Wright Cove Capital: January 2025

In 2024, we advocated for calm throughout the election cycle and geopolitical uncertainties. Our strategies of overweighting large-cap growth and quality stocks allowed us to participate in the market rally, and our decision to maintain short fixed-income durations again outperformed the aggregate bond market.

Entering 2025, our focus shifts from calm to vigilance. While last year we aimed to disregard the noise and posturing surrounding the prolonged election cycle, this year it is paramount that we remain focused on clients’ long-term goals while also remaining mindful of the cyclical and immediate effects of new policies and executive orders.

Trump campaigned (and won) on a platform of tariffs and “America First” policies. Time will tell whether these policies will ultimately succeed, but in the interim, we anticipate increased market volatility.

However, market volatility also presents opportunities, and we will strive to capitalize on these—rebalancing and diversifying portfolios into strength and looking to add risk and increase exposures to select sectors during periods of weakness.

Our playbook for 2025:

On the equity side, we remain focused on large cap growth but have already begun diversifying and broadening out our exposures.  After two consecutive years of over 20% returns, the domestic stock market is not inexpensive, but we still believe there are areas with room for growth – we favor technology, financials and various mid-cap sectors – where business models are focused on domestic sales and manufacturing.

The outperformance of the technology sector and a handful of mega-cap stocks over the past few years has resulted in substantial unrealized gains for many. We will continue to take advantage of tax-loss harvesting strategies to reduce both tax liabilities and idiosyncratic risk in portfolios due to over-concentrations.

In fixed income, we favor the belly of the curve (the 2–5-year sector) over ultra-short and longer durations debentures. We believe yields in the 5-6% range are obtainable without taking extreme credit or duration risks. Using a multi-sector approach (including MBS, TIPS, Credit and Consumer Finance), we will continue to rotate out of T-bills and short-duration bonds into sectors that offer a better risk/reward profile in the current environment.

On the economic front, we believe that while inflation has cooled, significant hurdles remain in reaching the Fed’s 2% target. Consequently, we anticipate it will be difficult for the Fed to cut rates meaningfully in the next 6-12 months, and rates will likely remain range bound. We can envision a scenario where the Fed is compelled to cut rates due to political and market pressures, but even in that case, we foresee a steeper yield curve, with long rates remaining elevated due to fiscal and deficit concerns.

This brings us to our final and most important economic and political issue: U.S. debt and the federal deficit.

The federal deficit continues to grow, and our cumulative national debt is fast approaching $37,000,000,000,000.00 (thirty-seven trillion dollars). Until recently, the U.S. has been able to fund this deficit at ultra-low interest rates. This year, however, nearly a third of the $37 trillion comes due, and the U.S. will have to access the bond market and borrow money at significantly higher interest rates than in years past.

This is why so much emphasis is being placed on D.O.G.E., budget cuts and tariffs. If Medicare and Social Security remain untouched, and taxes are not raised, this administration has indicated it will attempt to reduce federal spending through efficiencies, increase revenue via tariffs, and focus on domestic economic growth to reduce the deficit and hopefully, place our national debt on a more sustainable path.

How this unfolds will likely be the dominant narrative of 2025 and we are prepared to navigate this volatility and capitalize on opportunities when presented.

Our commitment to understanding and achieving our clients’ goals remains unwavering.

As always, if you have any questions or concerns – or believe someone you know would benefit from working with Wright Cove Capital, please feel free to reach out.

Regards,

Eric and Cass

Eric Leinwand, Principal – Eric@wrightcovecapital.com

Cass Tokarski, Principal – Cass@wrightcovecapital.com

The themes and strategies that we speak about and the positioning we take in portfolios are all customizable to best reflect each of our clients’ own unique goals and should not be interpreted as general investment advice.