To our Clients and Friends -
What a year we enjoyed in the markets in 2024. We are optimistic about 2025 as well, particularly with an expected recovery in the M&A and IPO markets.
While Santa did not bring a continued bull market over the holidays, overall it was a strong year. We enjoyed amazing gains for portfolios positioned with a focus on AI, Technology, and the formerly taboo Bitcoin/Cryptocurrencies. We also saw the beginning of the great interest rate reversal led by the Fed, and a titanic shift in governments across the globe.
Adding to 2023’s gains, 2024 produced a terrific 2-year return for public equity-heavy investors.
Technology investors had it even better. AI enthusiasm continued throughout 2024, carrying the Nasdaq 100 to a 24.9% gain for the year and an 84.5% gain since the start of 2023 – its best two-year return in 25 years.
US stock exceptionalism persisted. Real estate continued to suffer from higher rates and pricing issues, but international and emerging equities trailed badly as economies and governments faltered and conflicts raged. JP Morgan’s heat map of annual asset class returns is illustrative:
The private markets struggled to produce cash returns, although our private managers generally had decent mark-ups in valuations. The rapid 550 bps increase in short term rates by the Fed in 2022 did much to combat inflation, but also brought a standstill to the IPO and merger and acquisition markets which persisted until the end of 2024. Real estate, as we are all aware, suffered the most and continues in the doldrums.
The Vibe Shift
Bloomberg’s Big Take on January 2 summarizes what the finance world largely expects this year with a new Administration and continued economic flourishing in the US:
The return of Donald Trump to the White House dominates investment outlooks on Wall Street. His pro-business policies are fueling a sense of optimism, particularly when it comes to Corporate America.
The US economy and assets are once again expected to power ahead, enjoying new momentum from Trump and benefitting from the comparative lack of appeal of other major markets, many of which could be hit by his tariffs. This will be a world, says JPMorgan Chase & Co., “where US exceptionalism gets reinforced.”
Inflation is seen as broadly contained, albeit unlikely to fall to target as Trump throws up trade barriers and takes a hard line on immigration.
Pretty much every institution warns investors not to expect another year of equity returns topping 20%, just like they did a year ago. But few are ready to call an end to the artificial intelligence-fueled stock boom.
Bond yields across both rates and credit are solid, and many firms would agree with the sentiment captured by Schroders: “The old-fashioned reason for owning bonds — to generate income — is back.”
Diversification is the name of the game, Wall Street reckons. Look to alternative assets like private markets and hedge funds, they say.
What is our take at CrossGrain?
We are always skeptical of consensus, trying to think around corners and anticipate what events might bite us in the hindquarters or upset expectations. That said, we maintain our view, first expressed this time last year, that we are in the early stages of the Exponential Age where AI, quantum computing, genetics, robotics, the energy transition (and maybe even fusion power), and space exploration/exploitation will bring us into a new era of human prosperity. We observe:
The US economy remains fundamentally strong, and tech should continue to lead.
Deregulation via the efforts of DOGE (Elon, Vivek and co.) and the new Administration could unleash powerful economic growth as well as re-energize IPO markets and M&A activity.
US Inflation is generally under control. The Fed may cut rates this year but could accept a regime of higher short rates for a while.
Higher US rates mean near-zero risk cash returns are strong 3-5%.
Demographics and geopolitics strongly favor the Western Hemisphere.
Europe is caught in economic malaise from high energy costs, impaired manufacturing and exports, uncertainties around Russia/Ukraine, the Middle East and now Syria and Turkey’s role there.
China’s leaders are expected to pump up their economy yet again with Government capital, but growth is likely to be tepid due to deflation, political and military purges, real estate debt, and rapidly deteriorating demographics.
A new US tariff regime could negatively impact economies around the world.
India, Japan and to a lesser extent Australia look comparatively better.
Of course, there are many risks in the world and to our outlook.
Long bond rates are unexpectedly high. This could signal concerns by the Bond Vigilantes about
a return of inflation...requiring more hikes in short term rates by the Fed, or
the persistent US government debt the interest payment on which currently consumes more of the Federal budget than all Defense spending... requiring massive US economic growth and/or lower interest rates to reduce the payment burden.
