Discussion: Inflation & Uncertainty Persist in 2025
for Insurer Investments
Alton Cogert, CFA, CPA, CAIA, FDP, CGMA, President & CEO, Strategic Asset Alliance
Dan Smereck, Managing Director & Principal, Strategic Asset Alliance
Alton and Dan review the close of 2024, while focusing on key expectations entering the new year. Although the inflation outlook has improved, uncertainty remains as the market scrutinizes geo-political issues and the incoming administration's various economic policies that are poised to be proposed and implemented.
In taking a longer-term perspective that insurers should always be mindful of, they address the 'Mega Forces' that reshape the long-term outlook for growth and inflation; which are poised to create significant shifts in profitability across various economies and sectors. Consequently, they offer substantial opportunities—and risks—for insurance investors.
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Key Takeaways
- Something to remember during 2024 – the Fed’s actions, by definition, are more reactive than strategic given it’s focus on data dependency…
- Consumers show strength due to a tight labor market, but signs of stress are evident with suppressed sentiment, slowed spending on nondurable goods, and rising auto and credit card delinquencies. Despite these signs of stress, a tight labor market and rising real wages are positioned to offset dwindling savings and tighter credit conditions, supporting continued economic expansion into next year.
- While the media remains fixated on the Federal Reserve's interest rate policy, particularly the Fed Funds rate, it is important to note that longer-term rates are predominantly driven by inflation and economic growth expectations.
- Consequently, investment income from fixed income reinvestment is set to continue rising, particularly for maturing securities with lower book yields and especially for those securities that were purchased before December 31, 2021.
- While current market metrics are no where near as extreme as they were prior to the dot-com bubble, this relationship is crucial to keep in mind when setting short- to intermediate-term equity performance expectations.