Podcast: Speaking of Quality: Wealth Management Insights with Hank Smith
Season 4 Episode 1 Title:2025 Outlook: Uncovering Economic and Market Trends

Episode Transcript:

Maxine Cuffe 00:02 

You are listening to Speaking of Quality: Wealth Management Insights with Hank Smith, a podcast by the Haverford Trust Company. On Speaking of Quality, Hank chats with authors, influencers, and wealth management experts to bring a sense of clarity and calm to the complexity and stress of personal finance. Here’s your host, Hank Smith. 

Hank Smith 00:23 

Hello and welcome to our first episode of season four, Speaking of Quality: Wealth Management Insights. I’m your host, Hank Smith, Director and Head of Investment Strategy at the Haverford Trust Company.

On this podcast, we explore topics ranging from quality investing, retirement resilience, stock market trends, estate planning, small business ownership, behavioral psychology, and more. Today we’re welcoming four dynamic minds to our podcast to dive into Haverford Trust’s 2025 economic and market outlook.

First, we have Keith Aleardi, President of the Haverford Trust Company. Keith joined Haverford in 2023 and has over 30 years of experience in the financial services industry. Also, joining the panel today is Maxine Cuffe, our Vice President and Director of Global Strategies. Maxine has been with Haverford since 2013 and brings more than 20 years of experience in investment research. Next up, we have Tim Hoyle, our Chief Investment Officer. Tim has been with Haverford since 2003 and is an integral part of our firm, ensuring the quality, consistency, and implementation of our investment philosophy. Last but not least, we have John Donaldson, Vice President and Director of Fixed Income. John has been with the Haverford Trust Company since 2008 and has more than 45 years of experience in the investment industry and managing fixed income portfolios.  

Together, we’re excited to tap into their collective wisdom to gain a deeper understanding of the economic and market outlook for 2025. Without further ado, let’s jump into today’s conversation with these esteemed guests.

Keith, congratulations on entering your third year as President of Haverford Trust. We are so pleased to have you. Could you share with our listeners some of your observations in the past two years being at Haverford? You’ve had a chance to meet with many of our clients, can you share what’s on top of their mind from these meetings

Keith Aleardi 2:30 

The first thing I’ve noticed is our clients are amazing. The families and institutions we work with are enthusiastic about being part of the Haverford family. Second, our teams are the best in the business. They’re caring and knowledgeable. They work really hard every day to bring the best experience to our clients in the investment management industry.

Our culture and our values are stronger than ever. Quality, integrity, respect, discipline, optimism, community – it’s what guides us every day and we do it so well. That’s been really fun to observe. Lastly, I’ve really enjoyed our podcast. There have been so many interesting discussions with wonderful people. I’ve learned a whole lot from that, so that’s been great as well.

I’ve had the real benefit of speaking with a number of clients over the last two years and they’ve been great conversations. Reflecting on last year, 2024 was a really good year for investors. U.S. large cap stocks, including the S&P 500, we saw the greatest gains out of that area of the market. For the first time since 1995-1996, we saw 20% increase in the market in two consecutive years.

We’ve had a lot of conversations about the concentration of the S&P 500 and now the top 10 stocks are over 35%. We’ve also talked about the fact that for active equity management performance, that has made it a real challenge for managers as a whole. What I really appreciate is at Haverford, our commitment to high quality investments with the focus on dividends is still intact. I believe that our equity management delivers strong risk management with consistent returns over the long term. It reminds me of the quote from the book Rich Dad, Poor Dad, that “It’s not how much money you make, it’s how much money you keep, how hard it works for you, and how many generations you pass it along.

Hank Smith 5:08 

Thank you for sharing that with us. Why don’t we move right to Tim. We were here exactly a year ago, at a high level, it seems to me our outlook at the start of 2024 is not too dissimilar to our outlook at the start of 2025. When we think about several themes, one, what is driving the economy and two, the anticipation of a broadening out of the equity markets. Can you elaborate on that? 

Tim Hoyle 5:44

Hank, well, what happened in 2024 was a strong consumer buoyed by a strong jobs market led to good strong spending and GDP growth that was buoyed by the AI revolution, probably the most exciting technological advance that we’ve seen in 25 years, which brought about a lot of spending in the industrial manufacturing sector. All of that along with an accommodative Fed, where we saw Fed easing, led to a strong economy and a strong market in 2024.  

