MARK RIEPE: Welcome, everyone, to Schwab Market Talk. Thanks for your time today. It is December 10^th, 2024, and the information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice in reaction to shifting market conditions. I’m Mark Riepe, and I head up to Schwab Center for Financial Research, and I’ll be your moderator today. We do these events monthly, and this is a little bit different. This is our 2025 Market Outlook episode, so we’ll have four speakers each presenting for about 10 minutes. And after they’re done, we’ll start taking live questions, and occasionally we’ll get questions about slides, and each of the speakers will have a number of slides that they will be reviewing. Normally, these webcasts are also for 60 minutes, but today we’re going to go for 75 minutes to leave more time for live questions. To ask a question, you can just type the question into the Q&A box on your screen, and then click Submit, and you can do that at any time during today’s event. For continuing education credits, live attendance at today’s webcast qualifies for one hour of CFP and/or CIMA continuing education credit if you watch for a minimum of 50 minutes. If you only watch the replay, you aren’t eligible for CE credit. To get CFP credit, please enter your CFP ID Number in the window that will be popping up on your screen right now. In case you don’t see it, don’t worry, you should see it again towards the end of the webcast as well. Schwab will be submitting your credit to the CFP Board on your behalf. For CIMA credit, you’ve got to submit that on your own, and near the end of the webcast, the directions for how to submit that can be found in the CIMA widget that will be appearing at the bottom of your screen. Finally, I want to call your attention to a few resources on the webcast console. In the bottom-right, there’s going to be a link to our latest market commentary, and in the top-right a link that will help you register for next year’s Schwab Market Talk series. So that’s enough for the preliminaries.

So let’s get to the speakers. We’re going to have Kathy Jones, our Chief Fixed Income Strategist; Kevin Gordon, our Senior Investment Strategist; Jeffrey Kleintop, our Chief Global Investment Strategist; and Mike Townsend, a managing director in Schwab’s Legislative and Regulatory Affairs Group. And that’s the order in which they’ll be speaking today.

So Kathy, go ahead and take it away.

KATHY JONES: So in terms of looking at 2025, I think… you know, we love to do cartoons. We have a very talented cartoonist in SCFR, and we asked him to draw this one, because a key indicator for where we’re going in 2025 is how low can the Fed go in terms of lowering rates? And you can see the bar is now… Powell is trying to slip under this bar here, and we’re not sure how much lower that can move down. And that will depend obviously on inflation, the pace of economic growth, and the employment picture, as well as other factors.

A key indicator, though, that we’re seeing is the market has shifted its expectations for what the Fed can do. Now, if you go back to the last time we had a Summary of Economic Projections, we still believed that the low end, or the destination, the terminal rate for the Fed would be somewhere in the 3% to 2-3/4%, around 2.8% for the cycle. You can see, though, that that has moved up pretty substantially since the last Summary of Economic Projections. We’ll get another one next week when the Fed meets on the 17^th and 18^th. We expect that the Fed will have moved up its expectations, but the market is already there. So we can see that the market looks at a terminal rate somewhere just under 4%, about 3-3/4- to 4. I think that’s probably a lot more accurate than the previous expectation of less than 3. We’ve had more robust growth since September, when we kind of hit the lows in economic activity. Things have picked up since then, and GDP estimates are pretty consistent in the 2-1/2- to 3% area, which is pretty healthy. Employment picture is slowing but still pretty healthy. Inflation is a little bit stuck. So we have a lot less room for the Fed to go lower unless the economic data changed significantly. That’s at the short end of the yield curve.

At the long end of the yield curve, what we see is that there… we think that there’s room for yields to move up from where they are currently, actually have them right now near fair value based on what we are seeing. But the one thing that gives us pause is that a lot of the policies coming in have the potential to be somewhat inflationary, and between the tariffs and the immigration reform, tax cuts potentially, although a lot of this is still down the road, the market is starting to build in a risk premium for the potential that inflation starts to drift higher rather than lower. And you can see, this is the term premium. This is the extra yield that investors require to hold long-term treasuries versus rolling over short-term treasuries. It’s moved up from negative territory a year ago, slightly in positive territory, but in a more normal sort of environment it would probably be higher than this. So if you add, say, just 50 basis points on here to the 10-0year, you would still have a term premium that’s below the long-term average. So we think that 4-1/2%, maybe down to 4%, 4-1/2% is the range that we’re likely to see going forward, assuming that the economy continues to do well.

The other component, obviously, the Fed is looking at is the inflation picture. And what we’re seeing is that sort of flattening out from this PCE, the deflator that the Fed uses to set policy. It’s still coming down on a year-over-year basis, but the rate of change has sort of flattened out, and it’s flattened out in the core PCE at a higher level than the Fed would like to see. They would like to see that number closer to 2%, and it’s flattening out between 2-1/2- and 3%. And it looks like we might kind of move sideways from here if we don’t get somewhat slower economic activity or some sort of event that sends inflation lower. And given that some of the policies that we’re hearing about are likely to be more stimulative than not, there is a case to be made that we could see this drift a bit higher from here. I think that will give the Fed pause. We are expecting a rate cut at the next meeting next week of 25 basis points. That’s well discounted by the market. But we do think that the Fed may be a bit more cautious or indicate more of a pause once they get that cut out of the way, and then it’s going to be just a meeting-by-meeting decision from there, depending on the data. And again, the data that will be important will be the inflation data, and of course the employment data.

So we’re painting a picture of a handful of Fed rate cuts next year after a December cut, maybe a pause in January, maybe skip every other meeting, maybe only getting down to around 4%, 3-3/4% in the Fed Funds Rate. And what that does is give us a higher baseline for yields than we thought just four or five months ago.

The good news is for investors, a lot of this is not extremely important because coupons are up. So the yield is the biggest driver. The coupon is the biggest driver of returns in fixed income over time. You can see it in this graphic how much the coupon return contributes over the long run to the total return in various asset classes in fixed income. And except for TIPS, where the price return has been a big component, pretty much all of it has to do with the coupon, and coupons are attractive right now. Coupons are the… you know, in the 4-1/2- to 5-1/2-plus area, and that means that your expected return, total return is probably mid-single-digits going forward. And for a lot of people, when you’re trying to create portfolios for clients, that’s not a bad baseline. So the good news is we’re not looking for negative total returns. We could see a lot of volatility going forward, but not the kind of volatility that we saw in 2022, because we have a coupon income now to cushion the price changes.

Now, I’m just going to run through a couple of the fixed income, the sub-asset classes. When it comes to foreign bonds, I often get asked about international bonds. And the problem we have with international bonds is not that there’s anything wrong with them. We do think rates will come down in Europe and elsewhere, and that gives a boost to bond prices. But you have the currency return to consider. The dollar has been strong. We expect it will probably stay relatively strong going forward because those interest rate differentials are wide, the US economic growth rate is much above most of the other countries in the developed world, and that keeps those differentials wide. There’s still about 200 basis points between the US Ag and the Global Ag ex-US, and that’s been a big driver of the dollar strength, still attracting foreign capital because of those yields. So not looking for that to change very much. Policy looks like it’s biased towards keeping the dollar stronger as well. Tariffs will generally do that. So if we get the follow through on the policy, it looks like the dollar stays up. And that doesn’t really help us very much in terms of international bonds. They’re great for diversification, and we are seeing some divergence in policy, which is good, and can provide some diversification, but we wouldn’t go overweight at this stage of the game.

