All Aboard!!!
The year ahead for the stock market may be shaping up to be a potentially profitable yet turbulent period (if historic trends hold true), driven by a combination of economic, political, and technological forces. As investors weigh the implications of a new administration’s policies, ongoing tariff negotiations, and the natural ebb and flow following two strong years of market performance, volatility is likely to be a central theme. Additionally, the tech sector is experiencing its own wild ride due to the emergence of DeepSeek, a possibly game-changing AI technology that has shaken valuations and expectations across the industry. The tech sector’s volatility is further exacerbated by its valuation sensitivity. High-growth stocks are particularly vulnerable to rising interest rates and shifts in investor sentiment, both of which are in play this year. As a result, the sector is, shall we say, “a bit unsettled”, leaving investors to ponder whether we are witnessing a temporary correction or a deeper reshuffling of value.
A New Administration and Policy Uncertainty
One of the key drivers of market volatility this year will undoubtedly be the policy decisions of the new administration. Transitions in leadership often bring shifts in priorities, and this administration is no exception. Early indications suggest a focus on trade policies, immigration and potentially significant changes relating to regulatory oversight in key sectors like energy, finance, and technology.
Tariffs, in particular, remain a wildcard. The uncertainty surrounding these policies complicates the math for multinational corporations and investors alike, as supply chain disruptions and fluctuating input costs become harder to predict.
Markets thrive on clarity, and the lack of that often leads to heightened volatility. As the administration’s
agenda unfolds, sectors sensitive to policy shifts such as industrials, consumer goods, and technology are likely to experience rougher seas.
A Bumpier Road Ahead?
Another factor contributing to expected volatility is the market’s historical tendency to take a breather following extended periods of strong performance. Over the past two years, major indices have delivered satisfying returns, fueled by robust earnings growth, kinder monetary policy, and a post-pandemic economic recovery.
When markets reach new highs, they often attract speculative behavior and inflated valuations, setting the stage for corrections. While this process can be unsettling in the short term, it is a natural and healthy aspect of market cycles. Corrections help reset expectations and potentially create opportunities for long-term investors to buy quality assets at more attractive prices.
Interestingly, historical data suggests that the third year following two strong years often ends on a positive note. Research shows that after consecutive years of strong performance, the stock market has historically produced further positive returns in the third year, but those returns came along with added volatility. While past performance is no guarantee of future results, this pattern may provide a glimmer of insight into what is to come.
The Long View and Lessons from History
While the current environment may feel uncertain, it’s important to remember that volatility is a normal part of investing. Markets are inherently forward-looking, and short-term fluctuations often reflect the process of adjusting to new information. Over time, however, fundamentals tend to prevail.
History provides a valuable perspective. Even in years marked by significant volatility, the market has demonstrated a remarkable ability to recover and deliver long-term growth. This resilience is particularly evident in the third year following two strong years, as mentioned earlier. Investors who maintain a disciplined approach and focus on quality assets are often rewarded for their patience.
So, What to Expect?
For those with a calm hand and objective head, periods of volatility can be a blessing in disguise. They create opportunities to buy high-quality assets at discounted prices and position portfolios for future growth. The stock market in the coming year looks like it may be a bit of a rollercoaster ride, influenced by a slew of political, economic, and technological factors. While volatility may dominate the headlines, history offers a reassuring reminder that markets have a long-standing tradition of resilience and growth. Regardless of what the coming year brings, a sound investment process and a well-defined plan can help investors navigate through volatile markets.
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Kindest regards,
Leo & Austin
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Disclosure: This piece is for informational purposes only and contains opinions that should not be construed
as facts. Information provided herein from third parties is obtained from sources believed to be reliable, but
no reservation or warranty is made as to its accuracy or completeness. Charts and graphs are for
illustrative purposes only. Discussion of any specific strategy is not intended as a guarantee of profit or loss. Past performance is not a guarantee of future results. Objectives mentioned are not guaranteed to be achieved. All performance referenced is historical. All indices are unmanaged and may not be invested in directly. Tactical allocation may involve more frequent buying and selling of assets and will tend to generate higher transaction costs. Investors should consider the tax consequences of moving positions more frequently. All investing involves risk, including loss of principal.
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