Important Update for Clients
This is the final notice that BCM has moved its offices. Effective immediately, our new office address is 7840 Madison Ave, Ste 115, Fair Oaks, CA 95628. Please update your records and mail all correspondence to our new address. Phone numbers and email addresses remain the same.
2024 in review
2024 was a good year for global financial markets and a historic one for politics. Global stock market prices registered another double-digit gain with the ACWI up +16%. Gold and U.S. stocks led the way; non-U.S. stocks lagged but were still positive. Meanwhile, U.S. Bond market prices had a modest decline of -2% for the year.
In politics, nearly half of the world's population had the opportunity to participate in elections in 2024. We saw new leaders elected from Mexico to the U.K., and we set new precedents here in the U.S. with our first female minority presidential candidate and our first non-sequential second-term president, among other things.
Judging by the returns and sentiment following the election, markets and investors are optimistic about the year ahead. They have their reasons. As usual, we'll consider both sides and what they mean for us in 2025.
Markets & parties
The U.S. post-election party in risk assets echoes the common belief that Republicans are good for the stock market. The logic is Republicans favor lower taxes and fewer regulations and that is good for corporate profits.
Politicians reinforce those perceptions by campaigning on them for advantage. Republicans promise to help the economy while Democrats claim Republicans only care about corporate interests.
Regardless of who is right or wrong, the markets may not care as much as people think. The chart below from Visual Capitalist shows returns for the S&P 500 by U.S. Presidents since 1953 (Red for Republicans and Blue for Democrats).
There are a couple of surprises. A Democrat (Clinton) had the highest return while two Republicans (Nixon and Bush Jr.) had the only negative returns. But over time there was no clear winner based on political party.
For example, based on average returns Democrats did better, but based on median returns Republicans did better. The data could be massaged to show favor for either party, and they often are!
Still, post-election market reactions indicate investors believe a second Trump term means better economic conditions. In November I noted that 77% of Americans did not think the U.S. economy was good, and 56% thought the U.S. was in a recession! With sentiment so low, it is understandable why so many Americans expect things to get better under Trump.
Yet, better is a relative term. We should be clear about "better relative to what?" Contrary to popular belief, the U.S. economy is not in recession. GDP is at all-time highs, unemployment is near all-time lows, inflation is back down near the Federal Reserve's long-term target, and the stock market made new all-time highs since before Trump was re-elected.
From that perspective, the U.S. economy has been good or, at least, not as bad as the consensus believes. That also means consensus expectations for improvement may be too high because the bar for "better" is higher than anticipated.
That does not mean we are bearish on the U.S., underweight equities, and moving to cash. On the contrary, we recognize the U.S. has been doing well and we have maintained our strategic target risk exposures since 2023.
However, we also recognize there is little room for disappointment when market prices and valuations are at all-time highs and the consensus is piling into stocks on speculation that conditions can only get better. Suffice it to say, we are not reacting to FOMO sentiment (fear of missing out) or jumping "all-in" to U.S. stocks at the start of 2025.
Seeking value in 2025
With U.S. equity valuations high and fixed-income income back in doubt due to the Fed's changing rate outlook, investors may find difficulty allocating among traditional asset classes. This is likely one reason that cryptocurrencies like Bitcoin are seeing renewed interest (a whole other topic for another time).
However, one traditional asset class may still offer opportunities in 2025 and beyond. Commercial real estate (CRE) is one of the few markets in the U.S. that has struggled in the last couple of years. CRE is a broad category and some sectors have done fine, but the U.S. commercial office sector has not.
The remote work-from-home trend, which started during the pandemic, caused many companies to rethink their office space needs. From Salesforce to Bank of America, companies across all sectors are reducing their CRE footprints. One survey found as high as 75% of businesses expected to reduce office space in 2024.
Meanwhile, higher interest rates make it harder for CRE office owners to refinance their properties, especially as banks become more hesitant to lend against rising vacancy rates. This vicious cycle has led to some shocking results.
In 2023, the renowned Union Bank building at 350 California Street in San Francisco sold for $61 million, more than 75% below the initial asking price. That same property was valued as high as $300 million in 2019.
