Happy New Year! We hope this message finds you refreshed from the holiday season and ready to embrace the opportunities the new year brings. As we turn the page on the calendar, we want to take a moment to reflect on recent market developments and share insights on what may lie ahead for 2025.
The Market
2024 was another great year for stock investors. The total stock market as measured by the MSCI All Country World Index was up by 18.02%. Communication services (companies like Alphabet/Google, META/Facebook, and Netflix) and Information Technology (companies like Apple, Microsoft, and NVIDIA) were the top performing sectors, while materials (companies like Air Products, Sherwin Williams, and Linde), health care, and real estate struggled by comparison.
The rise in stock prices was due to increased earnings and investors willingness to pay more per dollar of earnings. Generally, no one wants to pay more for something - we’d rather buy it on sale – except, of course, if we think the price is going to be higher in the future. This was true in 2024. The market expects better times ahead as interest rates and inflation are expected to come down, tax rates appear on track to stay at historical lows, and the labor market is strong.
We expect the market to remain laser focused on the US central bank (the Federal Reserve) in 2025. Most economic headlines since 2022 have centered around inflation, interest rates, and the Federal Reserve’s reaction to those numbers. The market (and consumers) would love to see declining inflation and the return of lower interest rates. While inflation has come down since hitting 9% in June of 2022, it still sits above the Fed’s 2% target at 2.75%. In reaction to declining inflation, the Fed started lowering interest rates in September with additional cuts expected in 2025, although they have signaled that they would take their time and don’t want to risk cutting too much too soon causing inflation to return.
The Economy
While our economy appears to be in good shape, there are always things we are watching that could cause possible issues. Following the election, we have seen a sharp increase in the value of the dollar as compared to other global currencies. This may seem like a good thing, but it can actually hurt U.S. manufacturers who export goods around the world, as our goods become more expensive overseas. The value of the dollar fluctuates daily, but it’s important to remember that about 40% of earnings from S&P 500 companies are derived from countries who don’t use the dollar as their primary currency.
The strong outlook for the economy and the threat of aggressive tariffs has also caused longer-term interest rates to creep up. If we see more economic growth, we would expect rates to be higher as long-term interest rates are made up of growth expectations plus inflation. This increase in long-term interest rates hurts bond prices today but increases bond investor’s yield going forward. The bond market posted a total return of only 1.25% in 2024 but yield on the Bloomberg Aggregate Bond Index now sits at levels we haven’t seen since 2009. Geopolitical concerns don’t seem to be easing as the Ukraine/Russia war continues and tension between the U.S. and China remains. With continued conflict comes increased global uncertainty and the desire for global central banks to not just own U.S. dollars, but to also own gold. As gold demand increased, gold prices were up over 25% in 2024.
While there will always be concerns for investors, we head into 2025 with a resilient economy, tailwinds from lower interest rates and a strong consumer, and attractive interest rates for savers. When investing, overcoming our emotions can be one of the greatest challenges we face. As advisors, we find ourselves tempering expectations when times are good and returns have been strong (as we see today) and injecting optimism when times are tough and returns have been poor. When we see risk rewarded, it’s natural to want to take on more risk (at the extreme, we could call this greed), but as Warren Buffet once said, “It is insane to risk what you have and need in order to obtain what you don’t need”. In charting the most reliable course toward accomplishing your financial goals, we continue to believe that a diversified portfolio customized to your situation is the best path forward.