One area we have liked and continue to like is investment-grade corporate bonds. Here we’re comparing the yield curves for single-A-rated, triple-B-rated versus US treasuries. And if in the treasury market we’re right, that short-term rates come down roughly to about 3% or a little bit lower, but the long end kind of hangs in there, that we’re going to get a very flat yield curve to upward sloping. But right now it’s still pretty inverted to flat, so that’s going to take some time, probably, to play out. But in the corporate bond world, there is a slight inversion in, let’s say, the two- to three-year area, but then it’s upward sloping at a much steeper rate, particularly for triple-Bs but also for single-A. So you do get more yield as you go out in maturity. So we’re somewhat cautious on duration of the treasury market. We would stay benchmark or a little bit under. But in investment-grade corporate bonds you can take more risk, more duration risk, because you’re getting rewarded for more in the way of yield as you go out the yield curve. So that’s one advantage to being in corporates versus in treasuries.

That being said, spreads are very low. Credit spreads, really, throughout the fixed income world are extremely low, almost record low levels. You can see here high-yield bond spreads, pretty much at all-time lows, or the lowest we’ve seen in decades. That’s been a very strange environment that we’re in, but we would be cautious about stretching for yield in lower credit quality for this reason. The backdrop is good, the fundamentals are good, but the valuations are stretched, and that’s kind of the key message that we have. Valuations are stretched based on spreads, and we’ve actually started to see even in the leverage loan space, really great demand even though defaults are rising. So it tells you there’s tremendous demand for yield out there, but I would be cautious about reaching too far for it in the lower credit quality bonds. If something goes wrong, if something changes in high-yield, in leveraged loans, those spreads can move very, very quickly, and diminish the extra return that you’re hoping to get. So we like IG. We’re a little bit more cautious on high-yield. We’re fine with holding it, we just wouldn’t overweight or stretch for yield in this circumstance.

And then in municipal bonds, we think there’s a compelling case for munis. The yields are attractive on an after-tax basis, particularly... even if we extend the tax cuts from before, they’re still attractive on an after-tax basis for many high-income folks. And volatility tends to be lower in the muni market, and we think it’ll continue to be lower. The fundamentals are good, and most state and local governments are still well-funded. Economic activity is healthy, which means tax receipts coming from income taxes, from sales taxes, property taxes, state and local taxes, excise taxes, all those taxes, those revenues are still rising while budgets are pretty well in balanced. So obviously, there’s some exceptions, but in general, the muni market is healthy from a fundamental basis, and on a risk-return basis we think that they’re attractive for high-income investors. And right now, the valuation piece is okay. It’s not as stretched as it is in, say, corporate bonds are in the taxable world. The bond spreads, our munis-over -bond ratio that we track for valuation, is kind of in the middle of the long-term average. It’s not at the high end. Particularly as you go out a little bit further out in duration or in maturity, they’re kind of in the middle. We don’t expect it to go back to those long-term averages anytime soon. Demand for tax-exempt income is just very, very strong as the population ages, people retire out, or… there’s a lot of wealth created at the higher end, and those are typically very strong muni buyers. We don’t think that that’s going to change. The demand is going to stay strong. These valuations are okay, particularly if you go out five, 10 years, and beyond.

And then finally, in terms of credit quality, again, states are in good shape. There’s been a lot of talk about having worked down the rainy-day funds, but keep in mind, rainy day funds are still very high relative to the past. Forty-four states could run on their rainy-day funds alone for up to a hundred days, and that compares pretty favorably right now to the past. So we’re not having a huge amount of concern about budgets at this stage of the game.

So just to sum up, we think that there’s less room for rates to come down than had been anticipated just a few months ago. Probably 4- to 4-1/2% is where the 10-year treasury yields will go, with shorter term yield settling in just under 4%, barring some change in the economy. And we are cautious on duration in treasuries. The benchmark are a little below, but we would be benchmark or even above on investment-grade credit and taxable, or in municipals, but we wouldn’t stretch for yield because we don’t think that you’re getting rewarded as you go down in credit quality.

And with that, I am going to pass it over to my colleague, Kevin Gordon, for comments on the equity markets.

KEVIN GORDON: Alright. Thanks so much, Kathy. Hi, everybody. Thanks for being here. Thanks for having me back. It’s great to be back and chat about the outlook that Liz Ann and I put together. She’s recovering from surgery, by the way, so she sends her best. But our outlook was last out of the gate. We published it late last night. And I just wanted to go through a couple of slides that we pulled together. We have a ton of charts that we put in the report itself. If anybody has gotten to it, you know just how many charts and visuals there are in there. So I’m just going to go through five, two covering the economy, three covering the stock market.

But of course, I want to start with the cartoon that we had put together for this year. We had a particularly fun time with this one, just because of, you know, I think probably the mood that a lot of people are in with regards to policy, in particular, and how much potential it has to be a driver of, in particular, the equity market in the US, which is what we cover. So as Kathy mentioned, we have a fabulous artist and cartoonist, Carlos Gary, who puts these together. And I think this really sums up kind of, you know, part of our outlook, at least in the what we don’t know column, you know, heading into 2025. And I’ll touch on some of these as we go throughout the presentation. And I know Mike is going to have a lot to discuss based on some of these policies.

The one that probably comes to the front burner for us in terms of the biggest potential hit to growth, and I want to stress that this is not just a 2025 story where from January 1^st to December 31^st, here’s what the specific impact is going to be on the economy specifically from an immigration policy perspective. But given where we’re at with the labor market, given where we’re at in terms of the makeup of immigrants for our total labor force, I think this really becomes an important factor here. And so what you’re looking at in this chart is just a rolling five-year percentage change in real GDP, which is on the left scale in the dark-blue line. And then on the right scale, it’s the same time horizon but for growth in the labor force. And you can see there’s a really tight relationship over time. This data goes back to the ‘60s. And really if you start to see a material hit to the labor force via mass deportations or a significant curbing of immigrants into the country, whether it’s undocumented, whether it’s documented, that does put the US in terms of GDP in a little bit of a precarious situation. But again, I want to stress that this is probably something that happens a little bit later in the year in terms of the actual logistics in carrying this out. And again, Mike will have more details on the feasibility of it, but this is one of the risks that we would put… you know, sort of bring to the front just because of the makeup of the labor force in particular.

If you look at the past four to five years, really since, you know, right before the pandemic started, the growth in the US labor force has almost all been from the foreign-born labor force. It has not been from the native born. And there’s a host of reasons for that. You’ve seen a significant drop-off in labor force participation from those who are older than 55 in the US You’ve seen sort of this leveling out after really significant surge in the prime-age labor force participation rate. But the reality is just from a demographic standpoint, and this is not a case unique to the United States, it’s very much the case across the western world and in almost every developed country that you see, there are aging populations and there’s not as much of a replacement rate. So we just have to rely… we’ve had to rely a lot more on immigration to be able to plug that gap. So I think the sequencing matters a lot here in terms of what can be done unilaterally, in terms of when it’s done, and what announcement is made by when he becomes President Trump. So keep that in mind. But this is one of the risks that we see from a growth perspective, and probably down the line in inflation perspective too.

