December 13, 2024—As we look ahead to 2025, several key factors suggest investors should prepare for potential market volatility and consider defensive positioning in their portfolios. Our analysis points to three primary areas of concern that could impact market performance:

Interest Rate Trajectory

While market consensus has built around expectations of significant rate cuts, we see a more nuanced picture emerging. Interest rates may prove more stubborn than anticipated, with potential increases possible in the first half of 2025. This divergence from market expectations could create significant volatility across asset classes.

Political Landscape and Reform Implementation

The new administration’s deregulatory agenda, while promising for markets, faces substantial implementation challenges. We anticipate resistance from both sides of the aisle, potentially creating friction between market expectations and political realities. The complex nature of enacting structural changes, combined with entrenched interests, suggests markets may need to reset their timeline expectations for meaningful reform.

Market Structure and Correction Potential

Historical patterns show markets tend to climb gradually but correct sharply. Given current valuations and potential catalysts, we see an increasing probability of a significant market correction in 2025. This asymmetric risk profile suggests investors should consider:

• Reviewing portfolio defensive positioning
• Maintaining adequate liquidity
• Preparing for potential opportunities during market dislocations

Strategic Implications

While maintaining a long-term investment horizon remains crucial, tactical defensive positioning may be warranted. The combination of potentially sticky interest rates, complex political dynamics, and historical market patterns suggests a prudent approach to risk management in the coming year.

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