Viewpoints
Happy 2025 from Mill Street! As we step into the new year, we also look ahead to a new administration—one that feels both familiar and potentially transformative. In the months ahead, several compelling investment themes are emerging, and we remain cautiously optimistic about the market’s prospects. To align with this evolving landscape, we’re introducing a new element to our portfolios, aimed at seizing strategic opportunities as they present themselves. While 2025 promises to be an eventful year, it is sure to bring both challenges and opportunities that will shape the road ahead.
Themes Under Trump 2.0
As President Trump prepares to retake office—becoming the first president since Grover Cleveland to leave and return—he has made his economic agenda unmistakably clear. This clarity allows us to identify several sectors that we believe are well-positioned to potentially outperform in the coming years. First, the industrial sector—particularly infrastructure—stands to benefit significantly from the ‘America First’ policies championed by President Trump. His stated commitment to reshoring production and manufacturing, while ambitious, positions American industrial companies as likely winners. Similarly, the Utilities and Energy sectors appear poised for strong performance, driven by the major power grid expansions (Chart 1) required to support AI advancements, the build out of data centers, and the growing adoption of electric vehicles. This grid development will directly benefit utility companies and rely heavily on natural gas for energy generation. We also believe that healthcare stocks, supported by strong demographic tailwinds, are poised to outperform, despite their recent underperformance, which may prove to be an overreaction to Robert F. Kennedy, Jr.’s potential confirmation as the Director of HHS. What remains to be seen is how the ambitious Department of Government Efficiency (DOGE) initiative will take shape, particularly against the backdrop of a near-critical national debt and the evident re-acceleration of inflation—a trend we foresaw in July’s Viewpoints. That said, we anticipate gaining clarity on these developments in the near term.
Capitalizing on Strategic Opportunities
Winston Churchill once said “To improve is to change; to be perfect is to change often while never forgetting where we began.” As many of our clients know, SG&CO has a long and proud history of maintaining a value-based investment strategy, with a strong emphasis on dividend-paying stocks. This focus remains the cornerstone of our portfolios and will continue to guide our approach, just as it always has.
In recent years, the investment landscape has changed significantly. We have discussed these changes in our Viewpoints over the past year—highlighting the growing prevalence of short-term hedging and speculative options trading. Since 2021, zero-days-to-expiration (0DTE) options, which represent the ultimate short-term speculative instrument, now account for more than 50% of daily options flows! This trend underscores the rapid evolution in market behavior and reflects a shift towards increasingly short-term speculation. Additionally, the asset management industry has experienced a significant shift towards passive ETF strategies. J.P. Morgan estimates that approximately 90% of U.S. equity trading volume is now executed systematically, meaning trades are conducted based on pre-programmed criteria without direct human intervention (Chart 2.) This phenomenon, which we referred to as “The Machine” in our inaugural Special Report, Magnificently Manipulated, highlights the growing influence of algorithmic trading systems capable of moving markets. Notably, there has been a 240% increase in passive ETF trading volume since 2015, underscoring the rapid adoption of these strategies.
So how is this relevant to our clients? In the words of Charles Darwin, “It is not the strongest of species that survives, nor the most intelligent, but the one most responsive to change.” While it is important to reiterate that our value-based approach, which has been in place for nearly 50 years, will not be going anywhere, we also recognize the need to adapt. We are dividend-based investors at our core, but we must remain responsive to the changes in the investment landscape to continue protecting and enhancing our clients’ wealth.
The current environment, marked by extreme short-term trading biases, exposes much of the market—particularly in the U.S.—to systematic drawdown risks. In response, we are strategically allocating small portions of portfolios to assets that we might traditionally consider outside of our core portfolios. The objective is clear: to mitigate U.S. market risk through prudent risk management and proactive hedging.
This approach reinforces our longstanding commitment to avoiding significant drawdowns, which is essential for compounding wealth over the long term. By managing portfolios with a global, full-cycle perspective, rather than reacting to our domestic market’s daily fluctuations, we can continue to serve as better stewards of your wealth. This new component complements our strategy, enhancing our ability to navigate risks while maintaining our focus on the prudent total return of our portfolios (growth plus income).
How We Are Positioned
The good news is that many of the sectors poised to potentially outperform under the new administration have long been among our favorites. Combined with our Strategic Asset Allocation, we believe clients are well-positioned in a resilient, “all weather” portfolio. As the likely mean reversion of tech outperformance unfolds, we anticipate that overlooked sectors–particularly defensives–will emerge as significant beneficiaries.
In Conclusion
As we navigate the early days of 2025, the interplay of political shifts, economic policies, and evolving market dynamics offers both challenges and opportunities. The return of a familiar administration brings with it bold initiatives and strategic inflection points, from the reshoring of industries to power grid expansions and the ambitious Department of Government Efficiency (DOGE). Our Strategic Asset Allocation is intended that client portfolios remain well-positioned to capitalize on these potential opportunities while mitigating risks. By focusing on overlooked sectors, embracing prudent risk management, and maintaining a full-cycle investment perspective, we continue our commitment to preserving and compounding wealth for clients. While surprises are inevitable, we are confident in our ability to adapt, seize opportunities, and guide our clients through what promises to be an eventful and transformative year.
Cheers to 2025!
Michael P. Moeller
Portfolio Manager and Director of Research