Those trends are in place for 2025, we don’t see them changing much. Layering onto that, there’s really three key expectations we have that are going to continue to drive the economy, continue to drive the markets. 

Broadening out, as what you mentioned there, we expect a real broadening out of earnings. Over the last two years, if you exclude the Magnificent Seven or the top 10 stocks in the S&P 500, earnings growth has been lackluster, negative 4% in 2023, positive 4% in 2024. In 2025, we expect to see the earnings growth of those, what we call the despicable 493. We expect those earnings to appreciate at a double-digit rate, which is really going to drive a broadening out of market performance.  

We also see many more pro-business policies coming to fruition. Over the last four years, the FTC has been regulating and putting a dampener on mergers and acquisitions. There’s been this expectation that companies were not going to be able to go out and grow the way they wanted to through mergers and acquisitions. There’s also been a heaping on of regulations. The Biden administration put on more costly regulations than any four-year term president in history. We can’t forget that six months ago, the Supreme Court overturned Chevron deference, which means that these bureaucratic agencies just can’t add on regulations, and they need to be explicitly called for in the legislation out of Congress.

Lastly, we think that there’s going to be continued fiscal and monetary accommodation. Now, that might be pulled in a little bit. As John is probably going to talk about, the expectations for the Fed continuing to cut rates is probably going to be muted in 2025, and with each successive cut, there’s going to be more angst around if there will be another cut. But we continue to see that and there’s going to be a budget deficit, obviously, which is pro-growth. 

Hank Smith 8:28

John, you’ve really been spot on for the past 18 months in some of your calls, and one of the big ones was the shift from quantitative easing of the Fed bond buying to quantitative tightening of the Fed selling. That means one thing and that is increased volatility, and boy, we have seen that over the past 15 months plus. Is that your expectation for continued interest rate volatility in 2025? 

John Donaldson 9:01

Yes, Hank, there are many uncertainties out there and the market has and continues to overshoot in one direction or another. A year ago, when we were here, we were saying that we thought that the market was predicting, through the futures market, more Fed cuts than what happened, and they would happen later than predicted. The first cut wasn’t until September, and they cut a total of a hundred basis points in three cuts. The market I think peaked at predicting six cuts.

We have swung that exactly to the other end of the pendulum swing right now where the futures market is only predicting one cut during calendar 2025 and a second cut not until after June of 2026. We’re now on the exact opposite side of where we were. We think there will be more than one, and thinking there’s not going to be a second one for 18 months is too pessimistic on that. Obviously, bond prices have followed that and swung yields from high levels back lower. At the end of 2023, they swung from 5% down to 3.8% back up to 4.5%, back down to 3.6% right at the time of the first Fed cut, and is 4.7% today. That’s a lot of volatility. When your psychology can swing that much, yields and prices will follow

Hank Smith 10:38

John, the Fed at its September meeting cut the Fed funds rate by a half a percentage point, yet almost immediately the 10-year treasury didn’t cooperate. It went up and went up significantly. Can you tell us a little bit about what the bond market is saying with that divergence from the short end to the intermediate end? 

John Donaldson 11:08

First, at the time of the cut, the 10-year rate had dropped to 3.6%, so it was already pricing in and had gotten ahead of itself. Some of this is a correction to that and as I said, not only a correction but an overshoot to the other direction. While we talk a lot about market rates and the 10-year treasury, also very pronounced has been the impact on mortgage rates.

The treasury has swung, the Fed funds rate has been cut a full 100 basis points from a range of 5.25% to 5.50% to 4.25% to a 5.50%, it’s a full point lower. On the day that the Fed cut, Freddie Mac’s 30-year mortgage rate was 6.09%. This week it’s 6.99%, so it’s 90 basis points or almost a full percent in the other direction.

Now you look at what that impact has in the real economy, short-term rates, policy rates going lower is meant to stimulate the economy, make borrowing easier and less costly. Higher mortgage rates put the brakes on the economy and the number of places that housing flows through to the economy is a very long list as we all know.