But from inflation, and, you know, Kathy was talking about kind of this leveling-off that we’ve seen in some of the metrics that the Fed looks at most closely, most importantly, core PCE and PCE. If you look at the CPI components of this, and we can kind of break it down into core goods and core services, which is what we’re showing here, and it’s the year-over-year changes. So you could see the year-over-year change for core goods in dark-blue and then in light-blue you could see the year-over-year change for core services. We do see… you know, one of the risks that we see for inflation just being a little bit stickier is, number one, if we’ve already seen this goods deflation cycle play out, which you can see we’ve been in goods deflation for a good chunk of the past year, and the first stage of the disinflation that you had seen, but then the second stage being the deflation had been a significant driver of overall disinflation for the headline CPI or headline PCE. And you could see that services is still really the culprit here in terms of keeping things stickier. And we’ve actually sort of leveled-off in terms of the year-over-year change here, with core services being relatively sticky. So the risk from a now tariff policy perspective, if you do get a pretty significant increase in what is charged for US imported goods, for US importers, in particular, which is a really important point, if you see those prices start to go up, it probably deals a pretty significant level shift up in core goods. And I think the important distinction here is level shift versus actual inflation. Level shift would be, yes, you get that one time increase that does boost prices, which is what we saw in 2018 and 2019 from the first trade war that we had with China. But whether it becomes inflationary is probably more of a question, or if you start to see retaliation from other countries, not just China this time, but presumably all of our trading partners, if that is the route that Trump wants to take when he gets into office. But this is a really important, I think, distinction in relationship to look at as we go into ’25, because that goods deflation cycle is playing out, because you’re not going to get as much aid to the downside for headline inflation, and because the labor market in the services economy are, you know, relatively resilient. We really haven’t seen, you know, many cracks there. You still got relatively healthy demand for services labor. You still got relatively healthy wage growth in the services part of the economy. So if that does continue, then we do see, you know, a case where you do probably have a little bit stickier inflation, and as Kathy was mentioning, you probably have a Fed that needs to maybe, you know, rethink or recalibrate how much they could go to the downside for rates.

The tricky part for that from a stock market perspective is that when you do look at prior Fed tightening cycles… or I’m sorry, Fed cutting cycles, and you start to look at the pace of the cuts that they’re engaging with… you know, if it’s a fast cutting cycle, presumably it’s because they’re responding to some sort of financial or some sort of economic crisis. If it’s a slower or more methodical cutting cycle, they sort of have the luxury of taking a little bit of a slower approach. We seem to be, you know, in the latter right now, and historically that’s actually consistent with a much stronger stock market reaction. So the better or the slower easing cycles are better for stocks, and that so far has been the case. So you’re sort of seeing that play out in the chart here, which is just looking at the S&P 500, along with its 50-day and 200-day moving averages, to show that, number one, momentum is pretty strong heading into 2025. So I mentioned the what we don’t know column earlier, but what we know column is that from a market perspective, from an economic perspective, at least in the case of the United States, momentum is pretty strong heading into ’25. You’ve got close to 75% of S&P 500 companies trading above their 200-day moving average. You’ve seen a pretty significant breadth improvement down the cap spectrum, whether it’s in the Russell 2000 or even within the broader NASDAQ universe. And you can see from the table embedded within this chart that as long as the 50-day is above the 200-day, you tend to see pretty solid gain. So if momentum were to peter out, and you started to see a little bit of a deterioration in breadth and this started to turn a little bit lower, where the 50-day slipped below the 200-day, and you started to see more deterioration under the surface, then we would go a little bit more concerned. But I think that the important kind of backdrop right now, and especially as it relates to, or sort of compares to other years in which you saw a significant spike in record highs for the market and sort of consistently new highs for the S&P 500 itself, the sort of closest comparison we have just a few years ago was 2021, where by the end of the year, you had seen the S&P 500 consistently make new all-time highs, but breadth was also deteriorating at the same time.

The good news is we don’t have that backdrop right now. And I think that’s really important because this year is already shaping up to be, you know, pretty historic in terms of the number of record highs we’re seeing. So we’re at 57 so far for the S&P 500, and you can see from the top chart here that puts us really on par with only a handful of years going back in the history of the S&P. So we’re looking at, you know, 2021, 2017, 1995.

I think what’s probably more important is the takeaways from the table below this, which is showing that whether it’s the next year’s median gain for the market, whether it’s the number of years that you see… or the number of highs you see in the following year after you have a year like this year, whether it’s the number of cases that the market is actually higher in the following year, they all sort of argue for, and the data just sort of argue for a little bit of a step back, or a little bit of a scenario where the market is catching its breath. And I think that’s an important distinction from this being some sort of fatal moment for the bull market, because it’s still a relatively young bull market, you still have relatively strong participation, I mentioned on the prior slide that you’ve got relatively strong momentum heading into the year, but I think it’s a way to sort of temper expectations where you’re probably not expected to see another year like we had this year, with the great exception, and you could probably see it in the chart above, being, you know, the mid- to late-1990s, where you did have a really strong, you know, kick higher in momentum.

One thing I think that might change that for next year is if you did start to see a significant reversal in leadership from what you had seen in the second half of this year, where somehow the Magnificent 7 starts to really take off again, which is what we have, in fact, seen over the past month, but if that were to persist and if that were to continue, where you had a rotation back into those names, then the math of the index and the weightings of the S&P 500 is such that you would probably start to see, you know, a pretty significant move higher. But just a way to sort of visualize that, especially with the table below, you should probably just temper expectations in terms of the strength of the bull market as we head into its third year.

And in keeping with that, the bigger risk that we see, again, nothing that’s sort of fatal right away, but something that keeps the market in a little bit more of a vulnerable position is the sentiment environment. And there’s so many pockets of different markets, not just the US stock market, that you could look to see how frothy sentiment has become. There was an art piece that just sold for $6.2 million which consisted of a banana duct tape to a wall. So that’s pretty much all I have to say, probably, to give you a sense of where sentiment is at. But, you know, one of our favorite metrics that we track is what I’m showing here, and it’s the household stock allocation as percentage of all assets basically hovering at its all-time high. The only other times that you’ve been in this territory have been 2021, and then also right at the beginning of 2000, which, you know, in and of itself, those time periods in comparisons probably would spook a lot of investors. And it is, in fact, in keeping with the notion that from a behavioral standpoint we’re pretty stretched right here. Also, it happens to be consistent with the fact that when you go back in history, and this is shown by the light-blue line here, the subsequent 10-year return for the S&P tends to be pretty weak when you get to households being this exposed to stock.

So there’s many reasons to suggest that, you know, I don’t want to say it’s just it’s different this time, but you can already see the lines kind of pulling apart just a little bit. And I think what’s important here, especially when you’re comparing to periods like ‘21 or periods the late ‘90s, is kind of looking at the characteristics of the rally and the makeup of the rally itself. And in particular, for 2021, I mentioned the deteriorating breadth profile that you had in the second half of that year as the market continued to power to all-time highs. Again, that’s not the case that we’re seeing this year. So if that were to be the case, then I could see a scenario where you started to probably see much more of a material risk from a sentiment perspective.