In 2024, an office building at 135 W 50th St in Midtown Manhattan, New York sold for $8.5 million. That was an eye-watering 97% discount compared to its last sale price of $285 million in 2019!
Yet, the fact that we are seeing transactions executed at such substantial discounts could also be a good sign. The CRE market was frozen so any activity shows thawing. Furthermore, the acceptance of large losses is needed to purge the market's problems before it can move on.
The Federal Reserve Bank of St. Louis's CREMI index below tracks the strength of the U.S. CRE office sector. While conditions are weaker now than they were 24 months ago they are still relatively better than 48 months ago. If the current pullback proves to be a higher low, then the worst in CRE could be behind us.
I am not trying to predict a bottom in CRE, I do not know when that will happen. Regardless, I expect more pain to come in CRE and more weak positions will be forced to liquidate at steep discounts. There will be value and opportunity for those with the risk appetite and wherewithal to buy when everyone else is selling.
A note on timing and value
Capturing value is easier said than done especially in distressed markets. Catching a falling knife is difficult and dangerous! Alas, trying to predict market tops and bottoms is almost always futile.
From my experience, it is a wee bit easier to emphasize valuation over timing. Valuation will not help with market timing, but it does change the focus. It swaps the need for getting timing precisely right, for the ability to succeed by being approximately right.
Instead of needing to predict precisely when a market price hits top or bottom, we can simply approximate if a market price looks high or low relative to fair value. When the market price falls below fair value by a wide margin, we have more room for error and the job gets a little easier, all else equal.
Of course, all else is often not equal and, the market price could always fall to $0.
Still, having an understanding of how fair value and valuation relate to market price offers a rational and reasonable approach to investing that can improve our chances of being approximately right.
On that note, valuations are looking increasingly relatively attractive in non-U.S. equity markets but few investors seem to care. For example, the financial media is busy reporting on every new high the NASDAQ hits but there is little mention of how European equity markets appear to be sliding into a downtrend.
The French equity market (as represented by the iShares MSCI France ETF), is nearing bear market territory. It is down about -17% from its highs in May 2024.
Likewise, other European markets like Spain and Italy were also recently down by double-digits from their 52-week highs.
Despite, the downtrends, European equity market prices still do not look absolutely low by historical standards. I am simply pointing out they look relatively better than U.S. equity market prices, which look absolutely high by most traditional measures of value.
I see an exception in emerging market equities, which look undervalued in relative and absolute terms. For example, I wrote about the Chinese stock market in July 2024. I received a good amount of negative comments from readers who were convinced Chinese stocks were "uninvestable."
Ironically, it was that same pervasive negative sentiment surrounding China that grabbed my attention in the first place. The Chinese stock market was up about +42% from August to year-end 2024. At one point, it spiked up +76%, before Trump's election victory.
My timing was lucky, but the valuation numbers were clear and compelling. Chinese equity market valuations were already low enough. Based on facts and data, it was rational, reasonable, and approximately right to assume prices would reverse over time. The following excerpt is from my article published in July 2024 on Seeking Alpha.
Of course, valuations have now increased in China. However, valuations, in general, remain relatively more attractive in emerging market equities versus in the U.S. I will elaborate on my thoughts about emerging markets in upcoming posts at thebellwetherblog.com. For now, the point is opportunities appear to be improving the most in places where many investors are ignoring the most.
The bottom line
2024 was full of surprises, but markets and investors seem to be confident and convinced of what to expect in the year ahead. At BCM we are less certain and we recognize that great expectations sometimes become the greatest impediments.
With consensus expectations running high, we are taking the side of caution, maintaining our strategic risk allocations, and not stretching for risk and return. However, within risk assets, we do see selective opportunities in areas like commercial real estate and non-U.S. equity markets. We will explore these opportunities further in the year ahead and we will keep you apprised of what we see and do along the way.
Meanwhile, on behalf of everyone at BCM, I would like to thank all our clients, families, and friends for another great year. We are always grateful for the trust and support you continue to invest in us. We look forward to serving you in 2025 and beyond. Thank you!
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Victor K. Lai, CFA
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