We are pleased to report that 2024 was a strong year for stocks, especially the types of growth companies that we look to own. You have been invested in the right stocks for the right reasons for a long time. Most clients have long-term positions with leading tech innovators, such as Apple, Nvidia, and Amazon, among others. Under our management, many of you have owned these companies for a decade or more, with position sizes that are many multiples larger than your initial investment. Notwithstanding inevitable bouts of volatility, the future tends to reward this long-term approach of identifying and acquiring innovative growth leaders early and then sitting–patiently allowing these businesses to evolve, mature, and expand.
Exposure to gold and gold miners also contributed to your success in 2024. Gold rose 27% last year, outperforming the S&P 500.[1] Despite being ignored by most of our competitors, gold plays a crucial role in your portfolio. We have long favored this asset class as an important hedge against the dollar’s devaluation and the risk of rising geopolitical turmoil. We continue to see it as such.
Today’s backdrop supports a constructive outlook for the US economy and markets. The election of Donald Trump brings a business-friendly administration to the White House. We have the blueprint for Trump 2.0. Expect a regime of reduced regulation and an extension of the 2017 tax cuts (currently set to expire at the end of 2025). Trump will streamline domestic energy production to strengthen national security, create high-paying jobs, and drive down prices at the pump. Furthermore, policies to incentivize the reshoring of capital, manufacturing, and critical supply chains should encourage investment and spur domestic economic activity.
Trump notoriously leverages tariffs as a negotiating tactic–threatening access to our world-leading economy to obtain more favorable terms for American taxpayers and our exports. The issue is controversial and complex with multifaceted economic impacts. Tariffs will be a source of volatility for markets. However, imposing tariffs on foreign competitors while extending favorable tax rates to consumers and domestic businesses could be a good trade-off. With strong leadership and smart strategy, we can ultimately reduce trade barriers and shrink our trade deficit by enhancing the competitiveness of American exports in the global market.
At the end of Trump’s first term, US Government debt was $27.8 trillion.[2] Four years later, it is over $36.2 trillion and rising rapidly. We are increasingly funding long-term obligations with short-term debt. This is the most pressing challenge we face, yet no one within government has been willing or courageous enough to tackle the issue. Thankfully, two of the brightest minds in business–Elon Musk and Vivek Ramaswamy–have volunteered to head the D.O.G.E. initiative.[3] This is a once-in-a-lifetime opportunity to make substantive changes in the ways the federal government spends our money. The task before DOGE is monumental; status-quo bureaucrats will resist. Nevertheless, Musk has repeatedly demonstrated an ability to quickly identify and eliminate excess while improving efficiency at SpaceX, Tesla, and Twitter/X. They will surely find waste and abuse within our $6.75 trillion budget (~23% of GDP). But our greatest hope is that DOGE gives politicians on both sides of the aisle the cover they need to make much-needed spending reforms.
Turning to Artificial Intelligence (AI), the boom continues with ample room to develop, broaden and expand. We are still in the early innings of this critically important computing revolution–laying the foundation for the next generation of disruptive applications. You already own some of the earliest beneficiaries–the key enablers of AI, like Nvidia and the cloud hyper-scalers. Still, we remain eager to identify and accumulate future leaders as the AI economy proliferates. To be clear, the opportunity before us is massive. The impact of AI will ultimately reach across all sectors of the economy as companies better utilize their data to refine processes and boost productivity with these new, powerful tools.
One risk to our optimistic outlook is higher-for-longer inflation and interest rates. Yes, inflation is slowing, but so is its progress toward the Federal Reserve’s (FED) 2% target. The persistence of above-target inflation could lead to a prolonged environment of higher interest rates. Even as the FED cut short-term interest rates by 100bps (1%) since mid-September, the yield on the 10-year US Treasury Bond has increased by 100bps.[4] This steepening of the yield curve hinders interest-rate-sensitive sectors like autos, housing, and small businesses. Once again, market participants could be overestimating the pace of interest rate cuts to be delivered by the FED; and lower interest rates may be needed to spark further upward momentum in the US economy and stock market.
Perhaps the most significant near-term risk facing markets today is excessive investor complacency. Much good news is being “priced in” to markets with valuations reflecting high expectations for earnings growth. In the wake of the November election, we’ve seen investors embrace speculative assets with enthusiasm. We expect a resilient macro backdrop to persist, but valuations leave little room for disappointing economic data.
You can be confident that there will be stock market “corrections” in 2025; however, we can’t project the timing or magnitude of these drawdowns. For this reason, we carry a cushion of cash in your account(s).[5] This enables us to acquire attractive companies during periods of volatility or excessive negativity. In the current environment, pullbacks are opportunities. Economic tailwinds have us leaning optimistic with an eye on any dark clouds that may build on the horizon.
We could be entering a prolonged economic boom, and if so, we want you to take full advantage. Our buoyant, consumer-driven economy and leading position in critical new technologies make America a magnet for the world’s capital. We plan to maintain and build large(r) positions in market-beating growth leaders while remaining vigilant to identify emerging disruptive businesses.
When opportunities arise, the willingness to forgo diversification in favor of fewer, bigger positions has been key to our success and outperformance over the years. Most advisors and brokerages are unwilling to do the work or accept the risk of diverging from their benchmark. This sets us apart from large investment firms, ETFs, and mutual funds. We do not want to own every stock, just the right stocks. Selectivity is our strength.
The benefit of our customized, long-term portfolio management is further magnified in taxable accounts since you don’t pay tax on gains until a stock is sold. We closely monitor your accounts to minimize the tax liability every year. Again, this is something that most advisors do not do. For your biggest winners, the ideal holding period is forever. The step-up basis[6] provision can save you and your estate significant tax dollars.
As always, it is essential to remain nimble and open to new information that could alter financial conditions and strategy for your portfolio(s). We are grateful for your trust and confidence to navigate this exciting and potentially transformative time.
[1] The S&P 500 returned 23% in 2024.
[2] https://web.archive.org/web/20210119064847/https://www.usdebtclock.org/
[3] Department of Government Efficiency. A two-year advisory council to the President tasked with identifying waste, fraud and abuse in the federal bureaucracy and proposing remedies to streamline government operations.
[4] https://ycharts.com/indicators/10_year_treasury_rate
[5] Liquid, government-guaranteed money-market funds currently yield between 3.6 - 4%.
[6] Step-up basis is a tax provision that adjusts the cost basis of an inherited asset to its fair market value on the date of the previous owner’s death.