But really our main takeaway from this chart itself… I mean, we’ve got more sentiment charts in the outlook that we publish, but the main takeaway from this would be more so that if you started to see more of a material hit to the market, that probably becomes more of an economic driver because you’ve got so much more wealth tied into risk assets, in general, and then you start to see more of a material hit to spending or a slow down in spending. And I think that’s probably exacerbated more in this cycle because you have seen, you know, a pretty big wedge in inequality between those who are asset owners versus those who aren’t. And I think that becomes probably a material driver for the next part of the cycle, not necessarily just 2025, but that’s a little bit more of a broader look maybe two to five years out.

So that’s my portion. I’m happy to answer questions when we get to the Q&A round. But in some pretty strong momentum heading into ‘25 from a stock market and an economic perspective, but a wide range and a huge range of outcomes from a policy standpoint in terms of what could be a volatility driver for US stocks.

So now we’ll go around the world. I’ll pass it over to my colleague, Jeff Kleintop.

JEFF KLEINTOP: Thanks, Kevin. I’m going to be brief. I’m just going to touch on three charts, but all of the charts and many more, along with them along with 3,000 words are going to be in our Global Outlook published about a week ago now for 2025. You can find that on schwab.com just as Kevin mentioned that his outlook is posted today. I just reposted a link to the Global Outlook on my X and LinkedIn feeds. To make it easy, you can find all the charts there.

So far, global stocks have been performing in line with the typical post-election day performance when transitioning to a new administration. So I’m focused on the near-term here. This chart here, this red line, the bright red line shows what stocks have been doing so far, and the other lines allow us to see other periods when preparing for a new administration over the past 50 years. Global stocks are up 3.2% since election day, and a pretty mild path of gains, despite some worries over wild swings and potential losses. This couldn’t be more boringly typical. I think the reason is likely what we pointed out on election day, that the resolution of uncertainty is a bigger factor than the potential policy changes, at least right now.

If we break this performance down a little bit, I think it’s interesting to see what’s been performing well and what hasn’t. If we look at it, America first policies seem to be driving leadership by US small-caps since election day, while international stocks, and especially emerging market stocks, have lagged badly since election day. But that’s exactly what happened after Trump won in 2016, so maybe we shouldn’t be surprised. But it completely reversed in 2017. No one seems to remember this, but in the first year of Trump’s term, despite the risk of tariffs and the uncertainty of a Trump administration, emerging market stocks rose nearly 40% in 2017, led by 56% gains in China, followed by the outperformance of developed international stocks… they did very well… then with US small-caps were the worst performers in 2017. Remember that, okay? Because just because we’ve got this incredible movement towards, you know, a smaller-cap US now, US exceptionalism, doesn’t mean it’s necessarily sustained next year. A key reason that all that happened in 2017 was because we got better global growth in 2017. Global growth accelerated. That lifted more economically-sensitive stocks, and that echoes our outlook for better growth outside the US in 2025.

Now, what’s the risk to that scenario? Tariffs is a big risk to that scenario. And as you can see in this chart, if you add up every tariff threat from the Trump campaign, and we painstakingly have, we get a US-weighted average tariff on imports from the rest of the world to rise from the current 2.6% to more than 26%, rivaling the Smoot-Hawley tariffs that proceeded and worsened the Great Depression. Anybody who remembers Ferris Bueller’s Day Off remembers that boring economics lecture. Well, it’s back again baby, and it matters. But look, I think the bark may be worse than the bite. Trump appears to be using tariffs more as a tool of statecraft, as seen with a recent tariff announcement on Mexico in an effort to curb illegal immigration to the US, rather than tools of economic policy. So if instead US import tariffs quadruple to 10%, not 26, but to 10, and they’re matched with tariffs by all other nations on US exports, so reciprocal tariffs everywhere, the IMF has estimated the impact on global GDP growth would be just 0.1% in their latest World Economic Outlook published in late October. You can see it in this chart. It trims global growth from 3.2% next year, according to the IMF to 3.1 in the event of a trade war. You can see maybe a slightly bigger impact on the US there, but the point is you can still see solid growth next year, even in the event of a trade war.

One of the reasons? Well, trade isn’t that dramatically impactful on GDP, and currencies tend to adjust pretty dramatically to offset the impact of the tariff. I’ll give you a quick example. So one of the tariff threats that seems likely to come to fruition is an increase on tariffs on European autos being imported into the US. Quickly, Europe charges a 10% tariff on US cars being sold in Europe, but the US only charges a 2-1/2% tariff on European autos coming into the US. I’d say it makes sense those two probably come together. That could suggest a 7-1/2% increase on European automobile tariffs. Well, that’s a huge… that’s one of the biggest categories of imports from Europe into the US Okay, so maybe we pay 7-1/2% more to the Customs and Border Patrol in order to buy a European car, but already the Euro has fallen 6% against the dollar since election day. So the dollar buys 6% more euros, so it’s kind of a wash. That’s my point, that it’s not really that impactful when you look at the currency adjustments and many other adjustments as well. That’s why you can see a chart like this and say, ‘Oh wow, the hit of even a trade war wouldn’t be maybe that dramatic when it comes to global GDP.’ Obviously, tariffs could be higher or lower and more selective than this across the board, so there could be more dramatic impacts on some companies than others and more countries than others. But broadly speaking, maybe the economic impact might be more mild than you might think even in the event of a trade war.

But hey, let’s break down the global outlook by country and region. The world’s biggest two economies may slow in 2025, US and China, but we see better growth among developed economies outside the US after many of them experienced recessions over the past six quarter. None of the top 45 economies in the world are expected to be in recession in 2025 according to the IMF, the World Bank, the OECD, the consensus of economists tracked on Bloomberg, and three-quarters of the world’s biggest economies are expected to grow faster next year. That includes Europe, Japan, Canada, the UK, you name it. The better economic growth can lift earnings growth with very easy comparatives to a year ago. Remember, many of these countries were in a recession a year ago, so the comps are pretty easy on earnings. In fact, in the just reported Q3 earnings season, the earnings of European companies outpace those in the S&P 500 for the first time in about five or six quarters. In Europe, real wages have risen for four straight quarters now. That’s helped Eurozone workers recoup more than two-thirds of the real income losses they suffered in the post-pandemic inflation bubble. And in recent months, retail sales volume in Europe have now climbed the fastest pace in over two years. So things are picking up. And in the latest forecast from the IMF published in mid-October, estimates for Eurozone GDP are now 1.2% for 2025. That’s still a little bit below the 1.5% average, but it’s better than the last year’s 0.8, this year’s 0.8, and 2023’s 0.4, right? So improving growth can still coincide with rate cuts because it’s still below average. It’s improving, and better is good for markets, and at the same time, you’ve probably got five or so rate cuts from the European Central Bank because growth is still below average. So valuations can expand from below average levels on the outlook for improving growth, better earnings and rate cuts.

So while 2025 may bring some hurdles, here’s my cartoon, in the form of uncertain trade policy, tighter fiscal policy in parts of Europe and maybe the US, and slightly slower than average growth in the global economy and corporate earnings, all these may drive some ups and downs, but improving growth along with the rise in stock market valuations may support solid returns overall for international stocks in 2025, and better performance than we saw here in 2024.