In effect, you are putting one foot on the accelerator with the lower short-term rates and your other foot on the brakes with higher mortgage rates. Pretty hard to predict exactly how a car’s going to steer if you do that, trying to predict how an entire economy is going to act when you’ve got an accelerator and a brake on at the same time, and that’s not even going to what may happen with fiscal policy at the same time. 

Tim Hoyle 13:17

In the third quarter of 2024, as the 10-year rate was falling and there was an expectation of interest rates coming down across the yield curve, the broad market did very well. The broad market outperformed the Magnificent Seven, outperformed the S&P 500 market cap-weighted index. As the tenure has now gone back and backed up to 4.7%, we’re back to that market where only growth stocks are working. We think that in 2025, as we see earnings broaden out, we’re going to see the market do much better. The equal weighted index will do much better than the cap weighted index.

We also think that as we get more M&A, we’re seeing it this week already, we see Paychex buying a competitor. We see Cintas buying a competitor. These deals were never going to happen under Lina Khan at the head of the Federal Trade Commission.  That’s going to be good for mid-cap and small cap stocks if we get M&A back and we get some animal spirits back in the market. 

Maxine Cuffe 14:17 

I was going to add that part of the market looks reasonably priced. The small and mid-cap indices are trading at 16 times, 17 times versus the broader market. That is absolutely the hunting ground for a lot of the large companies that are looking to add value is to look for acquisitions in that area at good valuations. 

Hank Smith 14:36

Off of John’s comment on the housing market and mortgage rates, the US economy has really been the shining star among many other developed economies and even some market economies. And yet it hasn’t all been tailwinds, there have been headwinds. We’ve had manufacturing surveys in recession territory for 30 out of 31 months now. We’ve leading economic indicators trending down for 27 consecutive months. We’ve had a housing market that’s been flat on its back due to higher interest rates, and yet we continue to plow forward. Is there a chance that some of these headwinds could turn into tailwinds in 2025? 

Tim Hoyle 15:35  

We’ve already seen leading economic indicators tick up. We see manufacturing broadening out. We know that we need to increase spending on the electrical grid. We know that the demand for power is going to be insatiable over the next 10 years. There is a broadening out that’s expected in the manufacturing part of the economy. However, let’s not forget that the services part of the economy is what drives the markets. It’s what drives the economy and most people’s earnings today. Most people’s wages is the service economy. The service economy has been strong, you cited that manufacturing has been weak for the last 36 months, but services have been above 50 or in expansionary territory that entire time. 

Maxine Cuffe 16:21  

Some of these indicators that we used in previous cycles just have not worked this year or for the last couple of years. Some of that is just because our economy is just not as sensitive to changes in federal rate hikes. What it really came down to, it was the consumer that drove so much of this outperformance of the economy over the last couple of years, and a lot of that is the consumers have been pretty flesh. The net worth of the consumer has skyrocketed over the last five years. I read a stat the other day that just in the last two years, $29 trillion of net worth has been added to the economy, and that’s not just the higher earners, it’s really across the board. So that’s giving people confidence to spend and that’s why retail sales have continued to be strong, consumer sentiment’s been ticking up. It’s really helped keep the economy growing, while some of these other parts that we talked about have been a little bit sluggish and are now actually starting to reverse.

Keith Aleardi 17:23

A lot of that is dependent on the job market, and there doesn’t seem to be any real softness in the job market. Demographically and secularly, it looks like the job market remains in great shape, and I think that propels the service industry and spending. 

Tim Hoyle 17:45

We like to point to the participation rate of wage earners in their prime, it’s what they call the prime wage earners, from age 25 to 55. The participation right there now, Maxine, is 84%, it’s high as it’s ever been. Let’s not forget that we had Quantitative Easing (QE) for so long, which kept us in the perpetual state of expansionary territory in GDP. If you think about the economic cycle, it kept us at that mature growth cycle. Then for the last five years, we’ve had significant deficit spending, which I think has kind of thrown off some of these indicators that, as Maxine said, when you’re spending $2 trillion in deficit spending every year, it covers a lot of sins.

