5 min read
Performance
U.S. stocks were the top performer of the fourth quarter, standing in contrast to just about everything else, as they closed out another substantially positive year of strong performance. The domestic economy remains resilient, while hiccups in other parts of the world have emerged. Bonds posted a negative return for the quarter, as interest rates (especially outside of the short-term rates the Federal Reserve directly controls) did not move in line with consensus projections. In these early days of 2025, all eyes are focused on how asset classes will respond to a new administration, ongoing geopolitical strife, and still-developing Fed monetary policy.
Stocks
After the results of Election Day became clear, U.S. stocks (Russell 3000) broke away from the rest of the pack, rallying into the quarterly leadership position. Small-sized (S&P SmallCap 600) and mid-sized (S&P MidCap 400) stocks rallied strongly after the election, but could not sustain their momentum through December, and failed to outperform returns of large-sized (S&P 500) companies. Tailwinds aiding the domestic economy – a still-strong labor market, sizable fiscal spending still in place, capital expenditures increasing – do not seem evident in most other countries. Therefore, prospects for international stocks appear muted compared to their U.S. counterparts. As a result, international stocks (MSCI All Country World Index ex-U.S.) lost ground over the quarter, although they still returned positively for the calendar year. Neither developed markets (MSCI EAFE) stocks nor emerging markets (MSCI EM) companies fared all that well over the quarter, as political and economic challenges plaguing China, France, Germany, and the U.K. weighed on returns.
Bonds
Longer-term interest rates rose during the quarter, sending bond (Bloomberg US Aggregate Bond Index) prices lower, even as the Federal Reserve reduced short-term rates multiple times. (Bond prices typically move in the opposite direction of interest rates,) Expectations for higher economic growth and stubbornly high inflation helped boost longer-term rates. While the Fed did cut short rates again in December, the future direction is not as clear as originally thought in early 2024. The Fed now seems likely to slow the pace of cuts – or pause them altogether.
Alternatives
Alternative assets overall declined during the quarter, dragged lower by negative performance across the asset class from commodities (Bloomberg Commodity), natural resources stocks (S&P Global Natural Resources), and global real estate (FTSE EPRA/NAREIT Developed).
Source: Planning Alternatives
Source: Planning Alternatives
Perspective
“The bad news is that time flies. The good news is that you’re the pilot.”
– Michael Altshuler
How is it 2025 already? It seems hard to believe that another year has passed – and what a year it was. Another sizable advance in the U.S. stock market, an election season like no other, and continued geopolitical strife are but a few of the things that 2024 will be remembered for. After all of the bumpiness of the last 12 months, I think motivational speaker Michael Altshuler would be quite fine with all of us filing a flight plan that includes less turbulence in this new year.
But that’s not the way things necessarily work. Maybe investors will be blessed with smooth skies, but more likely than not, something unanticipated will happen in 2025 that forces us all to change heading – and that’s OK! After two consecutive sizable up years for the stock market, there’s no guarantee that a third will emerge. But there is a chance. Even though potential headwinds around employment, economic growth, debt levels, and inflation could all interfere with continued stock gains, it’s just as possible that the promise of low taxes, fewer regulations, a still-strong labor market, and strong corporate profits will continue the recent trend.
Among multiple other important inputs, the outlook for corporate profits remains the key determining factor for stock prices. On that front, the most recent projection for global 2025 earnings shows promise. Through the first 10 months of 2024, earnings per share (EPS) growth across regions was on track (below chart, gold bar) to exceed 2023 – except for the Eurozone, which experienced myriad political and economic challenges in 2024. Although year-end 2024 EPS figures will post after our Thrive publication date, expectations for year-over-year EPS growth in 2025 (green bar in chart below) are for growth across all regions, with the S&P 500 Index estimated to resume the leadership position with an advance of 15%.