So I hope that gave you a quick overview. There’s of course lots more I could talk about there in the global picture, but I just focused on Europe, and the overall Smoot Hawley tariff what’s happening here post-election, and how that could potentially reverse next year.

But for more of a deep dive into the politics of it all, let me turn it over to my colleague, Mike Townsend, for a deep dive into Washington DC. Mike.?

MIKE: Well, thank you, Jeff. And hi, everybody. Great to be with you today.

We’ve heard from Kathy, we’ve heard from Jeff, we’ve heard from Kevin about the relationship between potential policy and political decisions, and the markets. And so let’s take a closer look at what we think is happening, and I’ll start with kind of the lay of the land post-election. The new Senate that will take office in January will be 53 Republicans and 47 Democrats. So that is slightly smaller, I think, than could have been expected based on the election outcome. There were four Democratic senators who won seats in states that Donald Trump won the presidential race in. So that indicates that there was a little bit of a split there that was more split seats between Senate and presidential race than have happened in the last two presidential elections combined. So I think that’s notable that the margin in the Senate is going to be a little smaller than expected.

But the real interesting thing is going to be the House of Representatives because the final count and the last race was just decided last week in California. So all House races are now determined. The final count is 220 Republicans and 215 Democrats, except representative Matt Gaetz from Florida, who was briefly the president elect’s nominee for Attorney General resigned from Congress, and is not going to take office in January. So there will be one vacancy. Then on top of that, Trump has nominated two other House Republicans for cabinet level positions. So Representative Mike Waltz in Florida is going to resign on January 20^th to become the National Security Advisor, and then sometime a week or two into the administration, representative Elise Stefanik of New York is going to resign once she is confirmed. She is the nominee for the ambassador to the United Nations. What that means is that until April, when there will be special elections to fill the two Florida vacancies, the Republicans are going to have a margin of 217 to 215. That is a one-seat margin because if one Republican votes the other direction and all the Democrats stick together, we have a 216 to 216 tie, and ties lose in the House. I think this is a really underrated part of the whole discussion of the beginning of the Trump administration coming in the first quarter, in particular, is that he is going to have an incredibly narrow majority in the House of Representatives. And that could make some of these things difficult to get through, or at least potentially slow down the process of getting things through the House of Representatives. It also brings into play, you know, people who are sick or have to be absent for a family event. There’s a Democratic congresswoman who is pregnant, so she is going to be taking some time off. So on both sides, when you have that margin so close, it really brings into play a lot of outside factors. Keep an eye on that because that is something that is going to affect some of these policy decisions.

Now, I wanted to focus my comments, though, on three main policy areas. I would have added a fourth, but tariffs, I think, which is the fourth big policy issue, has already been kind of covered by Jeff and Kevin. So we’ll focus on taxes and the debt ceiling battle and deregulation, in particular.

So I’ll start with taxes. Everybody knows 2025, at the end of 2025, all of the 2017 tax cuts expire. So that’s going to be the first priority, is extending all those expiring tax cuts. And Republicans can use an expedited process known as budget reconciliation to pass tax legislation. The main feature of this is that it requires only a simple majority in both chambers, and does not require the 60-vote super majority in the Senate. So no filibuster in these kinds of situations. So you can start with extending all those expiring 2017 tax cuts. It’s lower individual income tax rates, higher standard deduction, the estate tax exemption amount, I don’t think that’s going to change. It’s uncertain right now how many years the extension will be. I’ve heard five. I’ve heard six. That becomes kind of a math problem. So that’s something that we’re going to watch as this package comes together.

But I think the other unknown is what happens to all of the campaign proposals that were out there? So during the campaign, president-elect Trump floated a corporate tax cut. He talked about no taxes on tip income, no taxes on Social Security benefits, no taxes on overtime hours. You probably can’t do all of those in a big tax bill. There’s been a lot of talk in Washington over the last couple of weeks about how the no taxes on tip income is maybe at the top of that priority list, but that whole bill is still coming together, and obviously won’t come together until after the first of the year. So we don’t really know.

Another one that’s attracting a ton of attention is the state and local tax deduction, which of course that cap has been the discussion for particularly members of Congress from both sides of the aisle in places like California, New York, New Jersey, Illinois, Connecticut, other states that are particularly impacted by that. What will happen with that? Late in the campaign, President-elect Trump said he wanted to get rid of that deduction cap, even though of course that was part of the 2017 tax cuts. So we’ll have to see how that plays out. It’s a tricky one in Congress because incredibly important to a number of members of Congress from these key states, but incredibly unimportant to other members of Congress. You know, people from Oklahoma and Kansas don’t really have a dog in this fight, or care much about it. So we’ll have to see how that one plays out.

I think the other unknown factor here is will some Republicans balk at the cost and the impact in the debt and the deficit of extending all these tax cuts? There’s a huge price tag attached to it, something like $4-1/2 trillion over 10 years just to extend the expiring tax cuts, not including all the other things that could potentially be added to it. So there’s talk about how whether various sort of budgetary gimmicks can be used to maybe bring that cost down. Obviously, tariffs will potentially raise revenue, and that could be paired with tax cuts.

So there’s a lot of uncertainties here, but I feel pretty confident that by the end of the year we’re going to see those expiring tax cuts passed by Congress and signed into law for some number of years into the future and potentially some of these other items added to that.

I mentioned the debt. The debt ceiling is another one that I think hasn’t gotten a lot of attention yet because the debt ceiling has been suspended since mid-2023. It comes back on January 2^nd, 2025. And at that point, US cannot accumulate any more debt until that debt limit is raised. Of course, Treasury can use cash on hand, and then it takes what it calls extraordinary measures, which is kind of a fancy term for moving paper around to make sure that we don’t default. You also have tax season in there in March and April. That brings in additional revenue. So the actual deadline for potential default and raising the debt ceiling I,s as usual, something of a moving target. Probably in the summer, I’ve heard as late as August or September, but that will be an ongoing calculation. But let’s just call it mid-2025, Congress is going to have to raise the debt ceiling. And that’s going to be tricky in an all-Republican Congress. There were 71 House of Republicans who voted against a debt ceiling increase the last time this battle came in 2023. There’s a handful of Republicans who have never voted for a debt ceiling increase. And typically you need Democrats to provide some of the votes here votes. I don’t know whether Democrats will be inclined to do that, given that they’re in the minority across the board. And you have just a number of Republicans, particularly in the House, who have been longtime deficit hawks, who are going to maybe push back on some of these increases in spending across the board, the impact these tax cuts will have. So there’s a lot of dynamics here. All that said, though, you know, Congress has never failed to raise the debt ceiling when it needs to. And last time we came right up against the deadline of defaulting, and they eventually got it across the finish line. Of course, the last time they did this, that was the catalyst for the process that ultimately ended up in Republicans dumping Kevin McCarthy as the Speaker of the House. So I don’t think this is going to be straightforward. I don’t think it’s going to be simple to do. I do think it probably gets done one way or the other whenever it happens. But as typically happens in debt ceiling battles, you probably have some increased market volatility around that uncertainty that Congress is going to act and when it’s going to act.