Hank Smith 18:30

Don’t forget, this has been a very atypical business cycle that really started with a healthcare crisis that we haven’t seen the likes of for over a century. A lot of traditional indicators just haven’t worked because of that. Therefore, a lot of prognostications for a recession back in 2023 and even in the first half of 2024 didn’t come to fruition, namely because many economists and strategists underestimated the strength of the labor market and the power of consumer spending, Maxine, as you pointed out.

Maxine, let’s stay with you, the U.S. markets have consistently outperformed international markets, both developed and emerging since the pandemic and in fact, really since the great financial crisis in 2008 and 2009. Should investors continue to have exposure to these areas for diversification? Is there a chance that one of these days they will be at the head of the derby?

Maxine Cuffe 19:51

It was a tough year for international stocks. It was a tough year for anything that wasn’t the U.S. large cap growth, to be honest. But this year, outside of the U.S. stocks were up 5%, so really trailing the index. A few key reasons for that: Number one, economies around the world are just taking longer to recover than the U.S. Part of that is China, it doesn’t have that engine of private investment behind it anymore. That’s trickling into places like Germany not getting those big orders. There’s a lot of other structural issues across Europe with their labor market, very low productivity. They’re just not getting back to the economic growth that was expected, although it does appear like it’s picking up going into 2025. The other thing has been the dollar. The dollar has been strong for most of the last 10 years, but this year we saw another surge up another 5% during the year and particularly after the election. Investors really feel that a lot of the Trump policies will be positive for the dollar: tariffs, “America first,” reshoring. All of these things are going to be positive for the dollar and negative for international currencies.  

Thirdly, the composition of the markets really matters. We’ve seen that here in the U.S., but in international markets, they don’t have those big, global leaders like we have here like Apple, Microsoft, those dominant players. They have great companies, but they don’t have those trillion-dollar dominant leaders. The makeup of their market has really struggled as well. We continue in our global portfolios to have a very large overweight to the U.S., a strong bias and we feel very confident in that. But you still want to have some exposure to these other markets, namely, there’s a huge discrepancy between valuations. We’ve talked about the S&P really having this huge multiple expansion over the last couple of years where multiples in other markets are trading at 12, 13, 14 times. So, there’s a valuation argument there.

Then just to go back to diversification, the U.S. looks fantastic this year, but after we’ve had two years of 25% returns, anything could happen. We’re facing a much different starting point today than we were over the last couple of years with much higher interest rates, higher multiples, and inflation that’s turning out to be kind of sticky. You always want to not have all your eggs in one basket. There’s lots of places around the world that still offer really good value. 

Hank Smith 22:34

Let’s segue to positioning for a minute. John, how are you advising our fixed income clients to position their bond portfolios in 2025? If a new client came in with just cash, how would we be positioning? 

John Donaldson 22:58 

We would be invested. We feel as though rates have swung to one end of the pendulum, very much tilting toward one outcome that favors you with higher yields already there, and being able to clip those coupons, so to speak. Although nobody clips physical coupons for most of the last 30 years. But you are getting income mortgage rates flowing through. You get 6.5% on U.S. government mortgage securities. Particularly for our nonprofit clients being able to generate income from that source, government credit not correlated to the equity market as much, and monthly cashflow, things like that are very valuable. We still remain very committed to our intermediate focus, one-to-10-year bonds. For us to say, “Hey, we want to be invested, but it’s still going to look like a five-to-five-and-a-half-year average maturity duration about four sensitivity interest rates.” You’re not talking about going into very volatile bonds, but we still think that there will be more reduction in yields on cash than the market expects today.

Hank Smith 24:22

For taxable investors with muni portfolios, are you saying something similar?

John Donaldson 24:29

One of the long-term cautions we would have there is that a lot of the discussions about reducing federal spending have an answer to push that down to the states, and that’s a trend that’s been in place for a while, but it doesn’t look as it’s going away. So, you may think for a 10-year period that that’s something to keep your eye on, but if your portfolio is only out to 10 years with a five yards life, it’s going to roll over a few times in between now and then. The other thing that we see clearly is the concern at the state and local government level about unfunded pensions. It’s nothing like a couple of years of a very robust market returns to ease that burden. 

Hank Smith 25:25

For clients with national municipal bond portfolios, are there any states that we’re avoiding? 

