Hello, everyone, Tim Melvin here. Welcome back to the Benzinga Yield Report. We’re sliding into December, the year-end is in sight, and the markets are throwing plenty of curveballs as we prepare for 2025. If you’re looking for clarity, good luck. If you’re looking for opportunity, stick around—there’s plenty to unpack.
Let’s start with a little perspective. Looking back at the predictions for 2024 made a year ago, most of them were wrong. The only certainty heading into 2025 is that uncertainty will rule the day. Volatility is going to dominate, and it won’t always mean downward moves—markets can go up just as sharply as they can go down. Either way, it’s going to be a wild ride, so buckle up and get ready to adapt to what the market throws at us.
The Fed and Rates: A Murky Picture
Fed officials are back from Thanksgiving break and wasting no time making the rounds. On Monday, Fed Governor Christopher Waller signaled he’s inclined to support another rate cut this month. On the other hand, John Williams, the influential New York Fed president, was noncommittal. Meanwhile, San Francisco Fed President Mary Daly hinted at recalibrating policy but left December’s decision wide open.
Here’s the thing: markets and dot plots are signaling two rate cuts this month. But remember, this time last year, they predicted five or six cuts for 2024. How many did we get? Two. So take those projections with a grain of salt.
The Fed remains accommodative, but inflation is sticky. Rates may need to normalize, but the timeline is hazy. What’s clear is that mixed data and geopolitical pressures make predicting the next move a fool’s game. Reacting to the markets, not trying to predict them, is the name of the game.
Valuations: High Enough to Burn
Stocks have been on a tear for well over a year, and something’s got to give eventually. Valuations are now at levels reminiscent of the dot-com era. Metrics like the CAPE ratio, market cap-to-GDP (now over 200%), and other measures suggest we’re playing with fire.
Warren Buffett warned that when market cap exceeds 200% of GDP, you’re asking for trouble. At these levels, the best we can hope for is a 3% compound annual return over the next decade. The worst? Negative returns. History is clear: periods of strong returns often precede decades of little to no gains, punctuated by sharp drawdowns.
The message is simple. Treat any gains from here as a gift from the market gods. Valuations don’t justify them, earnings growth doesn’t justify them, and the geopolitical environment certainly doesn’t justify them.
Bonds vs. Stocks: One Must Budge
Here’s another conundrum. Bonds remain in a downtrend, while stocks are in an uptrend. That divergence can’t hold forever. Either stocks come down or bonds go up. My bet? The market will figure it out soon enough, and the resolution won’t be pretty for one side.
The economy looks strong on the surface. Unemployment is low, wage growth is steady, and Black Friday sales were decent. The manufacturing sector even surprised with positive ISM numbers. But peel back the layers, and you’ll see a catch-22: much of the GDP growth this year was fueled by government spending. That’s great for now, but it’s horrible for deficits and the national debt. Kicking that can down the road only works for so long.
2025 Wild Cards: Tariffs and Spending Cuts
As if valuations and rates weren’t enough, tariffs are shaping up to be a major wild card. History has shown that widespread retaliatory tariffs don’t work—they raise prices, stoke inflation, and heighten geopolitical tensions. Could this time be different? Sure. Am I betting that way? Absolutely not.
On the fiscal side, the incoming administration is making bold promises about spending cuts and debt reduction. Here’s the reality: cutting programs like Social Security, Medicare, or military spending is politically untenable. Any significant cuts risk plunging us into a depression, not just a recession.
Portfolio Moves: Getting Defensive and Yield-Focused
Now, let’s talk about what we’re doing in the portfolio. With market valuations this high and uncertainty everywhere, it’s time to get more defensive and bring up the cash yield. Dividends are the lifeblood of this strategy—cash in your pocket that can’t be taken away.
This week, we’re making some tough but necessary moves:
- Northeast Community Bancorp: We love the business and management, but with an 80% gain, the valuation no longer works. Time to say goodbye.
- Kinder Morgan: A 60% gain and a great company, but we can redeploy into higher-yielding opportunities with better growth potential.
- KB Homes: Housing demand is strong, but affordability issues and higher mortgage rates are headwinds. We’ll revisit homebuilders down the road.
- Winnebago and ConocoPhillips: Taking small losses here to free up capital for better opportunities.
These moves take us to 60% invested and 40% cash. More importantly, they bump the portfolio yield to 7%. Over the next few weeks, we’ll deploy this cash into undervalued, high-dividend stocks to push that yield even higher, aiming for double digits.
The Plan for 2025
As we head into 2025, the focus is on credit quality, valuation, and margin of safety. The goal is simple: build a portfolio that generates substantial cash flow while remaining resilient to whatever the markets throw our way. Dividends are the key—markets can take away your gains, but they can’t take away your cash.
Valuations are high, risks are everywhere, and uncertainty is the only certainty. But with a defensive strategy and a focus on income, we’re ready for whatever comes next. Stay tuned as we continue to adjust, adapt, and find the opportunities hidden in the chaos.
Thanks for being part of the adventure. Let’s make 2025 a great year, one dividend at a time. See you next week!