Source: JP Morgan Asset Management
Even with this optimistic projection, a positive earnings landscape does not mean a zero chance for a downturn in stock prices. After multiple years of elevated market gains, it is inevitable to eventually have a downturn. The old saw that “bull markets don’t go on forever” is true. However, bull markets can last longer than consensus expectations. The incoming administration’s preferences for lower tax rates, less regulation, and higher economic growth could extend the upswing. That said, other policy preferences come with potential downside consequences.
Tariffs
Protracted tariff wars are usually not productive, but tariffs can be effective in shaping relationships in the short term. Tariffs against Mexico and Canada could pressure policy changes and agreements on issues like immigration, but they might be short-lived. Tariffs on Chinese goods could conceivably be a different story: a more protracted struggle would likely increase inflationary pressures, especially if America experiences a reduction in imports of cheaper goods from China as in the past 25 years.
Immigration
Many people on both sides of the aisle agree that some reform is needed in immigration policy. Pieces of a potential compromise – deporting criminals and certain others in the country illegally while allowing some to remain (e.g., DREAMers) – have been floated by the incoming administration. While more restrictive immigration policy could reduce the overall labor force and create short-term inflationary pressures, productivity gains from technologies like artificial intelligence could offset these effects.
Entitlements, Deficits, and the National Debt
We’ve read the conjecture about “eliminating” Social Security. We just don’t think this is a realistic concern. There is no current proposal from the incoming administration to reduce Social Security spending or eliminate the program, both of which would require an act of Congress.
Navigating even the slightest change to the system would be tricky, given that that 73 million Americans receive some sort of Social Security benefit. At some point, however, elected officials of both parties will be forced to tackle the issue of entitlements (Social Security, Medicare, Medicaid) if the debt and budget issues in America are to be solved.
Just the interest paid on publicly held U.S. government debt has doubled over the past four years (see below) – an unsustainable pace. Meaningfully addressing debt issues will take significant discussion, debate, and compromise, and will not be subject to the whims of any single individual. Thus far, there has been very little will from either Congress or the executive branch (regardless of which party is in control) to address this problem.
Source: Apollo Global Management
Positioning
Our examination of the prospects for financial markets remains mixed. A positive EPS environment, a still-strong labor force, and prospects for less regulation and continued lower taxes to boost economic growth have us optimistic. On the other hand, a potential rekindling of inflation, increasing unemployment, and a greater probability that “higher for longer” interest rates finally dampen economic demand are cause for caution. Similarly, there is no overwhelming consensus view among our research providers regarding 2025 – with some taking a bullish stance while others are more bearish.
The divergence of thought surrounding the economy in 2025 extends to market expectations. Analyst projections vary for where the S&P 500 Index will settle by the end of the year compared to current levels – expectations that range from sizably higher to sizably lower. This uncertainty cascades down to public opinion as well. While Americans are generally pessimistic about stock market prospects, a record high level (see chart below) believe stock prices will move higher from here. Even at that record level, though, roughly half the country believes markets are due to trend lower.
Source: Apollo Global Management
While it’s true enough that the current combination of financial news, political fighting and geopolitical strife is unsettling, this seemingly chaotic environment is emblematic of how things typically are. There is always something going on in the mainstream news or the financial press that stirs emotion, angst and concern. As Planning Alternatives has always done, we will sort through this noise and work with you to meet your goals by staying true to our core principles.
We construct a financial plan for each client that works in conjunction with an investment portfolio; the two pieces are intertwined. The allocation reflected in portfolios is commensurate with each individual’s willingness to handle risk. We purchase securities of companies and governments across many asset classes, styles, and sizes to reduce overall portfolio risk. We generally focus on companies that have some combination of the following attributes: solid earnings, high-quality metrics, substantial dividend distributions. We stay diversified to be able to capitalize on market opportunities as they arise (e.g., a dedicated small-cap exposure which spiked higher post-election). We stay invested but can adjust exposures when conditions warrant.
The beginning of a new year is a great time to review your financial plan, adjust your level of portfolio risk, plan for cash needs, or determine what True Wealth means to you. Please contact us with questions regarding any of these items, or just to chat!
