The team from Aptus Capital Advisors discussed the firm’s outlook for 2025, including their views on the economy, markets, and investment strategy.
Key points
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- The team is optimistic about the path forward for stocks, with the path of least resistance appearing to be higher given continued monetary and fiscal policy support.
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- Aptus believes owning more stocks and less bonds is the best portfolio positioning, as bonds are unlikely to provide strong returns with higher rates.
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- Potential risks include political volatility in Washington, D.C. as the new administration tackles issues like taxes and the debt ceiling.
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- Overall, Aptus remains bullish on large-cap U.S. equities, which they believe can benefit from the operating leverage characteristic of the market.
Hope you enjoy, and please send a note to [email protected] if you’d like to discuss any of these topics further or have any questions.
3 Minute Read: Executive Summary
Full Transcript
Derek
Good morning. We are December 18th, so a week from today is Christmas, and we’re lucky enough to have a crew ready to talk about what’s happened in 2024 and what to look for in 2025. We’ll certainly let people trickle in over the next minute or so. We appreciate y’all making time to spend with us. I’ve got our experts from both sides. We’ve got Dave Wagner who’s the head of equities, and we’ve got John Luke Tyner, head of fixed income. We’ll certainly cover both of those areas in pretty good depth. We’ll try to keep this to 35 minutes or 30 to 40 minutes and then certainly hit us with questions. We’ll try to get to them depending on time and if we don’t, we’ll certainly hit you afterwards with feedback. If you work with us, you know that our guys are very responsive and always interested in chatting about markets. So yeah, we appreciate any feedback and hit us.
And I’ll read a disclosure here right at the beginning to get us kicked off. The opinions expressed during this call are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus’ investment advisory services can be found in its Form ADV Part 2, which is available upon request. So welcome guys, Dave, JL, thanks for joining.
John Luke
Yeah, thanks Derek and thanks everyone for popping on and spending some time this morning with us. We always like to start out this end of the year call with just a token of appreciation and gratitude for all of our clients, our shareholders. The trust that you guys have put into us, we definitely don’t take this lightly. The responsibility of helping steward your clients’ assets, their nest eggs, their future, it’s certainly a process that’s very endearing to each of us. It’s been a great year 2024. We have so much to be grateful for. But I think that as we look forward to 2025, we’re going to have a lot of exciting things to post you guys on updates from Aptus, whether it’s the growth of the team, which we’ve had a huge growth for 2024, but we’re expecting much more for ’25.
We appreciate just each of you guys in challenging us daily and weekly and monthly on our process and our philosophy. I think it’s important in how we’re helping approach markets that are very difficult. Things have changed a lot since the pandemic and how portfolios are constructed I think is going to dictate a lot of the success of your clients. And so we feel blessed to be a part of helping navigate those markets and work with you guys on an individual basis. So without you guys, we aren’t here. So we really appreciate everyone’s time and trust.
David
Awesome message there, John Luke. Myself included, all the team, we’re so appreciative for everyone on this call, everyone who’s going to be listening to this call in the future. Aptus is such a cool firm. All of our clients, our partners. Y’all are very cool people. And I think one thing that really embodies everyone here at Aptus from an ethos perspective is that we take our work very seriously, but we may not take ourselves seriously. And I think that’s what separates us and differentiates us from really anyone else. But the challenges that we’ve had in the past that we’re going to have in the future, I know that we have the best team around that I trust to really tackle those obstacles moving forward, so. Speaking about the ethos of that, we take our work seriously, but not ourselves seriously.
We all know our Market Outlook and a lot of the writing that I do, it’s very somatic based. I think that plain reading on most investment jargon is like watching paint dry. So we try to have a little fun here. With our Aptus Market Outlook, I think this is our fifth or sixth year run, and we’ve always had a theme behind it. So the introduction of the 2025 Aptus Market Outlook theme, it’s going to be based off of the 1980s movie Airplane. And I’m always going to get this wrong and Derek can step in here. I always try to say that the main character was Liam Neeson, but that that can be more of a different character than Leslie Nielsen who’s one of the head people here in this movie.
The basis is obviously the market’s now in its third year of a bull market cycle. John Luke will probably talk about how whenever the bull market has hit two years in duration, the minimum duration of the bull market is closer to five years. So we just entered our third year for this bull market cycle, and since 10/13 of 2022 when the bull market cycle started, the S&P 500 is up close to 70.3% as of today, which is December 18th. And so I think a lot of people call us crazy saying, “Hey, you guys are still bullish on equities after that hockey stick up in a performance chart after that remarkable 70% run in the S&P 500? Surely you can’t be serious.” We are serious and don’t call us Shirley.
But that is also coming on the back of a theme that I love back in 2024 based off of Ayn Rand’s 1957 novel Atlas Shrugged that focused on the consumer and the propensity of the consumer to spend. I think the theme from last year actually could continue into this year, which we’ll talk about here on this presentation, is that the direction of the economy, as always, no matter what year it is going to be hinged on the health of the consumer as a whole. In the theme of 2024, we said Atlas is basically like the consumer in the economy holding up the US… Actually not just the US economy, but the world economy as the consumer accounts for 70% of the US GDP. And whenever the consumer may shrug, that’s when the market can see some problems. But right now the market and the consumer looks very, very healthy.
And that’s why we have the conviction of our theme of 2025 of, hey, we want to be bulls for stocks over longer periods of time. That doesn’t mean that we won’t encounter some type of turbulence over the next 12 months. I think that there’s a lot of stuff that’s going on in Washington, DC, whether it’s a debt or corporate or individual taxes that’s going to have to be tackled not just in the next 12 months, but probably in the next 3, 4, 5, 6 months. And some of that political volatility could translate to some turbulence in market volatility. But all in all, a lot of the structural forces that we’ve seen over the last two years from fiscal policy, monetary policy, they still remain structurally ingrained in what’s going on with our market that we’re comfortable to say that, “Hey, we’d like stocks for the long term, there may be some turbulence.”