And then the other one, which I think is really important for the investment advisor industry, is deregulation. And deregulation is sort of a word of the moment in Washington, but deregulation has a lot of sort of practicalities that take time to it. We’re going to start with the DOGE, Elon Musk and Vivek Ramaswami’s Department of Government Efficiency, which I think is going to be the sort of catalyst, or the central repository, of ideas for regulations that should be cut. Remember, DOGE is not an actual government agency. It’s sort of outside of government. It can only make recommendations, and ultimately Congress is going to have to make those determinations. And it’s important to remember that most things in the federal budget have champions for them on Capitol Hill. And what I’m talking about is that all of a sudden when it gets to actually cutting things that affect people in my district as an elected member of Congress, or that affect a big business that I have, a big employer that I have in my district, all of a sudden those votes become much, much more difficult. So I’m not dismissing the DOGE by any stretch of the imagination, but I also think maybe Elon Musk and Vivek Ramaswami are overestimating just how easy it’s going to be to cut trillions of dollars from the budget.

From the pure regulatory standpoint, as we all know, Gary Gensler is out as SEC Chair. He’s going to resign on January 20^th. Also, Jaime Lizarraga is going to resign the day before that. He’s one of the Democratic commissioners at the SEC. And last week, the president-elect announced that Paul Atkins is his nominee as the incoming SEC Chair. Paul Atkins is a known quantity in Washington. He served as an SEC commissioner from 2002 to 2008 under George W. Bush. He has had a consulting firm in Washington ever since then. He’s the sort of person who writes comment letters. He has very public views on things. And, you know, I don’t see him… first of all, I think Wall Street is cheering him as somebody who gets Wall Street. I don’t see him as a sort of burn it all down kind of regulator as there are obviously coming into some other departments, but more of someone who really thinks about the burden on business, who really thinks about the cost benefit analyses that are supposed to be done in regulation, and somebody who is going to be very, very deliberate and thoughtful about where regulation needs to happen and where regulation doesn’t need to happen. So, you know, you look at some of the regulatory agenda that has been on the docket for advisors, and a lot of that, I think, is going to melt away. The DOL Fiduciary Rule, which has been a saga now for 15 years, likely to be struck down by the courts. It’s under an injunction right now. Even if it’s not struck down by the courts, I think, ultimately, this incoming administration probably repeals that and goes back to an older version. And then a number of SEC rules that are sort of in process—the updated Custody Rule, the predictive data analytics proposal, which even Gensler’s SEC had said we’re going to pull that back and repropose. I don’t know that this new administration is going to focus on that sort of thing. I could see something like Paul Atkins as SEC Chair calling for a, you know, sort of a request for information type study to gather information about how AI and other types of technologies are being used in investment advice. But I don’t expect that predictive data analytics proposal to come back in anything like the form it is now. The mutual fund swing pricing proposal, also probably on the shelf, additional market structure reform proposals. And not surprisingly, ESG-related rules, the SEC Climate Rule, the DOL’s 401(k) ESG Rule, you know, those sorts of things obviously are going to be much, much less emphasized in the incoming administration.

And then, finally, the big winner, at least the perception of one of the big winners of the election outcome is the cryptocurrency space, which I think is anticipating a much lighter regulatory touch. I do think this is an area to watch for bipartisan legislation in the coming year. I think there’s a real understanding on Capitol Hill that there’s a need for a regulatory framework for cryptocurrency, that we need to clarify who is in charge of regulating the crypto space. Is it the SEC? Is it the CFTC, which I think is more the inclination of where things are going on Capitol Hill? But generally speaking, I think you’re going to see a much lighter regulatory touch for the crypto space. And certainly with Paul Atkins coming in as SEC Chair, I think that just underscores that.

So finally, I’ll just conclude with showing my favorite chart, which is, you know, a chart to help remind clients that policy should not be the driving factor in investing. And this chart goes back to the early 1960s. If you would invested $10,000 only when a Republican was in the White House, you would have about $100,000 today. If you would invested only when a Democrat was in the White House, you would have about $577,000 today. And of course, if you invested the whole time, regardless of who was in the White House, you would have 5.9 million today. So I think a really important reminder for clients who are feeling emotional about the election outcome. Those emotions are a terrible mix with their investing decisions. And really, I think it’s incumbent upon all of you as advisors, as wealth managers, to help your clients sort of move through the election outcome if they’re upset about it, if they’re joyful about it, whatever they’re feeling is. In either direction, those emotions probably need to be tamped down, given how complex I think it’s going to be to get a lot of these things through Washington, at least through in a fast pace.

So with that, I’ll show my little required microscopic disclosures here, and then we’ll bring Mark Riepe back on to go through some live Q&A. And I’ve been watching them scroll through here as they’ve come in. So I think there’s plenty to ask. Mark, take it away.

MARK: Thanks, Mike. Yes, indeed. There are plenty of questions to ask.

So Kathy, I’m going to start with you, and let’s see, number 12 here. ‘Kathy, what are your thoughts on the Feds QT program? Do you think they will cease and desist?’

KATHY: I do think they will have to cease and desist on QT because reserves are starting to get drained out of the system. And this has always been the risk with QT, that at some point the level of reserves will come down to a point where you’ll lose liquidity in the system. And when that hits, I am assuming probably sometime in the first half of 2025, when that hits, they’ll probably cease and desist. Now, the balance sheet has come down a lot, well over a trillion dollars. It is closer to about 25% of GDP, which is kind of a loose target. Between 20- and 25% of GDP, it’s much closer to that. So the big problem with QT for the Fed is that they’re still holding a lot of mortgage-backed securities, which is not what they would like to hold on their balance sheet. But that will take probably a very long time, or another recession with rates coming down and a wave of refi for that to change. But yeah, I think we’re probably looking at the end of QT in the next three to five months.

MARK: Thanks, Kathy.

Kevin, I’ll send this one your way. ‘Will Trump Tax Code changes and tariffs offset each other and have a neutral effect on the markets?’

KEVIN: It’s good question, but tough to tell at this point, especially because we don’t really have any meat on the bones in terms of what the actual policies will be. In terms of sequencing, what I mentioned earlier and what Mike touched on as well, it’s probable that you get just because of the unilateral nature of them, you know, tariff policy being announced first. So if anything, you probably get… I would think if you do get as aggressive as 60% tariffs on imported goods from China and then 10- to 20% on imported goods from our trading partners, if anything, you probably actually get a near-term lift in growth because that probably accelerates or speeds up some of the import activity and the change in inventories… in particular, the change in inventories because the speed up in imports would be a depressant on growth. But if you get that in the near-term, it probably gives you a little bit of a lift to GDP, but then after that, because of the way the calculation for inventory changes works in GDP, if you have a subsequent reversal, that probably brings growth a little bit lower. Not to mention the fact that, you know, you probably have a little bit of a pulling back, I would think, in capex expectations, and overall confidence from the business community because that’s what happened in 2018 into 2019. It’s not a perfect playbook for this next time around because you have other countries involved, and the economy is just in a different spot. But I would think that the hits for growth and inflation probably come first from that, and then you would probably see some effect from taxes later.

The one thing I would mention for taxes as it pertains to the market, it’s not always this magic elixir whether taxes are being raised or taxes are being cut. And I think about 2017, in particular. If we were in the year 2017, and I came from the future and told you that we were going to get this massive stimulus via tax cuts both at the corporate level but also the individual level, you probably think it’s nirvana for the stock market and risk assets in general. But the reality is, is that the year that followed 2017 was pretty rough. You know, you had a shortfall implosion in February that year. You had a near bear market in the fourth quarter.

