As we write this in late December, the market stands near all-time highs, reflecting an exceptional year for investors. Following the ~3% drawdown of the S&P 500 in mid December, driven by an anticipated reduced level of rate cuts in 2025, the year-to-date price return of the index stands at ~26.5%. Most major indices have delivered impressive double-digit gains, underscoring a strong and resilient economic backdrop. These gains have been fueled by strong fundamentals, including healthy corporate earnings, steady consumer spending, and renewed optimism under the incoming Trump administration. The positive sentiment has been amplified by expectations of continued deregulation and pro-business policies, creating an environment favorable to long-term economic growth. Investors have largely embraced the administration’s vision of a streamlined, business-friendly regulatory environment, which has bolstered confidence across sectors and industries. We are mindful that the recent meeting of the Federal Reserve indicated inflation remains a concern – the low interest rate policy environment from 2008-2022 is likely a historical anomaly and not the “new normal.” This has valuation implications for investors.
Amidst the fundamental economic optimism, a growing concern looms: the nation’s escalating debt and unsustainable government spending. At over $36 trillion, the US national debt is reaching unprecedented levels, with interest payments on track to surpass defense spending this year. History offers sobering lessons about the risks of excessive debt, which can hamper economic stability and lead to financial crises if left unaddressed. This challenge has sparked renewed debate about the role of fiscal policy in managing the economy. While traditional economic theory emphasizes the importance of fiscal discipline, proponents of Modern Monetary Theory (MMT) argue that sovereign governments can finance spending through monetary means without relying solely on taxes or borrowing. MMT advocates highlight the potential for increased social spending and investment in public infrastructure. However, critics caution that unchecked spending could lead to inflationary pressures and undermine investor confidence. As with most economic policies, the truth likely lies in a balanced approach—combining fiscal responsibility with strategic investments to drive sustainable growth.
To address these challenges, the Trump administration has taken a bold step by announcing the creation of the Department of Government Efficiency (DOGE). This initiative department, led by Elon Musk and Vivek Ramaswamy, aims to identify and eliminate wasteful spending, streamline regulations, and foster innovation within the public and private sectors. While the DOGE will not have direct authority, its role in advising the administration and shaping a long-term strategy will be pivotal. By working in tandem with a Republican-controlled House and Senate, the administration hopes to navigate the legislative process more effectively, creating opportunities for meaningful reforms. The DOGE’s mission is clear: to reduce bureaucratic inefficiencies, prioritize high-impact investments, and cultivate an environment where economic growth can thrive. Although significant cuts to cornerstone programs like Medicare, Medicaid, Social Security, and Defense remain politically sensitive, fostering growth through technological advancements and pro-business policies could help mitigate the debt burden.
As we look to the future, the administration’s ability to balance fiscal discipline with growth-oriented policies will be critical. By embracing innovation, fostering public-private partnerships, and maintaining a pragmatic approach to economic management, the United States has the opportunity to not only address its fiscal challenges but also lay the groundwork for a more prosperous and equitable future. So far 2024 has demonstrated the resilience of the American economy and the enduring optimism of its investors. While challenges remain, the path forward is filled with potential. With prudent decision-making and collective effort, we can secure a brighter future for generations to come.
Investment Commentary: Can The US D.O.G.E. a Bullet?
By Yuval Ezer, CFA®
As we write this in late December, the market stands near all-time highs, reflecting an exceptional year for investors. Following the ~3% drawdown of the S&P 500 in mid December, driven by an anticipated reduced level of rate cuts in 2025, the year-to-date price return of the index stands at ~26.5%. Most major indices have delivered impressive double-digit gains, underscoring a strong and resilient economic backdrop. These gains have been fueled by strong fundamentals, including healthy corporate earnings, steady consumer spending, and renewed optimism under the incoming Trump administration. The positive sentiment has been amplified by expectations of continued deregulation and pro-business policies, creating an environment favorable to long-term economic growth. Investors have largely embraced the administration’s vision of a streamlined, business-friendly regulatory environment, which has bolstered confidence across sectors and industries. We are mindful that the recent meeting of the Federal Reserve indicated inflation remains a concern – the low interest rate policy environment from 2008-2022 is likely a historical anomaly and not the “new normal.” This has valuation implications for investors.
Amidst the fundamental economic optimism, a growing concern looms: the nation’s escalating debt and unsustainable government spending. At over $36 trillion, the US national debt is reaching unprecedented levels, with interest payments on track to surpass defense spending this year. History offers sobering lessons about the risks of excessive debt, which can hamper economic stability and lead to financial crises if left unaddressed. This challenge has sparked renewed debate about the role of fiscal policy in managing the economy. While traditional economic theory emphasizes the importance of fiscal discipline, proponents of Modern Monetary Theory (MMT) argue that sovereign governments can finance spending through monetary means without relying solely on taxes or borrowing. MMT advocates highlight the potential for increased social spending and investment in public infrastructure. However, critics caution that unchecked spending could lead to inflationary pressures and undermine investor confidence. As with most economic policies, the truth likely lies in a balanced approach—combining fiscal responsibility with strategic investments to drive sustainable growth.
To address these challenges, the Trump administration has taken a bold step by announcing the creation of the Department of Government Efficiency (DOGE). This initiative department, led by Elon Musk and Vivek Ramaswamy, aims to identify and eliminate wasteful spending, streamline regulations, and foster innovation within the public and private sectors. While the DOGE will not have direct authority, its role in advising the administration and shaping a long-term strategy will be pivotal. By working in tandem with a Republican-controlled House and Senate, the administration hopes to navigate the legislative process more effectively, creating opportunities for meaningful reforms. The DOGE’s mission is clear: to reduce bureaucratic inefficiencies, prioritize high-impact investments, and cultivate an environment where economic growth can thrive. Although significant cuts to cornerstone programs like Medicare, Medicaid, Social Security, and Defense remain politically sensitive, fostering growth through technological advancements and pro-business policies could help mitigate the debt burden.
As we look to the future, the administration’s ability to balance fiscal discipline with growth-oriented policies will be critical. By embracing innovation, fostering public-private partnerships, and maintaining a pragmatic approach to economic management, the United States has the opportunity to not only address its fiscal challenges but also lay the groundwork for a more prosperous and equitable future. So far 2024 has demonstrated the resilience of the American economy and the enduring optimism of its investors. While challenges remain, the path forward is filled with potential. With prudent decision-making and collective effort, we can secure a brighter future for generations to come.
Shannon DermodyTEST