As equity markets delivered a second consecutive year of robust gains in 2024, financial experts are urging investors to exercise caution and reconsider their portfolio allocations. Martin Pelletier, a senior portfolio manager at Wellington-Altus Private Counsel Inc., warns against overreliance on high-risk assets, particularly amid potential shifts in U.S. Federal Reserve policy and broader economic uncertainties.
Liquidity and Market Dynamics
The U.S. Federal Reserve’s decision to cut interest rates in 2024, coupled with significant liquidity injections via reductions in its reverse repo account (RRP), played a pivotal role in supporting equity markets. U.S. money supply expanded by 3.7% over the year, marking the largest annual increase since August 2022. This monetary liquidity has long been a key driver of equity performance, with increased money supply boosting demand for risk assets and facilitating corporate financial strategies such as share buybacks.
Despite these favorable conditions, Pelletier expressed concerns over the speculative behavior emerging among investors. “We do worry that this has turned a lot of investors into speculators, and Wall Street has been more than happy to comply by providing a growing number of niche, high-risk vehicles,” he said.
Emerging Risks and Future Challenges
The incoming U.S. Treasury Secretary, Scott Bessent, has indicated plans to issue longer-term debt to address upcoming maturities, a move that could redirect bank reserves away from equities and into government bonds. This development, coupled with the depletion of liquidity from the RRP, raises questions about the sustainability of current market dynamics.
“The Fed may also be limited in its ability to cut rates further due to potential inflation risks if Trump enacts some of his promises,” Pelletier noted. The potential for tighter financial conditions and higher debt costs could hinder corporate growth strategies, particularly those reliant on financial engineering.
Pelletier also highlighted the disproportionate influence of a few technology giants on market indices. Companies such as Apple Inc., which is nearing a $4 trillion market capitalization and trading at record valuation multiples, underscore the broader market’s reliance on a narrow set of high-growth stocks.
Portfolio Rebalancing and Defensive Strategies
In light of these challenges, Pelletier recommends that investors reassess their portfolios. He suggests focusing on defensive sectors such as utilities and infrastructure, which are well-positioned to benefit from falling interest rates in Canada. Structured notes, particularly within registered accounts, also remain a key area of focus due to their downside protection and asymmetric return profiles.
“It’s crucial to avoid a binary approach of going all cash or leveraging heavily into risky assets,” Pelletier advised. “Good advisers will help you navigate these uncertainties by focusing on your financial goals while mitigating risks.”
As 2025 unfolds, investors are urged to prioritize financial stability and long-term objectives over speculative gains. “There is so much value in being able to sleep at night instead of trying to compete with and beat everyone else by betting your wealth on central bank policy,” Pelletier concluded.