So it’s not to say that it’s directly tied to tax policy itself, and that we should just flip our conventional wisdom as to what the outcome is for the market, but it’s to show that there are other macro forces at play. So sometimes there can be more idiosyncratic ones like that shortfall, implosion. Sometimes they could be a little bit more tied to manufacturing activity going into a slowdown, which is what I think was a pretty considerable driver of the decline that you had at the end of 2018. So I wouldn’t look at tax policy itself as being only pro-growth or only pro-market moving. It can eventually lead to that over time, but I think the macro forces that are in play currently are much more important.

MARK: Thanks, Kevin.

Jeff, we’ll take our current events here. ‘How does the change in Syria affect the global market, if at all?’

JEFF: I don’t think it affects it very much. Clearly, it shows that there are limits to how long these conflicts can go on in terms of the resources, the cost on Russia, in particular, and Iran. And so the odds that there will be ceasefire talks next year has risen. And one of the reasons why oil prices are near the low end of the range this year, $68 on West Texas Intermediate this morning, is because there’s relatively low risk of oil production facilities in Russia or Iran being targeted because, you know, essentially they’re giving ground a little bit here in terms of their ability to project influence. And this is a big deal for Russia. Of course, Russia using Syria as a staging ground for a lot of their operations, including those into Central Africa. So it has ramifications, but really the main way we feel the impact of these events in the Middle East and those involving major oil producers is through oil prices. And because they’re at the low end of the range and seemingly likely to remain there, given relatively lackluster demand from China, the biggest customer of oil, and the fact that we just have so much excess supply and that doesn’t appear to be going offline anytime soon, suggests that there’s really a limited impact in terms of its spillover to the rest of the world. Perhaps maybe just the resolution of the conflicts, if indeed that happens in 2025, could lead to a rise in sentiment, particularly in Europe where that war on their border has attracted their attention and increased defense spending. But for the most part, no, I think it’s a relatively minor event. The human toll is immeasurable of these conflicts, but the economic and market tolls have been quite small.

MARK: Thanks. Thanks, Jeff.

Mike, how is Gates’s seat filled, or more generally, given that you mentioned there will be a number of these, how are house seats filled?

MIKE: Yeah, unlike the Senate, House seats are filled by special elections. So there are two Florida seats, including Gates’s, that are going to be vacant, and DeSantis, the governor, has set the special election for April 1. That New York seat that I mentioned, that will probably be after that once that comes to pass. In the Senate, the governor appoint nominees… appoints people to fill vacancies until the next election, but in the House, they’re left vacant until there is a special election.

MARK: Alright. Thank you, Mike.

Kathy, I’ll go back to you. And what will the yield curve be like a year from now?

KATHY: Well, these spot predictions are always hard, given a certain date. But our expectation for the treasury yield curve for 2025 is that the Fed will lower rates a couple of times, probably 75, maybe 100 basis points from here, and get down to that 3.75- to 4% level from where we are. The longer you go out on the curve, the more… you know, the flatter or more inverted we get. So actually think that we could see initially a flatter yield curve as short-term rates come down and long-term rates are going to hang out in this vicinity. And then depending on whether we get an uptick in inflation, or some sort of surprise in policy or economic data, we could see a steeper yield curve. So first flatter, and then steeper. So I’d say by the end of 2025, again, a number of potential outcomes here. We could see the yield curve somewhat steeper from here, with short rates maybe 3.75 on three-month, the real short-term, and something around 4.50 on the 10-year.

MARK: Thanks, Kathy.

Kevin, let’s… yeah, this is a good one. ‘Should I be resetting from a wide market index to specific industry indexes instead? If so, which ones?’

KEVIN: Yeah, so if you’re thinking specific industries more in terms of, you know, the 11 sectors, our sector outlook has just been, I guess, refreshed for this upcoming month… or for the month of December, we just put it out a couple of days ago. And we’ve still got financials as the top-rated outperform, which has been the case for several months. But we just upgraded communication services. We just upgraded communication services to an outperform, downgraded materials to a neutral, and we’ve still got consumer discretionary as the sole underperform.

I will say from a factor standpoint, which is what Liz Ann and I have been, you know, a lot more focused on for at least this bull market, you know, if you date it back to October of 2022, you’ve been able to find a lot more consistent outperformance if you’re using factors or characteristics, rather than, you know, just outright sector calls. And one of things, and one of the reasons that we say that and we’ve had that higher conviction in favor of factors over just sectors is because the swings in sector leadership have been really aggressive in this cycle and in this particular bull market, and you’re starting to see it even happen again over the past month, where you’ve seen a really aggressive move back into just the Mag 7, if you want to think of that kind of as, you know, its own sector. But the sectors that comprise that being communication services, technology, and consumer discretionary, there has been a massive shift up in those areas versus basically the rest of the market. So one of the things that we’ve been really kind of pushing for in terms of the way to approach the market has been looking at things like strong cash on the balance sheet, strong free cash flow growth, high return on equity, high return on assets, pretty much everything that screens well in that higher quality universe, because across all 11 sectors, the companies in the industries, the smaller subset of industries that have those strong characteristics have been doing the best, and they’ve fared pretty well in market pullbacks, and they’ve fared pretty well when you go back into an upswing. So we don’t think that that dynamic really changes for the upcoming year. It’s admittedly a harder exercise if you’re more passive-oriented and you’re looking at indexes. But if you are focused more on indexes and you’re using one, you know, indexes as a benchmark, we would just probably guide investors more towards focusing those that have more of a quality filter. That’s probably the best you can do for anyone who is a little bit more passive-oriented. But for those who are taking more of an active approach, we’ve still found that consistency in looking for factors has been… or the practice of looking at factors has yielded more of a consistent result. So we wouldn’t deviate from that higher quality look.

And that goes for an area like small-caps too, which we get a ton of questions on, especially for the outlook for ‘25. If you look to the beginning of the bull market for the S&P since October of ‘22, the profitable part of the Russell 2000, if you want to use that as your proxy, is up by almost 50%. The non-profitable part has less than half of that return over that timeframe. So even if you’re a small-cap-oriented investor and you are taking more of an active approach, there are pockets of, you know, really strong performance to find, but you’re probably not going to find it as much at the index level because 40% of the Russell has non-profitable companies. So it’s going to be weighed down a little bit more.

MARK: Thanks, Kevin.

Jeff, is it finally time to buy Chinese equities?

JEFF: Oh, man. How long is your time horizon? So it’s hard to write-off Chinese equities for 2025. China is in the worst possible shape, right? Its economy is slowing. Consumer confidence is in the toilet. The property market is a big structural mess. The government continues to throw money at expanding capacity in industries like solar panels and semiconductors, where already there’s excess capacity, not only within China but globally. So it’s just so many things are going in the wrong direction, but the stocks are trading at less than 10 times earnings. I mean, it can bounce the most here. So it’s hard to write-off. China has some world-class companies there, which are really trading at very depressed multiples.

