Happy New Year! We hope you and your family had a healthy, happy, and prosperous 2024. We also hope you have a great 2025. In numerology, 2025 adds up to the number 9 (2+0+2+5), which represents completion, spiritual growth, wisdom, personal growth and a desire to serve humanity. It signifies the end of one cycle and the beginning of another, a year of big beginnings and partnerships. Let’s hope numerology serves us this year.
What can we expect in 2025? We enter the year with momentum as the economy is strong, inflation is within the Fed’s range, and unemployment remains low. But like Newton’s Law of Motion, the trend can continue along the current trajectory until it is disrupted by external factors. Sometimes “black swan” events can occur, which are rare and outside of regular expectations. Most pundits would agree that we may be facing an “orange swan” and that comes from the impact of the incoming administration. Many point to policies for mass deportation and tariffs as possible sparks to inflation. Where will those policies settle? It is widely held that we could not handle mass deportations as we do not have the infrastructure. Much like Trump states in the “Art of the Deal”, he aims high and adjusts lower, so tariffs may not be as egregious as advertised. In the long run, smaller, less intrusive government policies are looked at as a strong positive.
Beyond our borders, volatility may be fed by an expanding campaign from Israel. They have hampered Hamas and Hezbollah, but will they continue against Iran’s “axis of resistance”? Not only is Russia at war with Ukraine, but there are incidents of sabotage on the Baltic Sea floor as cables have been cut or damaged. In November, communication was cut on a Finland-Germany cable, both being NATO members. South Korea is a mess, as the guy who replaced the impeached guy was also impeached. Finally, we have roughly 45,000 US dock workers set to strike in the new year.
But volatility does not mean markets will not have a good year. We are coming off the best back-to-back years since 1998. What is the sentiment? Wall Street pundits have placed bets as to where the S&P could rise in 2025, ranges from 5,500 – 7,100 (closed 2024 at 5882). Seeking Alpha’s poll shows 54% of investors believe the market will close around 6500 (10% up). Also 81% will be buying stocks versus the other options for investment.
A contrarian would see these charts and surmise the markets could be a bit top-heavy. There are a lot of bulls, tremendous optimism, and no one cares much about valuation…AI will solve it. But the US economy is healthy and seems to be the best economy to see continued growth.
Stocks had a great run in 2024, finishing back-to-back years of double-digit returns. Growth stocks continued to outperform value stocks, and larger stocks outperformed smaller stocks. A select group of technology stocks lead the pack. Those top five names are listed in the chart. Not suggesting this is a top, but the top five stocks back in 1999 were only 9% of the weight, versus 27% today.
The Fed adjusted rates by 100 basis points in 2024, much less than consensus going into the year. The final 25 basis point cut was in December. The Fed funds rate now sits at 4.25% – 4.5%. As Chair Powell stated, it is still restrictive policy, albeit to a lesser degree. He also stated both the economy and policy were “in a really good place.” Based on the “dot plot,” Fed officials see Fed funds rate ending 2025 at 3.9%, a number higher than earlier projections. That implies about two 25 basis point cuts are expected in 2025.
We enter 2025 with an economy in good shape. The labor market is healthy (albeit slowing), unemployment is low, and currently inflation is under control. For those who enjoy history, you can look at a chart of the stock market run-up when Reagan was elected in 1980 (very reminiscent of the run-up in 2024). Markets had a tough 18 months as Reagan began initiating his policy to reduce tax rates, slow government spending and reduce government regulations. Granted, he was also fighting high inflation. As Reagan is quoted as saying “we don’t have inflation because the people are living too well. We have inflation because the government is living too well.”
We believe this will be a year that AI needs to move from “possibilities” to “integration.” A lot of money has been spent on AI and investors will want to see results. We anticipate a bumpy market as Trump begins to implement his administrations policies. It should be a good year for diversified portfolios, including those that hold bonds and alternatives. Well-balanced portfolios should help you prepare for an orange (black) swan.
We thank you for your continued support and look forward to speaking with you in 2025.
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