But I think the biggest risk or one of the biggest risks that investors have right now is finding that wall of worry after the run in the market and becoming too conservative because I’m a firm believer, I know JD is, John Luke and the rest of our team, that the hurdle rate for investors right now is substantially higher than where it was 20, 30 years ago. And if you don’t have the right proper structure allocation in place to own those risk assets, that you could be having more of an awkward conversation with clients than little Joey did with Clarence over in the cockpit within the show, talking about Turkish prisons and other things that I can’t say really here on a recorded webcast.
But one of the things we’ve been talking… Oh, perfect, yes, let’s start off with some polls here.
Derek
We’ll drop a couple polls throughout the thing, so feel free to participate. Nothing mandatory, but it’s always fun to take everyone’s temperature and just see what people think about… I think we’ve got three of them in there if we get to them, one about where’s the market potentially headed, what are the big challenges we see out there, what are your favorite asset classes? I think that’s where we settle on these. These are always fun. Meaningless, but fun.
John Luke
And for the record, we can’t vote on these as a host.
David
Would you be willing to say what your answer is though on this webcast, John Luke?
John Luke
I think it was going to be up 15 or more, just for fun.
David
I’ll play on-
John Luke
All right. So right in the middle there, most people in that 5 to 10% range, which historic average. Doesn’t happen, but-
Derek
The number that never happens but is the historical average
David
Never. It’s funny when you look at a lot of sell-side analysts and their expectations, not just for earnings growth but growth in the price of the S&P 500, they all just take the easy way out and say, “Oh, we’re going to have 8% earnings growth next year. The market’s going to go up 8% because that’s what it’s done historically” because those people want to keep their jobs. So no one really ever steps out of line when they come out with a lot of their outlooks, which I always find comical.
But as we continue here, I think we want to start off with something differentiated. I think that there’s a lot of consensus out there in this market, much like a lot of the sell sides expectations moving into 2025. So we want to start off with where we think we are a little different in our thinking and it really comes through. I think we do a great job here at Aptus of tuning out the short-term noise and focus on what’s going to be driving the market well into the future, not just over the next 12 months because I hate creating outlooks that just embody what’s going to happen in the next three months, the next six months, or the next 12 months.
There’s such a great characteristic for investors to be able to see the forest through the trees on how the market evolves over longer periods of time because if you can do that taking a broader brush at the bigger picture of what’s going on, I think you’re going to be more optimistic about the future and innovation and profitability, which is going to set you up for so much more greater success than those that focus on the short term. Because when you focus on the short term, you try to play with the pie across too much by trading too much or become too pessimistic or too conservative, that can lead to some type of longevity risk in a portfolio.
But the big thing I’m focusing on right now is somewhat twofold. I have a saying is that as the market evolves, you need to evolve with it or you are going to become obsolete. And when I say I want to focus on the forest through the trees, I want to look at the composition of the S&P 500 over last 30 and 40 years. Most people want to look at the composition of the S&P 500 now where the top 10 names account for 39% of the S&P 500, and they take that as a bearish signal. But if I think you step back and look at it from a holistic picture on how the market has evolved from the seventies and eighties and early part of the nineties to today, I think it could paint a very much more optimistic and better picture than just focusing on the negatives having so much market concentration in the S&P 500. Which relative to the rest of the world, the rest of the world tends to have a substantial more concentration within their major indices, which I would say as a disclosure.
But everyone wants to hate on valuation because expensive relative to its past. And there’s a lot of mean reversionist out there that want to say, Hey, you know what? The market’s expensive. It’s in its top 5% relative to longterm. Valuations have to pull back.” But I think those people are nearsighted and illogical in a few different senses. Because what the market was in the eighties, it was a very much more asset-heavy, CapEx-driven market. Fast-forward today, it’s the exact opposite. It’s very asset-light and very innovative industry as a whole. So I hate comparing today’s valuation to the S&P 500 of 22 times on a forward basis to the valuation of the S&P 500 back in 1990.
In 1990, the S&P 500’s forward valuation was 13 times. So right now, the market relative 1990, yeah, it trades at a valuation that’s 69% higher than where it was 34 years ago when the constituents were substantially different, the position was substantially different. And if you look at the chart on the bottom here, yeah, the valuation is 69% higher than where it was in ’90, but its profitability on an operating perspective is now 13.8 expected heading into 2025. And that’s when you compare to a S&P 500 operating EPS margin in 1990 of 5.7%. So you’ve seen operating margin grow over the last 34 years by 140%. The valuation’s actually only increased by 69%. So all in all, what I’m trying to show here is that the market has evolved and the valuation in my mind is not a problem because it has evolved in the right way here in the United States.
But if we take this a step further, I think what are the ramifications of this evolution of the S&P 500 is now that the US markets, as measured by large caps, have this characteristic that no one else has and it’s going to be operating leverage. Basically simplistically said, operating leverage is that for every $1 of revenue input we can have greater than $1 of earnings output. And I think next year is one of the best ways to look at this, is that in 2025, the average analyst expectation for revenue growth is 5%, and that equates to earnings per share growth of about 15%, meaning that we’re basically getting the three to one payoff of earnings growth to revenue growth. That’s operating leverage.
