Markets have seen tremendous change over the last few decades. Twenty-eight years ago, there were over 8,000 U.S. public companies. That number subsequently dropped to less than 5,000. There was also a sharp decline in the number of IPOs, which dropped by over 60% since the 1980 to 2000 period[1]. Meanwhile, the number of private companies increased significantly. Credit markets have also evolved. Private credit has grown from a nascent industry to a $1.6 trillion market in roughly 15 years, surpassing the size of the high yield debt market. Given the significance of these changes, the natural question is, “why?”

In many ways 2024 was a goldilocks year. Consensus heading into the year called for three Federal Reserve rate cuts, cooling inflation, and resilient growth in the U.S. From an economic perspective, that is exactly what we got. Despite concerns about valuation, this mix was just right for the S&P 500, which responded by rallying 25%, marking a second consecutive year of 20%+ gains – a feat not seen since 1999.

Tactical Allocation Takeaways

• We are not recommending any changes to our current tactical allocations. We continue to maintain a positive outlook for the global economy but are mindful of the uncertainty around geopolitical events including policies of the new U.S. administration.
• We continue to reflect on the risks associated with U.S. equity markets that have quite optimistic earnings expectations reflected in today’s prices and growing concentration risk as a few companies represent a larger portion of the market. On the other hand, non-U.S. equity market valuations are reflective of much more moderate economic outcomes.  That is to say that we prefer to remain well diversified because there are not obvious and meaningful asymmetric risk-adjusted return opportunities in any region.
• We continue to maintain a slight underweight to U.S. Large Cap equities in favor of cash/short-duration fixed income but will be exploring opportunities in Credit Risk Alternatives during the quarter ahead to evaluate whether better trade-offs exist there.
• Expect greater volatility in 2025 as policy uncertainty is expected to persist throughout the year.