Investment Insights

We are already diving into 2025, with Donald Trump already inaugurated for his second term. First, taking a brief look back at markets through 2024, it was a positive year for equities while fixed income once again struggled. For the full year 2024, the S&P 500 rose by 25%. Global equities also rose, with the MSCI World returning 19.2%  for the year. Returns for fixed income were muted, as yields rose across the curve. The benchmark 10-year US Treasury rate (UST10) rose from 3.88% at the beginning of the year, to 4.57% (up +69 bps) driving modest total return for the year (1.7%). Looking at other indicators for 2024, the US dollar index (DXY) rose (+6.5%) and gold (XAU, +27.5%) were higher for 2024. WTI oil was relatively unchanged (+1.9%).

Following the U.S. Presidential election, and especially the Republican sweep of Congress, we saw equity markets react positively, and interest rates move higher. Now that the new Administration has taken over, we have seen both these trends reverse to some extent, with equities and fixed income returns both modestly positive through January 2025. The imposition of tariffs has been President Trump’s first order of business, and we believe that tariffs are likely to slow economic growth and lead to higher inflation, depending on how high and how broadly they are imposed. Other priorities, such as lower taxes, will need to go through Congress, which holds the “power of the purse” in the U.S. government. Despite the Republican control of U.S. government, we note that the margin in the House is relatively small, and there are likely to be legal challenges to some of this Administration’s policy proposals. Importantly, we do not tactically adjust our investment recommendations on changes in the political arena. Rather, we focus on long term asset allocation and emphasize that it is nearly impossible to time the markets and generate excess returns.

For 2024, full-year performance of the S&P represented its second straight year of strong performance. We caution that equities are now trading at elevated multiples, and historically that has driven lower returns in the future. The fourth quarter saw the concentration trade in Mag 7 take flight again. In the first month of 2025, we have seen that tech stocks have been weaker, which in our view has been a long time coming given the optimistic expectations for the sector. As we noted in our prior letter, “We stick to our view that the leadership of the tech sector remains vulnerable given lofty valuations, and we maintain a more balanced, diversified approach to managing portfolios” and this continues to be true.

For fixed income, we note that the Fed paused at its January FOMC meeting for the first time since September, and expressed it was in no hurry to cut rates again. In our view, the pause in the rate cutting cycle is directly driven by the lack of further progress in inflation figures as core PCE has been stuck at 2.8% YoY for several months. Rate futures now price in 1-2 cuts for 2025. Notably, 4Q24 Advance GDP came in at 2.3%, which represents a marked slowdown from the 3.1% rate in 3Q24. Given the totality of current macro data, our base case is for the U.S. economy to post slower, but still positive GDP growth for 2025. Although we see a possible “no landing” scenario, we note that markets have already repriced the pace of rate cuts. Overall, we remain broadly neutral for fixed income positioning, with a focus on carry (coupon income) rather than total return.

Program Update

We have continued our partnership with global investment management firm, BNY Mellon, for consulting services on the advisory portfolios. We have chosen to maintain our portfolio weights for the time being, but we are evaluating a more meaningful shift in the coming quarters. If approved, we would focus our strategies more on specific value and growth funds, while reducing allocations to broader “blend” style funds in equities. We are also considering a move to eliminate exposure to emerging markets equities and shift to emerging markets debt. We consider that these changes allow us to better manage our exposure to desired styles especially given the better growth rate of the U.S. compared to other global regions. We continue to monitor the portfolios on an ongoing basis and expect to implement further rebalancing actions in the coming months.

In addition to the above changes in tactical allocations, the Investment Committee has confirmed its decision to terminate the Dynamic portfolio strategy. Any clients that still remain in the Dynamic program should migrate to portfolio strategy position of their choice as soon as possible. Please note that clients who wish to remain in the Income & Growth strategy will not see any changes in the existing portfolios, as the Dynamic program has already been in the neutral Income & Growth position for over a year.

Summary Market Views
In the table below, we update our Amerant Market Views, which represent our investment team’s strategic views based on investment valuations and macro trends. As a reminder, these are not client-specific recommendations, and clients should consider their financial goals and long-term objectives when determining their asset allocations.