And the reason that the market now has operating leverage is because of those top 10 stocks. There’s mega-cap tech stocks that are very innovative, whether it’s Microsoft, Amazon has a ton of OI and operating leverage in there. NVIDIA, Broadcom. Even Apple to an extent. Meta does. Those are the reasons that the market has this characteristic. And I don’t look at the market concentration as a problem because the reason that there’s market concentration in the S&P 500 allows us to have this operating leverage.
But I would say that the biggest thing you could take away from this [inaudible 00:14:46] invocation of how this market has evolved is that when you have operating leverage now ingrained in system, which again, operating leverage only accounts in US large caps. US small caps doesn’t have it, they don’t have it. International doesn’t have it, those are more service-based economies. And emerging markets don’t have it, they’re going to be more of a commodity-based or metals and miners market. So it’s only US large caps that have this awesome characteristic. But this awesome characteristic of operating leverage can cut both ways. When operating leverage is working for you, it’s your best friend. But when it starts to work against you, it’s going to be your biggest enemy.
Then like next year we have 5% revenue growth, which equates to 15% earnings growth. Let’s flip that up though. What if there’s 5% revenue growth, a detraction of revenue of 5%, maybe that could equate to 15% degradations in earnings per share. And then that would mean slowing growth and lower profitability. Two things that the market hates to see be in negative territory. So I think when you have operating leverage as a characteristic, the ramifications of market performance is that you’re going to get more tails.
And obviously I can talk about more tails in line of the 2025 Market Outlook of airplane because airplanes have tails, but what I think we’re going to start to see and we’ve seen over the past few years is that the better years are going to be better and the worse years they may be a little bit worse. Brian Jacobs, a CFA on our team, great addition over the last year, he showed me a statistic saying that on the average up year since 1926, the average up year is up 21% for the S&P 500. The average down year since 1926 is down 13%. Pretty big tails.
Then John Luke, who’s about to talk here, he showed another amazing statistic that, going back over the last… I think it’s since… Last 90 years or so, I think 27% of the last 90 years have seen a return in the S&P 500 be greater than 25%. That just shows you, those numbers shows you that given the operating leverage in our industry and how it’s evolved from the eighties to today, that we may see more tails moving forward into the future for the overall market. And as we know, and this chart shows it to you, and it’s in our asset allocation chart, but as we know, Aptus’ philosophy is basically two things.
We want to own more stocks, less bonds [inaudible 00:17:05] remaining risk-neutral. That’s one of our first investment philosophy. Our second investment philosophy is that we want to do better in the tails. And what we’ve seen from a data [inaudible 00:17:13] perspective, and what I just mentioned about with operating leverage and how tails happen more often, I couldn’t be more convicted on how we are positioned your clients’ hard-earned money for this characteristic to not only benefit from it, but make sure that we’re prepared for it if operating leverage becomes our biggest enemy. So we’ve had a great year at Aptus, 2024 was amazing, we love our partners, but we continue to have this amazing conviction in what we’re doing not just at our active ETF level, but our overall allocation level into 2025. And I just could not be more excited to be a part of this team and have all of our partners because we’re prepared for whatever the future holds.
Derek
I just dropped-
David
So we’re going to bring up a second poll. [inaudible 00:18:01] a second poll. Let’s look at the challenges that we may see over the next 12 months. Okay. We’re going to have five different options here and please vote for what you think is going to be the greatest challenge that the market or economy has to endure over the next 12 months. It’s going to be jobs growth.
Derek
I think you can pick a couple on here. I think this one we let-
John Luke
Multiple choice.
Derek
Multiple.
David
I loved multiple choice in high school. It could be Fed policy error, government debt, or valuation. I’ll give you a few more minutes and then I’ll let [inaudible 00:18:32] wrap this up. And then we’ll pass it to John Luke to talk about market commentary.
Derek
All right. I’m going to wrap it and we’ll share the results out there. Click your buttons and we’ll run with it. A couple of standouts. And they’re right up your alley there, JL.
John Luke
Yeah. There we go. I can’t actually… I couldn’t see the results there, but I’m guessing debt and inflation were… Yeah, there we go. Yep, that was it.
Derek
He teed you right up. Didn’t know [inaudible 00:19:19], but there you go.
John Luke
Yeah. When you look back over this year and you remember where we started, the market was expecting six, seven, maybe even eight rate cuts at the beginning of the year. It looks like we’re going to get four. Today’s obviously Fed Day where 25 basis point cut is pretty much inevitable. At the start of the year, the 2-Year Treasury was about 4.3%, and right now it’s 4.2. So you had a marginal 10% drop in 2-Year. But where you had seen some maybe differences from what people expected and getting into the next chart too, but the 10-Year Treasury started the year at about 4% and currently it sits at about 4.4%.
And so Derek, pop back to that other one for just a sec, I got a little ahead. But basically what this chart is looking at is the Fed fund futures curve today versus this time last year. And so you can see that there’s been a very, very large change in terms of what the market is expecting, the Fed’s neutral rate or where they’re going to stop cutting interest rates at, now versus a year ago. And that gets back to the initial commentary about markets expected a lot of Fed cuts, we got about half of what was expected in 2024. But the real question is, is what do we get next year?
And I think that the take that we have is the neutral rate or where the Fed leaves their ultimate policy is going to be higher than what most people expected. And it gets down to a lot of the points that Dave hit on about the consumer. It comes to many of the things about how basically everyone extended their debt when rates were really low, but the economy has been much less sensitive to interest rates than what a lot of people have expected. And really what that means is that we’re just probably going to get less rate cuts than what the market had initially hoped for. But the good part is, is as we’ve been in this environment of rates were high for a really long time, couple years, and we just saw the initial rate cut in September. And obviously it’s been pretty quick in terms of the cuts as the Fed has tried to get in front of any inflation woes, but what it has led to has been higher rates. And so next one, Derek, if you can. Or Dave, sorry.