If China delivers, and they’ve been underdelivering and overpromising on stimulus, but if they start to deliver on the stimulus promises they made again, most recently this weekend, with the work conference beginning in March, that could be a game-changer. I’d point you back to 2017. That was another year where China’s economy was really slumping, in late 2016 and into early 2017. And China unrolled the stimulus program that was worth 12% of GDP. Absolutely staggeringly massive program. And its economy took off, stocks went up 56% that year, really took off. And so that could happen this year.

Will it? I don’t know. The hardest thing about predicting what goes on in China is not really predicting the state of its economy. I use a lot of alternative measures for that. I think I get a good feel on that. A lot of what goes in and out of China. It’s hard to figure out what they’re going to announce next. It’s just a totally opaque system. And so they could actually deliver on some of these over-promises and over deliver with what they could come out with in early next year, and that could completely turn things around, or they could continue to do what they’ve done for the last two or three years, which is very little, and not address the real problems in that economy, and it could continue to limp throughout the year, and you don’t really get any kind of lift in earnings for that matter… or earnings, I think, are expected to be up 9% next year. But valuations are really the lever here, and they could remain relatively low, or even slide lower.

You get these bounces on stimulus announcements that fade. We’re seeing it fade, you know, the Hang Seng down half-a-percent yesterday after rising on the new announcements on Monday. We’ll just have to see how that plays out. I do think there are long-term opportunities there because the stocks are so cheap, and I don’t think that this downturn is going to last forever. But will it be a V-shaped rebound in 2025? It could be, but I don’t know how to predict their willingness to deliver on what they’ve already given voice to several times in terms of finance ministers and others over the course of the fourth quarter here. So we’ll have to see. It may be time to buy, but I keep exposure relatively low.

MARK: Thanks, Jeff.

Mike, what about the state and local tax deduction issue?

MIKE: Yeah, as I said, the state and local tax deduction issue is going to be one that is going to be, I think, a central part of this debate, because in a narrow House with tiny majorities, some of these Republicans in these key states who really want to see changes to that deduction, they’re going to have a lot of leverage. The margin is really, really narrow. And once president-elect Trump said on the campaign trail that he’d like to see that either go away or… I’m not sure that going away is realistic. But one thing that I do think is realistic is a doubling of the cap for married couples making that $20,000, that seems very much on the table. It could go higher than that, you could see an increase. So I think this is going to be a key issue to watch. I don’t think anyone has a clear line of sight right now as to what the ultimate number is going to be, but I would certainly put odds at least in favor of an increase of some type in that cap.

MARK: Any thoughts on Social Security? Mike?

MIKE: There’s a tough one. Social Security has come up a little bit in the context of Elon Musk’s DOGE project, mostly because he sort of threw out this number that he was going to cut $2 trillion. That the only way you do that is you start to get into the so-called untouchables, like Medicare, Social Security, and defense spending. So that may have been just his sort of rhetoric out there.

But everyone knows that longer term, the Social Security program needs to be addressed. 2034 right now is the timeline for potentially… that’s the timeline for when Social Security can no longer pay out full benefits if there are no changes. So everyone has that horizon out there. One question, though, is whether that gets accelerated by the fact that there are many immigrants who pay into the system. If a lot of them are deported, maybe that makes that number, amount going in go down. If you’re changing the taxation of Social Security benefits, that could have an effect.

So I don’t think it’s a high priority in the next year or two to change the system, but it’s certainly going to be something that a future Congress is going to have to address.

MARK: Kathy, why don’t we start with you, and have each of you kind of wrap up with your closing thoughts. So Kathy, go ahead and start.

KATHY: Okay. Just quickly, we do see the Fed cutting rates maybe 75, maybe 100 basis points in 2025, but largely already discounted in the long end of the market. So we see the treasury yield curve flattening and then steepening. We don’t see a lot of room for 10-year yields to fall much below 4% in that scenario. We favor higher credit quality. We still think that there’s opportunity in investment-grade corporates and in investment-grade municipal bonds in terms of a risk-reward because the coupons are attractive to deliver positive returns. And then, finally, I would say just a tremendous amount of volatility is likely because there’s so many potential policy options on the table. And expect the market to be a lot of… you know, surfing here. ups and downs, waves up and waves down. But in general, we’re expecting mid-single-digit returns for high-quality fixed income portfolios.

MARK: Thank you, Kathy.

Kevin, what are your final thoughts?

KEVIN: Yeah, I’ll echo Kathy’s point on volatility. We see the volatility backdrop being almost the opposite of what it was this year, you know, for 2025. So this year, pretty much… a pretty good year for index level volatility, where the max drawdown for the S&P has been just 8-1/2%. But you’ve had incredible churn under the surface, where the average members… you know, individual max drawdown has been 20%. So that’s bear market level, bear market territory, but you haven’t seen it reflected up at the index level because it’s been happening via rotation at certain times. So we see that kind of flipping next year if you’re to get more volatility driven specifically by anything tariff policy0related and we have a little bit of a playbook like we did in 2018 or anything labor policy-related. And I think that’s probably exacerbated by the sentiment environment that we outlined. Just looking at valuations being pretty stretched if you were to look sort of at an aggregate measure of them like we do. Whether it’s price-to-sales, price-to-earnings, price-to-book, pretty much everything averages out to being the most expensive since 2021 and the late 1990s, and pretty much no other period other than that. It doesn’t mean that the market is due for a downturn imminently, but it just means that stocks are a little bit more vulnerable at this stage. So we would just be on the lookout for more index-level volatility, and managing expectations around that for next year.

JEFF: So I’ve got a brighter round outlook for economic and earnings growth next year. Maybe a rise in valuations for international stocks, primarily in Europe. Europe is most of the EAFI Index. And, you know, this year, the German DAX Index is up 22%, but no one cares because the S&P is up 26. You know, since the bear market low ended back in October of 2022, so since this bull market began, so over two years old now, European stocks have outperformed the S&P 500 if you do one thing, take out Nvidia. Take out one stock and international markets have outperformed the US markets, and I think that’s an important perspective. Maybe Nvidia goes up another 1,000T%. I don’t know. I don’t know how to predict what one stock is going to do, but I’m seeing a better environment of conditions for international stocks for them sustain those gains as we look out, and maybe accelerate those gains into 2025. Thanks, Mark.

MARK: Alright. And Mike, why don’t you wrap things up for us?

MIKE: Sure. The thing to watch from Washington, I think it’s going to be really fascinating, is the incoming administration’s desire for speed and the Congress’s penchant for not being speedy. That’s going to be a conflict. You’re going to see a lot of executive orders on day one. You can do a lot by executive orders in areas like immigration and other places, but you can’t do anything about the Tax Code, and you can’t do anything about cutting government all at once. So I think watching the sort of push and pull between the administration’s desire to really get things done quickly and Congress’s just slow and deliberative process, and the incredibly narrow majorities on Capitol Hill are going to make so many of the things that the Republicans will like to get done just hard and time-consuming. So that’s going to be what I’m watching.

MARK: Alright, we are out of time. Kathy Jones, Kevin Gordon, Jeff Kleintop, and Mike Townsend, thanks for your time today.

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We’ll be back on February 4^th at 8:00 AM Pacific Time. Jeff and Kathy will be on that call, along with Liz Ann Sonders. Until then, if you would like to learn more about Schwab’s insights or for other information, please reach out to your Schwab representative. Thanks again for your time, and have a nice day.

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