BNY’s Wealth group has refocused its outlook for the coming year in the wake of a volatile month in the equity markets and following an onslaught of policy changes.
Although not an official redirection on the outlook for 2025, sources in the group made some different forecasts this week from those published in late 2024 as a result of the flurry of activity so far this year.
“The key theme, really for markets this year, as we see it, is volatility. There has been a huge amount of focus for decades on volatility in equity markets, but I think a lot of investors have actually forgotten about volatility in fixed income markets and what that can look like,” said Sinead Colton Grant, chief investment officer, during a roundtable discussion in BNY Wealth’s Park Avenue office in New York. There has been volatility for several months: At one point in 2024 the yield on the 10-year Treasury was close to falling below 3.75 percent but by the latter part of the year, the yield rose to almost 5 percent.
“So, volatility is back in fixed income. It potentially could be more volatile than equities this year,” said Colton Grant, adding that the big drivers of volatility come down to “tariffs, how they impact inflation, and also the level of outstanding U.S. debt, which brings in the question of the deficit.”
Further revisions may be needed given the market upheaval this week following the launch of Chinese AI startup DeepSeek, which caused havoc in U.S. tech stocks.
“We think that the market has really been overreacting to less detail than we’re obviously going to get in the coming months,” continued Colton Grant.
The outlook suggested that the U.S. economy will continue to lead the rest of the world, noting buoyancy at the consumer and business level.
Part of the reason for optimism towards the end of 2024 was the expectation that the Federal Reserve would address inflation and adjust rates. But Chair Jerome Powell stood his ground and did not immediately lower rates. Goods prices meant that flexible prices fell over the course of the last 16 on the healing of global supply chains, and that pulled down totals, said Vincent Reinhart, BNY chief economist and macro strategist.
“The Fed is going to hope that continues. They help it continue by keeping policy somewhat restrictive, not too restrictive to bite into aggregate demand, but restrictive enough to make sure there’s no pressure on labor market resources, because that would turn sticky price inflation around,” said Reinhart.
A cautious Federal Reserve is unlikely to do anything to raise its head too high in Washington D.C. right now, he continued, adding that this environment will lead to an ever greater need for a balanced and considered investment strategy and that the Fed’s concern is that the administration is likely to do things that will make it more difficult to manage that transition.
Reinhart said mass deportation policies, including the people who will be targeted, and the effect on the labor markets will be an important dynamic to watch and could cause changes in forecasts across the board. The impact of a shrinking work force will be harder on some industries, such as agriculture or leisure.
“It may be more inflationary than tariffs, because it’s immediate and it’s the non-sticky area of inflation, which is wage growth,” said Alicia Levine, head of investment strategy and equities. “Obviously if you create a supply shock in the labor market, prices become higher and wages have to match.”
Off the back of this, Colton Grant stressed the importance of using private markets for diversification. “If you take the 60-40 portfolio, back in the late ‘90s it was a very different proposition than what the equivalent portfolio is today.” At the time, there were around 8,000 U.S. public companies, which has shrunk to about 3,500, she said.
She added that public companies in the U.S. continue to face regulatory burdens, even as private companies have good access to financing and can stay private for longer.
As a result, some private companies that go public can also go straight into a large-cap stock index; SpaceX is one such example.
“So as an investor, if you don’t have private equity in your portfolio or venture capital, you’re missing out on a significant proportion of that early growth phase,” she said. A similar dynamic has taken place with credit, much of which has moved from banks to asset managers after financial crisis-era regulations were enacted. “Private credit has really stepped in to fill that gap,” she said.
In 2010 the size of the size of the private credit market was approximately $500 billion, including dry powder. Now it is estimated to be about $1.7 trillion, with forecasts suggesting it could rise to $3 trillion by 2028.
“When you take both of those elements together, if you were a 60-40 investor back in the late 1990s, to replicate some of that exposure today you probably need to have close to 20 to 25 percent in private assets,” she said.
