Place your bets

January 28, 2025

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Wars, rate hikes and political risk may not have derailed the stock market’s continued ascent, but investors should heed the warning signs, as George Muzinich explains.

This is a period of enthusiasm, excitement, and all manner of outbursts of predictive energy. It is January forecasting time. It is the beginning of a new year, the beginning of a new political order in Washington, and countless questions as to how the sociopolitical and economic landscape may change in countries across the world.

Will we go from war to peace in Ukraine and the Middle East; will we trend away from progressive to traditional values; will artificial intelligence (AI) better or threaten our economic and social wellbeing? The list goes on.

It is human nature to try to predict the future, even if history shows how fruitless this can be. Everybody has something to say, but nobody really knows. A Harris poll last year reported that “70% of Americans either somewhat or strongly believe in astrology”.¹  Anything goes. We give credence to what appears before us without much thought or judgement.

Leave before the party ends

The financial services industry is particularly fond of making predictions. It has, however, often proved unreliable at forecasting the timing of market turnarounds. Financial trends can take on a life of their own and become so entrenched in a population’s psyche, they become an almost unquestioned part of our shared understanding.

Bernard Baruch, a successful financier of a bygone age, was once asked how he had amassed his enormous fortune. He reportedly answered: “I made my money by selling too soon,” adding: “Nobody ever lost money taking a profit.”²  These are nuggets of wisdom the investors of today may wish to keep in mind when assessing equity valuations.

The US stock market has just reported a second consecutive year of 20%+ returns.³  What is to prevent this wonderful trend continuing?

There is great enthusiasm over the potential benefits AI will shower upon us. Conflicts in the Middle East and Ukraine may be coming to an end. Major central banks understand the desirability of lowering interest rates and are starting to do so. There is a new government in Washington that wants to create a more dynamic and entrepreneurial environment, unleashing the potential of an economy it feels has been fettered by bureaucratic regulation and heavy-handedness.⁴

This decade has been heralded as a new ‘Roaring 20s’. Neither war, rising interest rates or political uncertainty have been able to stop the stock market’s ascent. The trend is our friend, the music is playing. We just need to keep in mind that trends have a way of changing rapidly.

Warning signs

Markets may continue to rise for a while, but the warning signs are there for all to see. The US federal budget deficit is already running at 6.6% of GDP.⁵

US inflation, as measured by the Consumer Price Index (CPI), increased 2.9% in 2024, with core CPI up 3.2%.⁶ German inflation increased 2.6% in December, year-on-year, still some way off the European Central Bank’s 2% target.⁷

This begs two key questions: How tenaciously will policymakers fight inflation if increasing prices become more entrenched in the economy? And how long will investors want to stay in riskier financial assets if the mood starts to shift and there is a realization that the balloon is losing air?

Froth and bubble

Generations ago, gambling was frowned upon and strongly discouraged. Today, it seems to be part of accepted behavior and is everywhere, present in our media and at our sporting events. We increasingly want satisfaction in the here and now. We crave that quick feedback loop to give us a short-term lift. 

The rapid growth of predictive markets now allows us to electronically bet on almost anything, even elections. We have developed a betting mindset together with a certain credulity to simply take things at face value. Perhaps we increasingly need the instant gratification that social media and instantaneous communication seems to offer. There is a certain nervous frothiness in behavior that characterizes this period in our history.

The extraordinary rise of day trading is testament to the short-termism that increasingly influences financial markets and people’s relationship with them. A father and son, neither of whom work in finance, recently asked me about the merits of day trading. It reminded me of an incident in 2007 when I overheard a group of nurses discussing the stock market, with one volunteering that she was leaving nursing to trade full time.

Short-termism has always existed in financial markets. It is in those periods it becomes excessive that one needs to be especially vigilant. Our concern is that we may experience a prolonged period of inflation, an insidious pollution of steadily increasing prices. If this inflationary bias proves correct, it will coincide with an increasingly frothy mindset among some investors, an anything goes attitude and level of speculative behavior that is troubling.

We have been here before. This may be another of those periods when investors need to focus their attention on protecting capital and trying to stay one step ahead of inflation.

References

1.The Harris Poll Thought Leadership Practice, ‘The role of astrology in society,’ February 2024.
2.Brainy Quote, ‘Top 10 Bernard Baruch Quotes,’ January 2025
3.Financial Times, ‘US stocks soar more than 20% for second year in a row,’ December 31, 2024
4.The White House, ‘President Trump’s America - First Priorities,’ January 20, 2025
5.Congressional Budget Office, ‘The budget and economic outlook: 2025-2035,’ January 17, 2025
6.US Bureau of Labor Statistics, ‘Consumer Price Index – December 2024,’ January 15, 2025
7.Statistches Bundesamt, ‘Inflation rate of +2.6% expected in December 2024,’ January 7, 2025

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of August 2024 and may change without notice.

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Important information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall.

Any research in this document has been obtained and may have been acted on by Muzinich for its own purpose. The results of such research are being made available for information purposes and no assurances are made as to their accuracy. Opinions and statements of financial market trends that are based on market conditions constitute our judgment and this judgment may prove to be wrong. The views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity, they are for information purposes only.

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