Written by: Trek Investment Committee
The U.S. economy is experiencing a period of notable transformation under the new administration’s economic agenda. Pro-growth policies such as tax adjustments and deregulatory initiatives may drive economic activity, though they are not without associated risks. Below, we outline key factors that investors may consider as they navigate this dynamic landscape.
Inflation and GDP Growth: A Balancing Act
Recent trends suggest a nuanced economic environment. Inflation expectations have increased, with market breakeven rates rising above 2.4%.1 Meanwhile, nominal GDP growth is anticipated to remain above 5% annually, according to projections from the Congressional Budget Office. 2 Historically, movements in Treasury yields have been influenced by GDP growth rates. If this trend persists, it may signal upward pressure on 10-year Treasury yields.3
However, these projections hinge on various economic conditions, including the strength of consumer spending, corporate investment, and potential shifts in monetary policy. Investors should be mindful that these are estimates and subject to change based on evolving data.
Federal Reserve Dynamics: Evolving Policy Perspectives
The Federal Reserve has indicated a potentially lower terminal rate in its recent Summary of Economic Projections. However, market sentiment appears to reflect an adjustment toward a peak rate of around 3.8%, driven by resilient economic indicators. This recalibration suggests tighter financial conditions, which could impact borrowing costs, liquidity, and asset valuations.4
Investors are encouraged to monitor Federal Reserve communications and updates to economic projections closely, as these provide critical insights into monetary policy direction.
Sector Impacts: Small-Cap Stocks and Credit Markets
Economic growth has implications across various sectors. Historically, periods of robust GDP expansion have been associated with improved earnings for small-cap companies. This trend could help mitigate default risks, narrowing credit spreads and potentially enhancing the appeal of high-yield bonds for income-seeking investors.
It is important to note, however, that market conditions are subject to rapid change, and sector-specific performance can vary based on broader economic trends and individual company fundamentals.
Challenges and Considerations
Despite positive economic signals, challenges persist. Rising Treasury yields may affect housing affordability, particularly with mortgage rates hovering near 7%.5 Furthermore, potential geopolitical developments, fiscal policy shifts, or trade disruptions could introduce volatility into markets.
Investors should also be cautious of overexposure to interest rate-sensitive assets and consider how inflationary pressures might impact purchasing power and investment returns over the long term.
Sources:
1-Fred Economic Data: https://fred.stlouisfed.org/series/T5YIE/
2-Congressional Budget Office: https://www.cbo.gov/publication/58957
3- Cresset: https://cressetcapital.com/post/what-should-the-new-normal-level-for-the-10-year-treasury-be/
4-Federal Reserve: https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240918.pdf
5- Wall Street Journal: https://www.wsj.com/buyside/personal-finance/mortgage/mortgage-rates-today-november-19-2024
Investment Advisory Services offered through Trek Financial LLC, an investment adviser registered with the Securities Exchange Commission. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein.
This overview presents a cautious interpretation of current economic indicators and their potential implications for investors. It’s important for investors to remember that market conditions are inherently uncertain and subject to change. The information provided here should not be considered as personalized investment advice or a prediction of future market movements. Investors are encouraged to consult with their financial advisor to discuss their individual financial situation and goals. A comprehensive investment strategy should consider the investor’s risk tolerance, investment time horizon, and any changes in economic conditions. Trek 24-393
