The consensus view that the incoming Trump administration will usher in significant economic growth is too optimistic for bond veteran Gibson Smith.
Smith, founder of Smith Capital, said it’s logical that market participants expect a rosy economic outlook based on the combination of the Federal Reserve rate cuts and a belief that the new administration will be pro-growth and pro-business.
But he’s maintaining a defensive position in his portfolios, expecting much volatility in 2025, in part because of President-elect Donald Trump’s penchant for using headlines to get attention.
“Headlines can bring volatility with it. I think anyone managing money and not expecting more volatility is going to be surprised,” he said.
Smith helped build then-Janus Capital’s bond business into a fixed-income powerhouse, and in the 2010s worked for several years at Janus alongside Bill Gross.
It’s not that Smith discounts the incoming administration’s plans, pointing out that he’s “very confident” on a pro-growth, pro-business administration. “But that’s going to be balanced by a Fed that is going to continue to be very diligent around fighting inflation,” he said.
Market expectations for accelerated growth may be too high, he said, while ideas that Trump’s team will be fiscally irresponsible and run large deficits may be too pessimistic.
“It may be that this newly created DOGE (Department of Government Efficiency) is actually really aggressive and maybe even really successful in trimming the government excess that we’ve all kind of come to accept as just a reality. So, it’s going to be a very interesting time,” he said.
Because he expects high volatility, Smith said he is keeping high liquidity levels in his portfolios, including the actively managed exchange-traded fund, ALPS/Smith Core Plus Bond ETF (SMTH).
The fund is also celebrating its first anniversary, having gained $1.3 billion in assets under management, with a 4.2% year-to-date return. The fund has 44.4% in government debt, with an average credit rating of A and an effective duration of around 5.6 years.
Smith said that credit spreads are at their tightest level in 15 to 20 years for both investment grade and high-yield credit, leaving little value overall in credit markets. It wouldn’t surprise him to see spreads widen in the first six months of 2025. Meanwhile, U.S. Treasury yields of around 4% remain very attractive, even with inflation holding around 2.5%.
“Even at 3%, you’re looking at real rates of 125 to 150 basis points. And those are pretty darn good in historical terms,” he said.