John Donaldson 25:34

It isn’t as pronounced as it once was. There are places that have some pressures. Even Illinois is not what it once was. New Jersey, we were for a long-time telling clients to have a quarter to a third, if they live there, out of the state for diversification, not doing that as strongly now. I think that the one that remains, and it’s horrible because we’re looking at it today, is the risks to some credits from natural events like the terrible fires in California, potential other things in other places too. That’s a risk that’s out there too. For most municipal credits, for us, bigger is better. 

Maxine Cuffe 26:23

John, how much of a risk is it of some of these government efficiency programs at the federal level cutting costs and pushing programs down to the state level? Does that put further pressure on state budgets and does that come into your thinking? 

John Donaldson 26:37

It absolutely does. That’s several years by the time you get there. You look at what was embedded in Project 2025. There was an editorial commentary in the Wall Street Journal a couple of weeks ago where somebody walked through various programs that were front burner for cutting. Five of the eight, the solution was to push them down. So that is there, to really show up it doesn’t happen overnight. That’s where, if someone’s talking about buying 30-year bonds, the trend’s going to go that way for a while. Four, five, or six-year bonds – it’s not as impactful on the bond prices. 

Hank Smith 27:32   

Shifting to stocks, Tim, how are we thinking about positioning going into 2025 and throughout the year? 

Tim Hoyle 27:43

At Haverford, we manage diversified portfolios of high-quality stocks that pay dividends. We invest in ETFs to gain diversification in different market sectors. We’re not changing the course that way. It becomes easy or easier to think, we should just pile into what’s working. But I think as of today, the top 10 stocks make up 39% of the index of the S&P 500. Most people are putting their retirement money into a product that isn’t very diversified. We want to stay diversified, but at the same time, we’re not going to ignore the fact that, as I said at the beginning, AI is revolutionary. We’ve been adding positions to stocks and to companies that are going to be able to benefit from AI or to sell products to AI.

We think that after two years of 20% plus returns, we’re at an inflection point here where the market dynamics are going to shift.

We think that the average stock is going to outperform the S&P 500 because of those issues that we talked about before. We think that earnings growth might outpace the market cap weighted index because of the starting point. We’re starting now – Trump 2.0 is very different from Trump 1.0. Multiples are five points higher, the 10 year is 200 basis points, higher inflation is one percentage point higher. We’re in a different dynamic

We’re going to stay the course and invest the way we’ve always invested – thinking about quality, thinking about dividends. Also, I want to point out that our colleague shared a chart with us last week showing that dividend growth companies, those companies that have grown the dividends historically for 10 straight years, they trade at the biggest PE discount to the market in the history of the chart, which went back 25 years. There’s definitely an opportunity here to buy high quality stocks and dividend paying companies. 

Hank Smith 29:43

Maxine, with respect to our exposure with our global overlay, do you anticipate any shifts there? I know we’ve cut back a little bit on emerging markets. We’re very heavily weighted to U.S. markets. That’s the place to be and most likely in the near term will continue to be. 

Maxine Cuffe 30:05

We’ve been taking down our emerging market exposure mainly because when you look at the global benchmark, the MSCI All Country World Index, it’s now almost 70% U.S. stocks. It’s so dominated by the United States.  

Hank Smith 30:22

Just a point of reference, when we initiated this strategy in the mid-2000s, the U.S. represented about 50%. The sheer dominance of returns in the U.S. markets is reflected in that point. 

Maxine Cuffe 30:41

I feel like there’s good reasons for that. When we think about it, the companies in the U.S. are more profitable, they have better cash flows. There is a rule of law that you don’t have to question like you would maybe in China or some of these overseas markets. That’s allowed the U.S. to not just outperform but really have a higher PE multiple than the rest of the world. That expansion has been really continuing over the last couple of years. We’ve taken down our international weighting, particularly around emerging markets. We’re very underweight Europe, very underweight Japan. There’s a chart that we always show people, we call it our quilt chart, and it shows you how different asset classes have performed over the decades. We don’t have to go back that far to see that during the 2000s, international markets outperformed the U.S. for the entire decade, especially emerging markets. U.S. large cap stocks were negative for the whole 10-year period. It just makes sense to have some diversification. You don’t need to have the full allocation as the 30% MSCI, but to have something there to give you that balance if we were to see a pullback in U.S. stocks.