Yeah, so what’s been different with this cycle is rates did what? Where you’ve seen the 10-Year Treasury increase by about 80 bips since that first Fed cut. And that was definitely not something that was on most people’s bingo card. You’ve seen throughout the whole year where interest rates were trying to get ahead of what the Fed was going to do and expectations. But as we were really I think on the forefront of is, just because the Fed was cutting rates didn’t necessarily mean that longterm bonds were going to be the place to be. And I think that this play out has really shown that to be the case.
But I don’t think that higher rates up to a certain level, are going to be a major drag on other asset classes or risk assets. But I think it does make a point for when it comes to portfolio construction that we believe bonds are going to continue to not be friendly to advisors’ portfolios. They’re going to be an anchor where of course they can’t grow, as we’ve talked about. And the big thing I think is… And we’ve heard a lot about this the last couple of months, where the inflation prints that the Fed were really hoping would be moving closer and closer to 2%, while they have improved, they’ve started to become bumpy and the root to 2% is likely to be much longer than what’s expected. Because of that interest rate policy is going to be higher. And I think that it’s going to continue to push yields in an environment where you just can’t bank on those big total returns from rates dropping like folks have in the past. Next one, Dave.
So getting back to the point from last year, when you think about the backdrop of the debt of the country and how liquidity works out, one thing we’ve really harped on the last 12 months is there was a substantial change and the early part of Q4 of 2023 where… That was when interest rates were… You’re getting a 10-Year close to 5%. You were getting some pain in markets. And you saw Janet Yellen really shift policy to issue a ton of the US government debt on the very front end of the curve using bills. That was a big impact to risk assets where, when you issue bills, it just takes much less liquidity out of the market than issuing longer-term duration.
And so one of the things that I think we’re going to be really on the forefront of is we’ve got a whole new political regime that’s stepping into office in January, and you’ve got different beliefs on fiscal policy, you’ve got different beliefs on monetary policy. Obviously, President Trump has pushed in the past for lower rates. You’ve got Scott Bessent who’s very focused on fiscal, and he’s a very hawkish on fiscal policy and big believer that US deficits are too high. And so as we wrap into… And one more slide, Dave, as we walk into 2025, another topic that we’ve talked a ton about is the US Treasury has about 7 trillion treasuries to refinance in 2025.
And the big question is, where on the curve are they going to do it? And so the chart before was really saying, “Hey, we focused on the front end of the curve with issuing a lot of this debt,” which was great for liquidity, but maybe not so great for the short term because that debt rolls over, and if interest rates are going to be higher on the front end of the curve than what people were expecting, they’re rolling them over at higher rates. And I think that Scott Bessent has made some comments that he would like to see some of the issuance be further out, longer duration. And so as the market has to absorb a huge amount of refinancing, a huge stockpile of debt, and if they’re having to finance it at longer durations, that could continue to really pressure the long end of the curve.
So we’ve got this situation room, which the biggest thing that I think is on a lot of people’s minds, which was obviously in that poll, indicated in the poll, and another point that we’ve talked a lot about, but the US debt has obviously risen drastically. It’s knocking on the door of $37 trillion. But you think about the dead and the impact, there’s really a few ways to handle it. Austerity, inflate out of it, or growth. And I think the funny point on austerity is that’s like… I think it was Vivek or maybe Elon talked about using the last digit of people’s social security number that were employees of the government and basically eradicating their position based on those numbers. It’s just funny because that’s not going to happen. So we’re going to focus really on inflate or grow out of within these points because we think that austerity not only is it very uncomfortable on the front end, just ask Argentina right now, but also it’s just politically infeasible. No politicians are voting for any type of austerity types of policies.
David
I think you just wanted to talk about Argentina probably for a little bit there, knowing you, John Luke, but let’s set the stage for this. John Luke, wild-card question. 1 to 10, 1 not worried, 10 worried, what’s your worrisome scale here on the US debt right now? 1 to 10.
John Luke
Probably a 4.
David
Okay. If I had to give my answer, I would be closer to a two. So let’s walk through our thoughts because obviously this is on the forefront of everyone’s mind. I think John Luke doesn’t take enough credit for this, but he’s been so much on the forefront of talking to people about debt in this lens and I think it’s perfect. The only ways out of it is austerity, inflate out of it, or grow out of it. Let’s talk about grow out of it.
I think the best way to set this stage is actually talking slightly quickly about politics. I know, I’m sorry, but we’re going to do it. And I wrote a [inaudible 00:28:27] on this. It’s Trump is the Nominal GDP Growth Candidate? All right. I put the word nominal in there very much purposely because we have to talk about the other aspect here on how to inflate out of it. Trump knows that we’re in a debt problem right now. I think a lot of people wouldn’t know that our deficit has actually come down over the last six, seven months because tax receipts have increased, which we’ll touch base here momentarily. I think John Luke will.
But Trump understands that as long as you can continue to grow faster than the deficit itself, debt’s not going to be a problem. Let’s bifurcate that. All right, what if deficit doesn’t, or if deficit does grow faster than nominal GDP? All right, let’s segment this. So if nominal GDP grows faster than the deficit, that means debt’s not a problem and that means that stocks could probably do really, really, really well. But on the flip side, on the other side of the pillow, if the deficit grows substantially faster than GDP, that’s going to be a problem. But that’s going to mean that rates are most likely going to stay much higher and stocks may have some trouble. Let’s think about that conundrum there. Stocks may go down, but rates may stay higher, that means you can’t rely on fixed income, traditional fixed income as a mechanism to insulate the downside of portfolios moving forward into the future.
