Market Commentary - January 2025

Despite the long-term history of positive election years for stocks, investors were faced with challenges and uncertainty in 2024 that provided many off ramps. It is often said the market climbs a wall of worry; however, disciplined investors, who maintained a long-term focus with diversified portfolios, were well rewarded in a record setting year for US stocks.

Following the November 5 Presidential election, in which Donald Trump was elected as the 47th President of the United States with a decisive Electoral College victory, including Republicans retaking the Senate and maintaining the House with a thin majority, US stocks rallied strongly to new All-Time Highs on expectations of deregulation, lower taxes, and higher corporate earnings.

The post-election rally continued into early December, and the Dow closed above 45,000 for the first time ever, the S&P 500 closed above 6,000, and Nasdaq closed above 20,000 as investor risk appetites grew. However, the remainder of December was challenging as markets recalibrated with small-caps, mid-caps, and the Dow leading on the downside remainder of the month.

As expected, the Fed cut policy rates 0.25% at its December 18 FOMC meeting, for the second time in the Fourth Quarter, for a total of 0.5%; however, at its December FOMC meeting, the Fed lowered its 2025 rate cut projection from four to two, citing continued solid economic expansion and stickier inflation measures Stocks adjusted to smaller and slower Fed rate cuts in 2025, inflation expectations, policy uncertainty in the new Trump administration surrounding tariffs, taxes, immigration, and deregulation; Nasdaq was the only major US index to post gains in December, albeit a modest 0.5%.

Despite the volatile month of December, which included record highs followed by a healthy widespread pullback, 2024 was another remarkable year for US stocks, which posted double-digit gains across the board. Nasdaq led all markets in 2024 with a 28.6% gain, while the benchmark S&P 500 surged 23.3%, both led by the Magnificent Seven; back-to-back years of 20% plus gains are rare, happening just four times since 1930, according to JP Morgan. In 2024, the S&P 500 set 57 new All-Time Highs.

Market breadth widened post-election, as small- and mid-caps surged. Despite the rough December pullback, the Russell 2000 and S&P 400 posted strong 2024 gains of 10% and 12.2% respectively, while the Dow finished +12.9%.

2024 was more challenging overseas; after setting record highs in Q3, the benchmark MSCI EAFE index gave up nearly all its gains for the year in Q4, losing 8.4%, to close just +1.2% for the year. Emerging Markets slid 8.2% in Q4, and closed 2024 up 5.1%. The European Central Bank and the Bank of England began cutting policy rates in 2024 just like the Fed, as inflation declined towards policy goals as well. The strong US dollar, which rose 7.1% in 2024, contributed to the overseas losses for US investors; the MSCI EAFE index gained 8.4% in local currency, while Emerging Markets gained 10.5%.

The US bond market went through a series of adjustments as Fed rate cut expectations ebbed and flowed through the year as further progress was made on inflation declining towards the Fed’s 2.0% goal, though signs of stickiness presented challenges as well. The economic soft-landing narrative prevailed throughout the year, as the US economy maintained its global leadership and unemployment remained low.

Though the Fed cut interest rates three times in 2024 totaling 1.0%, beginning with 0.50% in September, the Benchmark 10-year Treasury Note yield rose 0.30% in Q4 and 0.40% just in December to close 2024 at 4.58%, up 0.76% for the year.

Investors were faced with plenty of concerns and uncertainties in the Presidential Election Year, yet prevailed if they stayed invested and maintained a long-term focus.

The Outlook

There is a general optimism for the markets in 2025, even coming off two straight years of double-digit and well-above average growth. Politics aside, markets are embracing expectations of deregulation, lower taxes, economic growth, and higher corporate earnings. Key investment banks and managers are setting S&P 500 year-end targets from 6,500 to 7,100. That translates to 10.5% to 20.7% gains from 2024 year-end. That is a wide range of optimism given current market valuations, which remain elevated historically.

We share in that optimism but at the lower end of the range, with some caution given market valuations, and the uncertainties around the new Trump Administration policies regarding tariffs and immigration potentially translating into higher inflation pressures and higher for longer interest rates.  

Both stock and bond markets have re-calibrated towards the Fed’s December FOMC projection of just two policy rate cuts in 2025. With the first being delayed to June, given the strong economy and recent stickier inflation readings. We see 2025 bond return expectations to be more constrained around the yield rather than total return potential. With intermediate-term bond yields hovering around 5.0%, that is an attractive return profile and a cushion against volatility, not only for bonds but also against stocks in balanced portfolios. Nonetheless, while the Fed expects inflation to continue its trend towards its 2% target, any retracement could present downside risk for bonds and stocks, as correlations align.   

Despite stumbling out of the gate with some downside spillover from December, stocks have rallied strongly across the board to begin 2025.  Led by the S&P 400 Mid-Cap, small-cap Russell 2000, and the Dow Jones Industrials posting gains of 4% to 5%, US stocks have again dominated. 2024 leaders, Nasdaq and S&P 500 have posted solid gains over 3% as well ending 1-24-25, with the S&P 500 setting a New All-Time High on 1-23-25. Overseas, stocks have started on a strong positive note as well, with the benchmark MSCI EAFE index gaining over 4%. The Fed's first FOMC meeting of the year is January 28-29: expectations are for the Fed to pause and leave policy rates unchanged, and comments will be closely assessed for guidance on future meetings. While the Fed remains data dependent, at this juncture, the market is expecting the Fed to be on pause until its June FOMC meeting for its first rate cut of 2025.

With optimism prevailing, we urge investors to remain within their risk objectives with well-diversified portfolios. While 2024 was not without a few bouts of volatility, especially during a Presidential Election Year and the market anticipating the Fed's next move, they were within common pullback ranges. However, despite the optimism, 2025 may bring a wider range of volatility and investors must remain disciplined and focus long-term. As market breadth continues to show signs of widening, with more participation beyond just the Magnificent Seven, diversification can pay well-rewarded dividends in the New Year and beyond. 

Catalysts for 2025:

• The US economy continues to grow solidly and leads all G7 developed economies
• Low recession risk: economic soft-landing is consensus
• Inflation continues to trend towards the Fed’s 2% target but remains sticky
• Corporate earnings remain solid and forecast for double-digit growth in 2025
• Job growth has moderated but solid; unemployment remains low at 4.1% (Dec)
• Valuations overseas remain attractive
• We continue to look for a broadening of market returns in 2025
  

Uncertainties:

• Tariffs
• Immigration and Labor
• Inflation progress stalls or retracement
• Higher for longer interest rate narrative resumes (i.e. fewer Fed rate cuts in 2025)
• Market valuations remain elevated but corporate earnings have supported thus far;
  however, as noted above corporate earnings forecast to be higher and double-digit growth in 2025
• December Market pullback consolidated post-election rally and relieved some concern the market pulled forward some 2025 returns 

The Net-Net:

• The markets and NSI are expecting the above Catalysts and Uncertainties to be a Net Positive for investing in 2025
  
  

During periods of optimism, uncertainty, and volatility, it is important investors:

• Remain well-diversified
• Maintain discipline and patience
• Focus on the long-term
• Review your Risk Tolerance

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.

~Your Nelson Securities Team   

*Past Performance is No Guarantee for Future Results