The Fed and the new Administration, as well as Congress which holds the power of the purse, could get squeezed.
Geo-politics are a mess. The Ukraine conflict rages on. Israel seems to have the upper hand in its war against Hamas, Hizballah, Houthis and ultimately Iran, but instability and nuclear threat are ever-present. China seemingly has its eyes on Taiwan as well as most of the waterways within hundreds of miles of its coasts, and with its partner-in-crime Russia is severing undersea cables across the Free World. And the US border continues to be an area of concern around unchecked immigration and drug smuggling.
The US markets are at historically elevated valuations. Most of the value is highly concentrated in the Mag 7 and less so in large caps generally. Higher rates are an impediment to the market advance broadening out to the Forgotten 493 as well as small and mid-cap names, while elevated expectations for revenue growth and multiple expansion may be difficult to achieve, leaving the market at risk for a correction.
And we will likely see the normal seasonal swings in the Market. You will likely see a note from us reminding you about the routine summer sell-off.
Investing in the Exponential Age
Last year, we discussed our investment thesis around Tesla (TSLA) as more than an EV company sitting as it does at the epicenter AI (Grok, X.ai), robotics (Optimus), space (SpaceX/Starlink) and data (self-driving cars). Indeed, last year we expanded our allocation to the Musk-o-sphere by investing directly in SpaceX which has almost single-handedly opened up lower earth orbit (LEO) to profitable, non-governmental uses.
We paired this allocation with an investment in Astranis which is putting satellites in geostationary earth orbit (GEO) for secure backhaul communications services to governments and companies. On December 30, SpaceX launched 4 Astranis satellites into LEO and, to date, all systems are go for the 4-6 month process of sling-shotting around the Earth for a gravity assist lift into GEO.
Here we’ll note that secure, super-high altitude communications services will only be more in demand with the cutting of undersea communications cables by Russia and China, not to mention the vulnerability of GPS and communications satellites in low earth orbit to lasers, missiles and killer sats.
Our Investments
Regarding our private investment portfolio, we anticipate more liquidity with a re-opening of the IPO window – very important for large, private equity backed companies – as well as a re-start of the merger and acquisitions markets – critical to sales of earlier stage companies. Stable–to-lower interest rates and a growing economy support our private credit managers lending to rapidly growing retail businesses. And we might even see the slow return to the real estate marketplace as homebuyers acclimate to higher mortgage rates and owners to more realistic (i.e. lower) valuations of their office, medical office, industrial, storage and other properties. Consequently, we anticipate liquidity from Blackhawk (mobile home parks) and 2GR (commercial real estate in Texas) and look to allocate to new and continuation fund launches by Switch (venture capital), Feenix (private credit) and CAZ (energy, sports and general partnership interests).
In sum, we were broadly correct about 2024 being a good year for equities, though we would have loved more liquidity from our private investments portfolio. We believe 2025 will be a reasonably good year for US equity markets and much better than last year for private equity, venture capital and even real estate. Our focus has shifted slightly in this great AI revolution, moving from chips (NVDA) to software, data center electricity, data center cooling and consumer use. We believe that, as the business cycle continues to improve, increased global liquidity and reduced regulation – aka a business-friendly administration — will lead to continued growth and acceptance of crypto assets. We expect further innovation in self-driving cars, robotics, space travel and new energy sources from the likes of nuclear fission and fusion.
Look for an upgrade to your Advyzon client portal. Clients can now access our reports anytime for any period of time. About time!
We look forward to connecting with all of you this year. We value our deep connections with our select group of clients and co-investors, all friends.
Warmest New Year’s regards,
Jeff & Biff
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CrossGrain Family Investments, LLC
2213 Loreines Landing Court
Henrico, VA 23233
CrossGrain Family Investments, LLC is a Federally-Registered Investment Adviser. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Please contact us at 804.217.2561 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from CrossGrainFI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on the SEC website, https://adviserinfo.sec.gov. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.