Weekly Newsletter: January 6, 2025
The calendar has flipped to a new year replete with plenty of resolutions. For many strategists, those resolutions might include being a bit humbler. Last year, projections were for modest gains in the market along with six-plus rate cuts to interest rates. With the help of the largest stocks in the indices, the SP500 tacked on another 20%+ year to match the gains of 2023. Interest rates were cut, but only three times, during the back half of the year. Indeed, backward-looking, it was all too obvious. But what about 2025? Does the track record of the market indicate continued success for stocks this year? The magic eight-ball indicates we should try again later. The markets remain among the most expensive in history (which was also true a year ago), the averages were carried by a few stocks (also true a year ago) and stocks failed to have a “Santa Claus rally” (again, true a year ago). 2024 was notable for a few things that may not portend well for 2025. The SP500 never traded below its long-term average price and made over 50 new all-time highs. Going back over 70 years, only five instances of both of those happened in one year. The following year saw three declines, two advances, and an average return for the 5 times of nearly zero. The variance was wide, with one year up another 20%, and one with a decline of 19%. Time to grab a halfdollar and flip for the returns in 2025.
The New Year might be the same old song and dance. Inflation remains well above the Fed’s target of 2%, while employment stays strong, indicating a healthy economy. The Fed indicated at their last meeting that they may be more “measured” in their rate decisions in 2025, meaning there may be fewer cuts during the year than expected. There will not be much time to recover from the New Year’s Eve hangover, as the employment report is due out Friday. Additionally, earnings season begins next week, and Fed speakers will yammer on about their views on the economy. The weekly jobless claims continue to match up well with the 2016-2019 period, indicating job growth should be above the 125k monthly figures needed to keep the economy going. Wage growth should also remain around 4%, above the rate of inflation, giving the consumer the ability to maintain spending.
Interest rates were the dark cloud behind the silver lining of the stock market. Rates rose consistently beginning with the Fed interest rate cut in September. To this point, stocks have ignored the higher rate environment, but if rates continue to march higher, stocks may sit up and pay attention. Commodity prices have picked up of late, which may keep the monthly inflation data above the Fed’s target. In turn, this could mean little, if any, rate cuts early in 2025.
In keeping with historical tradition, the financial markets will be closed on January 9th, to honor the passing of former President Jimmy Carter. This will mark the third consecutive shortened trading week. While normally not a market-moving event, investors are likely to remain focused on the earnings and economic outlook. After faltering for much of December, the large tech stocks resumed their leadership early in the new year. Whether that can continue depends greatly on the direction of artificial intelligence as well as the spending to provide the computing power. The difference between the largest US stocks’ performance over the past two years and more “value” and smaller stocks is at a level that historically tends to favor the value/small vs. the large. That said, the markets have proven conventional wisdom wrong over the past few years.
2025 should see a volatile market. Valuations remain high, but that says little about the overall direction of the market. The large swings may provide opportunities for both buyers and sellers in 2025.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.