A Cautious Outlook for 2025: Bond Veteran Gibson Smith Weighs In
As the Trump administration prepares to take office, many market participants are optimistic about the prospects for economic growth. However, bond veteran Gibson Smith, founder of Smith Capital, is taking a more measured approach. While he acknowledges the potential for a pro-growth, pro-business administration, he’s also wary of the potential for volatility.
The Fed’s Role in Shaping the Economy
Smith notes that the Federal Reserve’s rate cuts have contributed to the rosy economic outlook, but he believes the Fed will continue to prioritize fighting inflation. This could lead to a more balanced approach, rather than the unfettered growth that some are expecting. “I’m very confident in a pro-growth, pro-business administration,” Smith says, “but that’s going to be balanced by a Fed that is going to continue to be very diligent around fighting inflation.”
Volatility Ahead: Managing Risk in 2025
Smith’s experience has taught him to expect the unexpected, particularly when it comes to President-elect Trump’s tendency to use headlines to grab attention. “Headlines can bring volatility with it,” he warns. “I think anyone managing money and not expecting more volatility is going to be surprised.” To mitigate this risk, Smith is maintaining high liquidity levels in his portfolios, including the ALPS/Smith Core Plus Bond ETF (SMTH).
A Closer Look at the SMTH ETF
The SMTH ETF, which is celebrating its first anniversary, has gained $1.3 billion in assets under management and boasts a 4.2% year-to-date return. The fund’s composition is telling, with 44.4% allocated to government debt and an average credit rating of A. Smith notes that credit spreads are currently at historic lows, leaving little value in credit markets. He predicts that spreads may widen in the first six months of 2025.
U.S. Treasury Yields: A Bright Spot
Despite the uncertainty surrounding credit markets, Smith sees value in U.S. Treasury yields, which remain attractive at around 4%. “Even at 3%, you’re looking at real rates of 125 to 150 basis points,” he notes. “And those are pretty darn good in historical terms.” With inflation holding steady at around 2.5%, Smith believes that Treasury yields offer a relatively safe haven for investors.
A Defensive Posture for 2025
As the new administration takes office, Smith is advising caution. While he acknowledges the potential for growth, he’s also aware of the potential pitfalls. By maintaining a defensive posture and prioritizing liquidity, Smith hopes to navigate the volatility that he sees on the horizon. “It’s going to be a very interesting time,” he says, “and I think anyone who’s not prepared for more volatility is going to be surprised.”
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