We have mostly maintained our views across both equities and fixed income. For equities, we maintain our view that the valuation gap between value and growth should narrow, while also maintaining overweight on small and mid-caps. Our international equities view remains neutral.

We maintain our maximum underweight on cash, as we have already seen that returns on cash (and T-bills) have fallen dramatically since the last newsletter in July. We increase our allocation to investment grade debt, as we favor an “up in quality” bias at this point in the economic cycle. We believe clients are being compensated more for taking duration risk than credit risk, driving our change in view. We still maintain a neutral position on high yield, while we favor a slight overweight in emerging markets fixed income (in U.S. dollars) given the attractive yield in this asset class.

This information is being provided for informational and educational purposes only to support our general market commentary. It should NOT be interpreted as investment advice regarding any specific security or investment strategy. See the disclosures at the end of this presentation for additional important information.

We Can’t Predict, But We Can Prepare
As we enter 2025, we are reminded of the following adage: we can’t predict, but we can prepare. We believe that the new administration will continue its attempts to remake global trade, reduce taxes and regulation, and reduce government spending. As to the ultimate success of these endeavors, we are less sure. Further, the market impacts from these various initiatives is impossible to asset with certainty, and, in some cases, potentially contradictory. For example, we note that the goal to lower inflation could be offset by imposing tariffs. Similarly, the goal of lowering the budget deficit is laudable, but we note that the administration has also pledged to reduce the single largest source of government revenue, income taxes. Really all that we can say for certain is the amount of uncertainty in the year ahead will be high.

Despite our expectation for elevated headline noise, we reiterate that the U.S. economy remains on firm footing. Over the long run, financial markets to reflect company and investment fundamentals, rather than political noise. In equities, we remain cautious on valuations in large cap growth. In fixed income, we see risks as balanced and believe this asset class is best for investors looking for income rather than capital appreciation. Even so, we reiterate our view that the majority of clients are best served by “time in the market” rather than attempting to “time the market,” and we manage our program portfolios with this in mind.

Notes: Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (EMB ETF), Emerging Markets Sovereign (LCL) (LEMB ETF), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond). Source: Morningstar. (1) Strategy returns net of mutual fund expenses and Amerant Investments standard management fees.

On this table, you can see index and strategy returns for each quarter of 2024, and the full year performance.

The fourth quarter of 2024 experienced negative returns across equities and fixed income, as rising rates dragged down markets despite a post-election bump in November. For the full year, index returns were once again negative in 10Y Treasuries, while investment grade was barely positive. Equities rose globally, led by the U.S.

For 2024, all strategies rose despite the weakness in the fourth quarter. Our strategies maintain wide diversification, which is a negative during periods of concentrated returns which were present in 4Q24. As noted above, we have sunset the Dynamic strategy. The Dynamic portfolios were already in the neutral position of Income & Growth. As always, we continually review our fund positioning and will communicate any changes in our views going forward.

⁽¹⁾Returns may vary. Past returns are no indication of future performance. Returns up to February 2020 are based on A shares, which were used on the portfolios up to that month, net of the then standard AMTI 1% management fee. Returns from March 2020 to June 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1.25% management fee. Returns starting July 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1% management fee.

⁽²⁾Monthly returns before February 2010 are those of the offshore corresponding strategies. For the Dynamic portfolio, monthly returns before November 2009 are those of the Income & Growth portfolio, which is the neutral positioning of the Dynamic portfolio. Dynamic portfolio started in November 2009.

During 2024, the Income Portfolio returned 3.8%, the Income & Growth Portfolio returned 6.3%, and the Growth Portfolio returned 9.3%. The one-year performance is positive across all of our strategies, and we continue to gain ground after a tough performance from rising rates in 2022, which continues to drag down the 3 year performance figures.

As always, we take the trust you have placed in us very seriously. In our day-to-day operations, we continue to follow current events and the reactions of the markets closely, and we stand ready to adjust your portfolios accordingly.

To obtain more detailed information on our market views or the performance of your advisory portfolio, please contact your investment consultant at Amerant Investments by calling (305) 460-8599.

Sincerely,

Amerant Investments, Inc.

https://www.amerantbank.com/