Hank Smith 31:59

As Tim pointed out at the start, it’s so easy to just say, “Okay, here’s what’s working, let’s just pile in.” But, you’re unaware of the risks that you take and you just don’t know when you’re going to see those kinds of pullbacks and when very out of favor areas of the market, whether it’s international or within the U.S., sectors like healthcare, sectors like staples that have been flat on their back for quite a few years and the names that we own are all fundamentally sound with very strong balance sheets, good earnings growth, dividends and growth of dividends. That combination allows us to be patient and continue owning them because their time will come. 

Maxine Cuffe 32:56

The other thing I didn’t mention about international markets is that monetary policy is easing around the world. Almost every central bank now is cutting rates, and it’s not like here in the U.S. where maybe they’re only going to cut one or two times this year, and there’s maybe concerns around stickier inflation. In the rest of the world, rates are much, much lower. Their bond yields are not going up like we’re seeing here in the U.S. So, they have a little bit more flexibility.

If you look at China, they have a lot of flexibility of what they could do to their economy in terms of fiscal policy. They’ve already been cutting rates quite aggressively. So, there is a good story on that side of things, from the monetary and fiscal policy side.  

Hank Smith 33:37

We would be remiss if we didn’t at least highlight that there are some risks out there and there always are in the markets, in the economy. Tim, why don’t you highlight some risks? They could be policy risks. 

Tim Hoyle 33:56

I think it’s safe to say that investors today are much more excited about the opportunities for regulatory reform than they are for the risk of tariffs. As you said, there’s a chance of policy mistakes coming. There’s going to be some very large bills going through Congress this year. The Taxation of Capital Gains Act (TCGA) is going to be renegotiated.

There’s this expectation that taxes are going to be cut even more and get paid for by tariffs. None of these risks though, I don’t think they’re going to manifest themselves until 2026, if they do happen. That actually lines up with the presidential cycle where oftentimes the first year of a presidential cycle, markets, the economies are doing well. They’ve been buoyed by the election and by the animal spirits or by the positivity around the honeymoon period. But then you get to that sophomore year and policy errors start to come out, so that is a risk

Valuations are high. It doesn’t mean that they can’t get higher, and it doesn’t mean that earnings can’t grow into those valuations, which is just what we think is going to happen.

The risk here is that the market at the top level might not do as well as it’s done the past couple years. But again, as we’ve said, it doesn’t mean that the average stock can’t do well. There’s a lot of literature or clickbait saying, “After you have two 20% plus years, the next year is going to be horrible.” I don’t know if that’s accurate. They’re cherry picking one or two time periods in history. Obviously, they’re cherry picking the 1920s, the 1930s. There’s just as many cases in history where you have two 20% plus years and then the next year is still an up year, but it’s a pause of those 20% plus returns. Getting middling returns or high single digit, low double digits is much in the historical context. You’ve seen it happen five times in history where you have 20% plus returns and then the third year is still a positive year. 

Keith Aleardi 36:02

With those capital markets assumptions and the expectation for positive returns, but maybe more realistic returns over the next couple of years, this is a really good time for investors to review their plans, whether it’s a wealth plan, whether it’s your investment policy statement as a nonprofit or institution. These transition years kick up a lot of anxiety, they offer a lot of questions, but the best thing you can do is go back to your plan and look at it and clarify it and make sure that you’re still on track. 

Hank Smith 36:39

That’s advice we could give every year at the start of our year ahead outlook.  

Maxine Cuffe 36:46

I would like to follow up on the risk of tariffs, because that is getting a lot of headline news. We have gone through the portfolios and looked at every company and talked to management and really gone through to see where the risks are in our portfolios. Although we don’t really know what the tariffs are going to look like yet, we don’t feel that our companies are that highly at risk.

There are going to be some tariffs placed on companies and maybe that will trickle through to pricing to the consumer, but it’s not an inflationary adjustment because it’s kind of a one-off, right? Those tariffs impact one-time price level, and it doesn’t really start to impact inflation over the long term. And when we think back about the tariffs in the during President Trump’s first term, it didn’t have as much of an impact on inflation as one might expect. 