But bringing it back to the 10,000-foot level here. Trump knows that he has to grow. Whether Harris was in presidency or in Washington or Trump, we all know that once you turn the water spigot on for fiscal policy, you cannot turn it off. Obviously, Harris’s policies versus Trump policies were completely opposite on where the fiscal spending was going to occur, but it was going to occur no matter what. And Trump knows that he has to have more of a refined rightful approach than a shotgun approach here to utilize fiscal policy to his advantage to create the best IRR of some type of economic growth output because he knows that he has to keep growth above the deficit.
And I would say the biggest misconception in this market is looking at this debt from an absolute standpoint. If you can look at the debt from an absolute standpoint, we’re never going to win this battle. Debt is only going to continue to increase much due to the point that John Luke was just speaking about here, that we’re having to refinance it at higher rates. And right now the interest rate expenditure on the income statement for the US government is basically the second highest behind social security. It’s [inaudible 00:31:04] Trump and greater than the Medicare and the defense budget now. So the absolute debt level is only going to continue to increase.
What we have to think about is from a theory of relativity. All right, what’s our debt relative to GDP or our deficit relative to GDP? And Trump knows that and that’s why he has to make sure that we have the right fiscal policies in place to make sure that it has the best advantage to grow nominal GDP so the debt does not become a problem. But with that brings up the next point that John Luke’s going about. When you have this amount of nominal GDP growth injected by fiscal policy, there’s probably some ramifications that aren’t as great on this side of the ledger and that’s probably going to come through the form of inflation, but maybe inflation isn’t as bad as what you may think in regards to the debt problem.
John Luke
Yeah. And so this is a great chart that looks at basically the two inflation metrics that everyone knows and loves, headline and core. Obviously core inflation, as we saw last week, continues to be above trend. It’s over 3%, which is well over the Fed’s target of two. But when you make some adjustments for the shelter piece, which is very lagging, it’s trivial in how it’s calculated, the inflation rate is much closer to 2%.
And so whenever that Chairman Powell is looking at his job, which is obviously to fund the government in some extent, whether he’ll admit it or not, but he wants to get inflation low, he wants to keep unemployment in check from rising too much out of spades. But really I think what he’s trying to do is effectively not move the inflation target in mandate but move it in terms of the duration to hit it. And so by continuing to bump out the, “Oh, we’re going to hit 2%, but it’s going to come next year. Oh, it’s going to come the next year.” He’s basically just buying time.
Because if you think about from the Fed’s perspective, one of the biggest things that they can do to help offset some of that interest burden is to cut rates. And they can do that and keep nominal growth high. So that piece that Dave just talked about, nominal growth stays above the deficit growth. But when you look at inflation, it’s of course, been… It’s a sore subject and probably a lot of the results of the election were based on the amount of inflation that we have seen the last couple of years.
But when you look at where it’s at, it’s not at a level that is run away. And I think that’s really the important part, is as long as Chairman Powell has inflation in a spot where people aren’t too worried about things getting back to what we saw in 2021 and 2022 where it was absolutely running away. But if he’s got it controlled that it’s continuing to trend, even if it’s long and bumpy, he’s basically setting us up in an environment to continue to slowly inflate our way out of this debt problem while President Trump on some of the other side, the fiscal side, continues to push the accelerator and keep nominal GDP growing at a fast clip.
David
I would add one thing to this, and it’s… Everyone thinks of inflation is terrible. Obviously yes, it degrades your ability of purchasing power into the future, but if you have the ability to have the nominal growth that we [inaudible 00:34:31] in the United States from our policies and whatnot, it probably does mean also due to immigration and wages that inflation is going to be a little bit higher. It’s not an aspect for me to be worried because stocks actually work best within the environment of inflation from 2 to 4%. And if we’re within that range, I would own as much risk assets as possible, as I possibly can. And that’s why I have that conviction that I just spoke about with our asset allocation of owning more stocks, less bond because that’s a terrible environment for fixed income, but it’s an absolutely amazing environment for stocks. And if you can bring that all together while remaining risk-neutral, it’s like you’ve almost found a holy grail of some sorts.
John Luke
Yeah, this chart is nothing to scare investors, it’s just to accept the reality that Chairman Powell is going to accept inflation being above target for much longer than what people originally thought.
David
Because back to as the market evolves, we have to evolve our thinking or maybe our investment philosophy becomes obsolete. This is I think something that JD, John Luke, myself, and the rest of the team, I think we’re very much on the forefront of this conversation relative to others out there in our industry.
John Luke
Yeah. So really getting into this… All right, we’ve got another poll here. Which asset class do you like most in 2025? Large, US small, bonds, international, or Dave’s favorite, gold and Bitcoin?
Derek
We didn’t have a spot for Dave’s favorite that he always does in his presentations, which is guns and ammo. That’s best in an interactive where we can actually see the crowd laugh, people raise their hands and stuff, but that’s always-
David
They’re laughing there.
Derek
That’s always a default option.
John Luke
But regardless of, I assume how this poll is going to end, it really tees up nicely the next slide.
Derek
So we’ll get to some of the key ideas for the year ahead, but his questions too. There should be a chat poll in there and we’ll get to those at the end and we won’t labor on for too much longer than that. But if you do have questions and we don’t get to them, we will hit you afterwards. I’m going to wrap this one and I’ll share the results and we can see… It looks like a little more of the same.
David
This surprised me.
John Luke
I’m a little surprised, yeah.
