Market Update January 16, 2025
If the stock market is consistent in anything, it is that it is inconsistent. 2024 was a classic example as stocks defied their historic tendency to weaken in the months leading up to a Presidential election and further failed to follow their seasonal tendency to rally going into the end of the year. It was an unusual year.
Stocks broadly were having a very good year going into the election. We then saw gains explode even higher in response to the results of the election and a Republican sweep of all branches of government. Stocks continued to rally through the end of the month in anticipation of a more business-friendly regulatory environment in the coming years. Optimism took a blow following the Federal Reserve’s last meeting of the year on December 18th. While the rally was historic following the election, so too was the let-down following the Fed meeting. The Fed did oblige the financial markets by providing the expected 25 basis point (0.25%) reduction in the Fed Funds rate; however, investors were disappointed to learn that the Fed does not expect to be so accommodating in 2025. I read in Barron’s that the Dow Jones Industrial Average was down ten days in a row in late December which was the longest losing streak since 1974. So much for ending the year on a high note.
Overall, it was still a good year for the most part. The equal-weighted S&P 500 was up 13.0%, and small company stocks as measured by the S&P 600 were up 8.7%. Established foreign market stocks as measured by the MSCI EAFE Index were up 3.8%, and the MSCI Emerging Markets Index was up 7.5%. Bonds had been having a pretty good year up until the Fed meeting and ended up just 1.3% for the year as measured by the Bloomberg U.S. Aggregate Index. The tech-driven S&P 500 had a fantastic year, up 25.0%. As a testament of the concentrated nature of this capitalization-weighted index, 55% of this return came from just seven stocks, the “Magnificent Seven”.
While earnings for the S&P 500 were great in 2024, helping to drive up prices, much of the gain came merely from expanding valuations. Approximately 10% of last year’s gain and close to 40% of the gain over the last two years have come from the stocks getting more expensive. I read recently that the value discrepancy between growth and value stocks by one measure is at its highest level in over two decades. Looking forward, valuations of growth stocks could compress and value stocks expand. This phenomenon combined with rising earnings should make value stocks the better choice. The big “if” in all this is earnings. Growth stock earnings have far exceeded value in recent years, and expectations for a revival in value stock earnings have so far been disappointed.
New legislation taking effect this year has an odd provision for participants in defined contribution plans such as 401ks. Not unlike IRAs and Roth IRAs, these plans offer investors aged 50 and over the opportunity to make “catch-up” contributions. The catch-up contribution for these company retirement plans remains $7,500. The new provision allows participants who turn age 60-63 this year to make a higher catch-up contribution of $11,250. The base maximum allowable contribution for all participants regardless of age has gone up $500 this year to $23,500.
Financial market observers are of the view that 2025 will be a more volatile year than last year. This is probably a safe bet seeing as 2024 was tame by historical standards. I felt that the volatility last month was to a degree much ado about nothing. Yes, the Magificent Seven stocks are long overdue for a breather, but stocks more broadly are not extended, bond yields are becoming attractive again, and the economy is resilient. Lastly, a more rational Fed is not a bad thing for the long-term health of the economy and financial markets.
I wish you a healthy and prosperous new year and welcome any questions or concerns you may have.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· The S&P 500 is an unmanaged capitalization-weighted index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The S&P 500 Equal Weight index is the equal-weight version of the S&P 500. The Dow Jones Industrial Average index covers 30 major NYSE industrial companies. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S. Inclusion of these indexes is for illustrative purposes only. Note that bond prices rise when yields fall, and vice versa, due to the inverse relationship between bond prices and yields. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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