Hank Smith 37:35

I suppose one other risk coming from the bond market, as Maxine pointed out earlier, this disinflationary trend that has occurred over the past 15 months has kind of stalled out here at around 3%. Not many are expecting the potential of a second wave of inflation. And if that were to happen, you could throw out current monetary policy, you’d most likely see some rate hikes, and that certainly isn’t in the markets today, or the return of the so-called bond vigilantes. 

John Donaldson 38:22

While we think the pendulum has swung to thinking there’s too few rate cuts coming, to take that further even, is taking it a long way. You think back to how recently was it that common wisdom said the U.S. economy is so fragile it cannot survive without zero or very low rates. That was the pendulum out way at the other end of swinging, too.

I think the amount of government debt and what that’s going to cost is an issue. If you think about concentration in the equity markets, treasuries are 62% of the intermediate bond market. So that impacts our market very directly

Hank Smith 39:21

Probably not an issue for 2025, but possibly in 2026. 

John Donaldson 39:27

The question becomes if the market is an anticipatory discounting mechanism, while we’re thinking something doesn’t hit till 2002, maybe third quarter of fourth quarter of 2025, does it start to look ahead? If so, when and by how much? Clearly rates popping as much as they have is already projecting and discounting. 

Maxine Cuffe 39:54

What happens if inflation doesn’t come down or even starts to tick up a little bit. Do you think that the Fed moves the goal posts, or do they allow a little bit of hot inflation because of other structural issues in the economy? We need to build infrastructure. We have a tight labor force. These things are inflationary. Do they take that into account with their Fed policy? 

John Donaldson 40:18

They will work hard to look at something. Again, talking about words we wish we had never heard as often as we did, and hopefully don’t hear anytime soon. Again, it’s transitory, they’ll look at if there is a little bit of a pop. Is it a one-timer as you mentioned? Is it something that’s more embedded? And they’ll try and judge that. I think that the current expectations about only one cut this year and not even until middle of next year, already think that they’re going to be very cautious about doing this. Still think that’s overstated as we speak. 

Hank Smith 41:03

If I may, let me just summarize from a very high level. We believe the odds of a recession materializing in 2025 are very low. You can never rule it out. We could have an external shock to the economy, absent that very low. Therefore, the odds of a bear market are also very low because bear markets almost always occur in anticipation of a recession. That said, we should temper our expectations for returns. We have healthy earnings growth with elevated PEs, so maybe PEs stay flat or contract a little bit. It doesn’t mean we’re going to have poor returns, most likely not at the 20 plus percent of the previous two years. We should continue to expect volatility both in the equity markets and the fixed income markets. All in all, a good year to be invested.

Thank you so much to this terrific panel for joining us on Speaking of Quality.

To our listeners, thank you for listening to this episode of Speaking of Quality: Wealth Management Insights. We have more great episodes planned for this season, all with a focus on what’s driving the U.S. economy and markets. From former professional athletes to small business owners, nonprofit leaders, with each guest we’ll hear their unique stories, hear their take on economic drivers of today and tomorrow. In the meantime, please send suggestions or questions for me or the Haverford Trust team to marketing@haverfordquality.com. And don’t forget to subscribe, rate, review, and share this podcast. Until next time, I’m Hank Smith. Stay bullish. 

Maxine Cuffe 43:01

Thanks for listening to this episode of Speaking of Quality: Wealth Management Insights with Hank Smith. To hear future episodes of Speaking of Quality, please subscribe on Apple Podcasts, Spotify, or wherever you listen to podcasts. To learn more about the Haverford Trust Company, please visit www.haverfordquality.com.

This podcast is provided as general commentary and market overview, and should not be relied upon as research, a forecast or investment advice, and is not a recommendation offer or solicitation to buy or sell any securities or to adopt an investment strategy. Any opinions expressed are as of the date this podcast was recorded and may change at any time, and are the opinions of that commentator not Haverford’s. Any opinion or information provided are believed by Haverford to be reliable at the time of this podcast recording, but are not necessarily all inclusive or guaranteed for accuracy. Before making any financial decisions, please consult with an investment professional.