David
Because I’ve done a lot of presentations around the country the last few weeks and everyone hates US large caps, everyone loves small caps, no one likes international, no one likes bonds. And some people like… I’ve assumed that this 18% that [inaudible 00:37:09] for gold and Bitcoin is probably more on the Bitcoin side than the gold side of the ledger. But this is out of consensus in my mind and I think that’s going to be important. John Luke, let’s bring this back up here in a few slides.
John Luke
Yeah, so one of the main bullets that we think will continue to drive the economy, just like the Atlas Shrugged piece from 2024, is really everything dictates based on the consumer. And when you look at the backdrop of the consumer, you’ve obviously got consumer asset prices which have increased drastically the last two years. You’ve got consumer financial assets that are up about 13% on the year in aggregate. So that’s weighing more than just their stock bond and maybe Bitcoin portfolios. But you’ve got a huge increase from a wealth effect perspective of the average consumer has seen their property values, their 401(k)s, their investment portfolios, their real estate for the most part increase pretty handsomely. And so when the consumer has that money, they feel more inclined or at least more at ease to spend it.
And so when you pair that on top of just a continuation of a pretty strong labor market, you haven’t had a huge uptick in initial jobless claims, which has been something that many of the bears have been really watching for as when do we start to see unemployment tick back up? When do we start to see some pain in the labor markets? But this doesn’t actually hit on the real wages, which have actually grown very significantly the last couple of years. So you’ve got a consumer that’s employed that’s got their net worth increasing and that’s seeing their pay generally rise or really keep up, if not even outpace, the level of inflation that’s measured by the government. And so when you think about how this impacts markets, we think that the consumer has the propensity to spend and if they have the propensity ,they will.
David
I would add, John, the biggest kickback I’ve gotten probably over the last year for the Ayn Rand’s Atlas Shrugged, the consumer theme I’ve had is like, “Dave, the savings rate is substantially low, which is creating the consumer’s income statement to be negative, that their outlays are more than their inflows, and that started to go against their balance sheet or their nest egg because they’re spending more than they’re bringing in because the savings rate is so much lower than what it’s historically been.” The historical rate for the savings rate is between 5 and 7%. We’re getting lots of readings for the last 12, 24 months that is closer to 3%. But the government came back out and revised their savings rate right back into the historical range of 5 to 7%.
But then you couple that in, and John Luke’s always brought up a great point here, is that saves rate doesn’t account for what you’re earning on that savings rate. So I would say the savings rate is right where it’s been historically, that it’s not actually eating into inflation, isn’t eating substantially into the balance sheet of a lot of consumers, but they’re also earning more on it. So I think the consumer just remains absolutely just very strong right now and it’s something to be optimistic for.
John Luke
Yeah. And taking a step further from the government perspective of… Maybe Dave’s answer of two on the debt load and my answer of four. One of the points that I think I saw was just great is the recession isn’t going to cause the market to go down, it’s the market going down that could cause the recession. And I think that goes back to that wealth effect on the consumer. But the other second derivative piece of markets performing the way that they have is Uncle Sam’s taken a nice cut from a tax perspective of all these gains. And so that’s one of those things, like Dave said, where deficits have been actually declining more than what most people want to believe. But when you look at the actual numbers, when you have a market that’s up 30, when you have Bitcoin that’s done what it’s done, et cetera, as people are taking gains on their portfolio, it’s awful helpful from a tax perspective to Uncle Sam.
David
Yeah. Especially he was taking some gains on Broadcom stock, John Luke. It’s just great times.
Let’s go on to the next topic. What could do rail the market? Obviously John Luke and I have been very optimistic here. We are more optimist in genera.l I think that’s… I don’t know if I could say that about you, John Luke, two years ago, but I think that you are more of an optimist now. If we go back to the poll that Derek just put out of what is our favorite asset class moving forward into the future, majority said small caps and large caps. Like I told you before, no one’s really given me the large cap answer in a public form of when I’m presenting conferences for this because there’s a lot of consensus out there. So it feels like the results that we got from a lot of people on this call, the hundreds of people on this call is that… We had an out of consensus view right now and I love that. One, maybe you guys have been listening to us and I don’t know why sometimes.
But I would say that what I’ve learned over the past few months and what I’ve seen anecdotally from the market is that there’s been so much consensus out in this market over the past few years, and consensus has continued to be wrong. Whether it was back in ’21, ’22, ’23. Everyone wanted to hate the small caps in ’22, everyone wanted to hate large caps in ’21, and vice versa, you could say the same thing on the fixed income side. I would say that when there’s a lot of consensus or a step forward when a lot of people are very bullish, it could create air pockets in this market. And to keep with the 2025 theme, there could be some type of turbulence because I would say a lot of the indicators that you’re looking at, whether it’s the AAII bull/bear ratio or through the other studies and soft data points we’re seeing out there, there’s a lot of bullishness.
Obviously that was very different than where we stood two years ago when everyone was bears and that actually became a contra indicator that created a bullish sentiment and the market started to run. So I would say that when everyone has all their marbles or chips on one side of the table hating large caps or just hating the equity markets as a whole, it tends to make me want to take the opposite side of the table because consensus has continued to be wrong. I would say that is obviously the thorn in the side of what John Luke and I are talking about here, but I would say that I’m okay with that because when you get this type of very sentiment results or these air pockets, they’re very short-term in nature.
And I think it’s just a risk that we have to have on the table because there’s a possibility that there’s some type of washout bull system the market could pull back. But again, we have to be longterm mindset there of seeing the forest through the trees and understand that these pullbacks, they happen. We know 3, 5% pullbacks happen on average in a given year, and one 10% pullback happens on average in a given year. And that pullbacks are normal and that they’re healthy and it could be caused that there’s just too much optimism in this market right now.
