What do we know about dramatic meltdowns in the US stock market? In our recent memory, we’ve had three. In two of them, 1999-2000 and in 2007-2008, the writing was on the wall well before the fall. In the first, start-up companies with no earnings had colossal stock market valuations. In the second, tiered mortgage-backed securities for homeowners making no down payments were being sold to the general public. The third, in 2020, was in response to the global economy shutting down abruptly in response to the worldwide Covid-19 outbreak.

Post-election optimism around deregulation, tax cuts, and a business-friendly administration has given way to concerns about potential negative economic impacts, especially around how uncertainty may cause consumers and businesses to reduce spending.

The Economic Miracle

The US economy has proven to be surprisingly resilient during its post-COVID recovery. Inflation has come down as employment and real wages have grown, which has enabled the US consumer to maintain high levels of spending. The 2.4% annualized increase in real gross domestic product (GDP) in Q4 2024 (see Figure 1) was primarily driven by increases in consumer spending and government spending that were partly offset by a decrease in investment. Imports, which are a subtraction in the calculation of GDP, decreased.

April is a good time to reflect on our tax system and enforcement. Most Internal Revenue Service enforcement is automated and not done by individual agents. The automation involves matching the 250 million W-2 wages earned forms, the 5.4 billion 1099 miscellaneous income forms, and cash transaction reports filed by banks and other financial institutions to the 165 million individual income tax returns filed yearly. According to the IRS, “it’s not labor intensive.”

The original idea behind the “Page One” article in our Quarterly Market Perspectives (QMP) was to explain why our clients should be at Woodstock and not some other investment firm. One of our portfolio managers, Tom Stakem, says he wants to read something that he can’t find elsewhere. A recent article in the WSJ described good opinion writing as “impressive with its enterprise, originality, passion, boldness, depth, flair or wit.”[1] We try. We also borrow ideas and attribute them extensively. We keep in mind the line often attributed to Oscar Wilde: “Plagiarism is the sincerest form of flattery.”

We began 2024 in a very different place—investors had expected slow growth, or like me, a recession. The Bloomberg consensus estimate for US gross domestic product (GDP) growth was about 1 percent. We expected federal spending would decline following the pandemic response stimulus, while 2022-2023’s steep interest rate hikes were still percolating through the economy, and high overall price levels were expected to crimp consumer spending.

The theory and philosophy around taxation sometimes starts with the US Supreme Court’s distinction between “avoidance” and “evasion.” No American is obligated to pay more than what is required. Measures taken to avoid tax within the rules are fine; measures taken to defeat the rules—evasion—are criminal.

In looking at the universe of investable assets, there are warning signs. Recently, JP Morgan CEO Jamie Dimon lamented that public companies currently number 4,300 in the US, down from 7,300 in 1996. He cited some of the reasons companies are hesitant to go public: “increasingly burdensome regulation, intensifying public scrutiny and a growing obsession with short-term financial results.”[1]  The article highlights the growth in the number of companies choosing to remain private, backed by private equity.

We have often been asked “how should we be positioning our portfolios for the incoming administration?” One can make incremental changes to investments on the margin, tilting a portfolio to favor a particular outcome depending on what policies one expects to gain traction. It is difficult to predict these outcomes with any certainty, and this year has been no different. Therefore, gambling on one or another candidate or party victory generally does not warrant dramatic adjustments to a portfolio. This year, with the odds split on a winner in the months leading up to November 5th, we stuck to owning companies that we expected would prosper under either party’s victor, and would be capable of riding out any short-term volatility from post-election results.

This year’s cost of living adjustment (COLA) for Social Security recipients is expected to be 2.5 percent.[1]  Last year’s increase was over 8 percent. This is overshadowed by the Social Security Administration’s board of trustees report in May that “the trust funds for the Old-Age and Survivors Insurance and Disability Insurance programs are on course to be depleted (2035) and will only be able to pay out 83% of scheduled benefits.”[2] Potential and current beneficiaries of the program don’t seem to be panicking. The assumption seems to be that the elected politicians will not have the stomach to reduce benefits or stop annual increases. The economists who believe cutting taxes increases federal revenue assert that we can grow our way out of the problem with the right fiscal policies. Comparing percentages to gross domestic product (GDP), “it is hard to find a sustained reduction in government receipts attributable to tax cuts”[3] from the 1980s to now.

Woodstock prides itself on taking care of its clients, and we periodically like to use QMP to shine a spotlight on how individuals at Woodstock impact the larger community. In this holiday season of giving, we highlight the Boston-area nonprofit started by Lisa Supple, vice president and portfolio manager at Woodstock Corporation. For Pete’s Sake is a 501(c)(3) that funds hockey camp scholarships for children in inner-city Boston neighborhoods, formed as a way to honor the memory of her friend and former colleague Peter W. Smith, who died tragically in a fire in Boston’s North End on November 22, 2017.