Anything that happens before that is just progress.³

I use end in quotation marks in this header. In our time horizon – the next few decades – it’s possible anything will happen. It’s possible the last 100 years of U.S. stock market behavior is the anomaly, and we’ll either revert to something predating that or another new paradigm, for better or worse.

But I think, even as it’s likely the bull market will end in one fashion or another over the coming years, it is unlikely to be the ‘end.’ And that the market will still be here, the U.S. economy will still grow, and we’ll continue to invest. Everything that happens will just be a form of progress. Even when it doesn’t feel like it.

Interested in more from Middle Coast Investing? Or in talking to us? Get in touch.

Please read our full performance disclosures.

Disclosure: I am long AMZN and RWM (a small hedge position against the Russell 2000). I may change positions at any time. I have no immediate plans to make major changes. This is not investment advice. Investing is risky. Any investing decisions are your own responsibility and should be taken after speaking with an advisor or at your own risk. This is not a solicitation to buy or sell anything. Past performance is of course no promise of future results.

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1. The stock market barely reacted to this drama; the big sell-off that week had to do with the Federal Reserve slowing its rate-cutting plans. That Federal Reserve change, though, is in part a reaction to expected Trump administration policies. ↩︎
2. There is also a contradiction between a ‘cut regulation’ administration and a ‘we’re going to change how you eat and live’ administration, but, there are a lot of contradictions in this administration. ↩︎
3. For anyone who wants to geek out on Lost, I am citing the quotes from here – https://www.the-reframe.com/lost-002-it-only-ends-once/ – and the author of that blog has written great analysis of the show. ↩︎