John Luke
Yeah. And Dave, go back to that for just a sec. I wanted to make two points. So first is a funny point. You just had President Trump go in and ring the bell at the New York Stock Exchange. We saw four years of experience from his last term in office where he grades his performance by what the stock market’s going to do. And I find it hard personally to believe that he’s going to sit back and let things meander. I think he wants another four years of the market booming, and I think that that’s going to work against it. Some of this may be being a negative indicator.
And then the other piece of the pie that I think actually really applies to the portfolios is when everyone is this bullish, what they’re not bullish on is hedges. And when you think about the price of hedges, we’ve got some charts, we’ve shown a lot on this, but it’s very, very cheap to hedge your portfolio. And it’s been very cheap to hedge your portfolio all year. And what you’ve seen whenever we’ve got some bouts, whether it was April, whether it was May, it was July and August, a little bit in September where markets did bobble a little bit. Those hedges really were able to kick in. So not only is the cost to have your hedge very cheap compared to how it has costed historically, but the effectiveness of that hedge can really come into play if we do get some of those mild turbulence to go in line with your flight theme of this. We’re very well positioned I think to combat.
Yeah. I hit on this a little bit in the initial part, usually I do get ahead myself, but the two things that I think on the rate and the inflation side that obviously can cause some additional stumbling to the Fed and maybe even change the outlook for Fed cuts to be even less than the three that’s expected for 2025, which is obviously pretty low, is the 10-Year yield. When we’ve seen the 10-Year yield get above 4.5%, you have started to see some wobbliness in stocks where, from a relative value perspective, there’s been some questions. We’ll see, we’re not quite back to that level. We’re right in between the range listed in this chart, but that’s something to watch for a shorter term, at least noise.
And then the second piece, which is probably the most important is just inflation typically comes in waves. And we’ve obviously seen the wave come and go from the post-COVID, the fiscal craze that we saw. And now the question is, is do we see a return of inflation? And I would say I don’t think that we would see a return of inflation to get back to the levels that we saw before. I think Dave would agree on that. Probably the bigger concern is does inflation bobble more in that 3 to 4% range instead of the 2 to 3% range that the Fed’s hoping for?
David
Last and third, because everything comes in threes. The three things that we said would derail the market is sentiment is very bullish right now. Rates didn’t matter this year, maybe they’re going to matter more this year to equity markets. And third and final, is that… My least favorite of all three, but it’s going to be potential political volatility in Washington, DC. I’m not going to give you my thoughts and opinions on all this such as tariffs or taxes, but there is a lot that needs to happen in Washington, DC over the next few months, whether it’s in the lame-duck session all the way through the first quarter.
But we all know that the 2017 Tax Cuts Jobs Act, acronym TCJA, lot of the individual tax policies are sunsetting at the end of 2025 and they need to be addressed next year. It’s one of President-elect Donald Trump’s one of the biggest things he wants to get done next year because if the tax bill for individuals goes higher, if they don’t get it done, I think that could weigh on the market as a whole. And to John Luke’s great point, Trump is graded in his mind, his report card is the S&P 500’s performance. He doesn’t want that to happen. I like it.
So that’s just one aspect that Trump has to get pushed through next year on the individual side. He’s obviously looking to get stuff done on the corporate tax side of bringing the corporate tax rate from 21% down to 15%. He has a lot of stuff that has to occur on the ACA side for healthcare. And then obviously we’re going to have the reintroduction of the debt ceiling on January 1st of next year. So there’s a lot that has to happen in Washington, DC.
And where the water gets a little bit muddied is that you can’t attack or most likely Trump’s not going to attack each one of those four items. Individual taxes, corporate taxes, ACA, and the debt side of things. He’s not going to attack them in a standalone silo fashion. He is going to try to group a lot of things such as tariffs and immigration into these policies which to kick the can down the road to get a lot of these policies enacted into the market, which could create some market volatility. Obviously he wants to get it done as soon as he possibly can, but sometimes he bites off a little bit more than he can chew. Whether it’s a negotiation tactic or desire, I’m not too sure, but we’ll see how the market digests that moving forward into the future.
Obviously tariffs is at the forefront of everyone’s minds right now too. But all in all, there’s a lot that the market has to endure next year in regards to what happens in Washington, DC. And we know Washington, DC, the politicians in Congress, they were like me in eighth grade. It’s like me writing a book report in eighth grade where I’m going to start writing it at 11:59 the night that it’s due. I’m going to get it done, but it’s going to happen at the last minute. That’s what policymakers do, but the market doesn’t like that because the market likes consistency and it likes knowing its outcome. And when there’s uncertainty, that can create some type of volatility.
So in the next section and final section, our positioning moving forward. I’m going to give you two hot takes and John Luke is going to talk about how we think about it from an allocation standpoint to bifurcate the voices of this conversation. My hot take one is that the path of least resistance is going to continue to be higher. Okay, that’s why we have the theme here. “Oh Dave, you like stocks after the 70% run over the last 25 months?” Surely you can’t be serious. I am serious and don’t call me Shirley. I would say [inaudible 00:50:52] is for the time being, it looks like the prospects of continued monetary accommodation, relatively easy fiscal policy, and regulatory easing should continue to keep the animal spirits alive for both investors and deal-makers.
So that’s why I believe that investors need to own stocks for the long haul right now. And that’s basically my point saying path of least resistance is higher. I love our overweight stocks are underweight to fixed income while remaining risk-neutral, but there’s just too many structural things that are driving this market over the past two years that are still very much present in the market moving forward over the next 12 months. John Luke, any thoughts on how we’re attacking this on the allocation side? Hit it.
John Luke
Yeah. Yeah, you definitely stole a little bit of thunder, but no. When you think at the backdrop of how you address, credit spreads are stupid tight, fiscal policies continues to be accommodative, monetary policy like the next Fed moves are cuts, not hikes. So it’s at least moving in the right direction of being accommodative. You’ve got liquidity that’s very friendly. Just look at Bitcoin. You’ve got the regulatory backdrop, low vol. Typically continues to beget low vol. And then if you think about where the Fed sits with rates, they obviously have the room to cut if things do get weak, which I think continues to be a pseudo put for the market, the Fed put probably in place.
And then one big one that we didn’t touch on, and I haven’t heard a ton about it, but the Fed has been doing QT for a long time. And while a lot of the QT has arguably been offset by some of the bill issuance that I talked about at the beginning, the Fed does have the ability to stop the QT and I think that’s probably coming sooner than most people expect. I would really expect some update on that in Q1 of next year. So that will bring the Fed back in the market to help take down some of the surplus of debt that’s got to be refinanced to at least replace what’s rolling off.
And so when you look at the portfolio from a construction perspective, this year has been as good of a statement of proof for our asset allocations and how they can work. More stocks helps you capture that right tail move when they happen. Less bonds obviously frees up a lot more of the portfolio to own assets that can grow. And the volatility piece continues to be extremely important because not only are hedges cheap, but they can be very effective, and the hedges are in place to really create the differentiator on the downside where we really think that even if you do get a harder landing that it’s not likely that bonds are going to… You’re not going to see interest rates go back to 0%.
Of course now that I say that it’s on record, but I just think it’s very unlikely that you’re going to see interest rates fall meaningfully from here. The economy just continues to rock in a place that I think alludes to rates being higher than what they were in the last cycle. And so it just points to rethinking the asset allocation that we march to the grave on of more stocks, less bonds. And when you think about the government response and you go back to the ways to get out of the problem, some form of inflation, some form of grow your way out of it, the government has basically gone with the de jure policy of continuing to print their way out of the problem. And I think that it’s hard to bet that that’s going to change. And with that you’ve got to be positioned differently.
Dave, the mute button got you.
David
I was definitely not talking there. Since you just used the word de jure there. I don’t know if I’ve ever heard that word or could spell it or use it in a sentence, but we’re going to try. Hopefully I use it right. Everyone knows my de jure are small caps. But what this chart is showing you is that moving forward, given the component of operating leverage that I spoke about at the beginning of this call, it’s hard to bet against large caps right now still because when operating leverage works for you, it is your absolute best friend. But I would say that, I say that we like… Have a saying here now too. We have loved science here at Aptus.
When everyone is looking for alpha, we think beta is underappreciated. And when I say I want large over small isn’t just a call for alpha, it’s a call just like let me own as much beta as I possibly can in my portfolios without more risk because that’s what my clients are grading me on is the S&P 500. So let me own as much as I possibly can within reason of risk. And I think that could be the best thing that could happen to my clients and investors because it detracts their ability to inject and try to time the market or be mad at your performance and try to chase returns.
But when I say I like large over small, it is embodied by the characteristic that large has operating leverage as its main characteristics. As not a knock on small caps because the market could still very much broaden out. It started to broaden out after the election. That’s pulled back here over the last two or three weeks. But I’m comparing large caps to the universe of small caps. Obviously everyone knows my de jure, I love small caps. I know a fund personally with [inaudible 00:56:28] that is really good at small cap investing in my opinion, if I could say the name. But I would say that’s… I’m not comparing large over that, over our active ETF. I’m saying large over the small cap universe. Because what we do in our active ETF versus the small cap universe is very different. Many people don’t know that 40% of the constituents in the Russell 2000 Index, the benchmark for small cap stock, they don’t have positive earnings.
And that’s what I’m saying. I would like to choose quality over low quality. And low quality, if you don’t have the right active manager in place, you’re accidentally injecting a lot of lower quality characteristics into your portfolio. So I’m taking US large caps as measured by the S&P 500 to outperform the Russell 2000 Index as a whole. Okay. So it’s not a hit against all small caps because I… Like Animal Farm, I think all animals are created equal. Some animals that I really like are more equal than the small cap universe that’s littered with low quality, high short-interest, and non-earning companies. So that’s my take here is saying I love large [inaudible 00:57:40] operating leverage characteristic, a characteristic that small caps do not have.
Derek
I think we do. There have been quite a few questions that have come in, I don’t think we’ll get to them all here, but we’ll hit you directly. I think maybe we type back a couple of them, but we’ll also hit you if there’s anything worth, anything more complex.
You guys killed it, covered all the key topics. I think as far as advisors go, it’s hard to know what’s going to happen in the back half of the year or anything. We know that there’s a lot happening in January. Probably people that have had postponed gains, they don’t want to take the tax hit this year. You got some of that. You’ve got possible executive orders. You got two Fed meetings. You got one in January, one in March I think. You got earnings. There’s a lot. Three jobs reports. So there’ll be a lot to happen in the first quarter that is probably going to drive a lot of the action. Obviously, JL, Dave, and the team are always available to answer any of the questions. And we certainly appreciate people taking an hour out of their day right before Christmas kicks in to listen and participate in what the guys have to say.
David
Hey, thanks to all of our partners out there, we love you. We wouldn’t be us without you, so thank you so much.
John Luke
Yep, thank you everyone. Merry Christmas. Hit us up if we can help with anything.
David
God bless, America.
Derek
Thanks, guys.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security.
The opinions expressed are those of the Aptus Capital Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed.
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