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Winter 2025<br/><br/><sup>Volume 33 | No. 1</sup>

Winter 2025

Volume 33 | No. 1

Market QuickTakes Q4 | 2024

2024 was a great year for US stocks across the board, with the major indexes posting double-digit gains for the second year in a row, led by Nasdaq and the S&P 500. In a contentious Presidential Election Year, there were many off ramps for investors; however, those who remained disciplined and maintained a long-term focus were rewarded.

Key Highlights:

  • Following the 2024 Presidential Election win by Donald Trump, and Republicans retaking the Senate for full control of Congress, stocks rallied strongly to new All-Time Highs on expectations of deregulation, lower taxes, economic growth, and higher corporate earnings

  • 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; in 2024, the S&P 500 set 57 new All-Time Highs

  • Despite a strong post-election rally to new All-Time Highs into early December, markets recalibrated with small-caps, mid-caps, and the Dow leading on the downside remainder of the month, adjusting 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 for the month

  • As expected, the Fed cut policy rates two times in the Fourth Quarter, November and December, 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

  • 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 7; back-to-back years of 20% plus gains are rare, happening just four times since 1930, according to JP Morgan

  • Market breadth widened post-election, as small- and mid-caps surged; despite the rough December pullback, the Russell 2000 and S&P 400 posted 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, while Emerging Markets slid 8.2% in Q4, they closed 2024 up 5.1%; the strong US dollar, which rose 7.1% in 2024, contributed to the losses for US investors; the MSCI EAFE index gained 8.4% in local currency for the year, while Emerging Markets gained 10.5%

  • 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

  • The Bloomberg Aggregate Bond index lost 3.2% in Q4, including 1.7% in December, to finish 2024 up just 1.3%

 

Past Performance is No Guarantee for Future Success 

2025 Retirement Contribution Limits

Market Review 

A record setting year for US stocks,
overcoming challenges and uncertainty

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

The Importance of Diversification


It is often said, "Diversification is the only free lunch when it comes to investing." However, diversification does not prevent losses, nor ensure gains. 

In the following commentary below, our partners at Vanguard expand on this important foundation for successful investing over the long-term.* 

You've heard the expression, "Don't put all your eggs in one basket." The reason is that if the basket falls, you could lose everything in one fell swoop. But if your eggs are in multiple baskets, you have a much better chance of getting home safely with enough eggs to make that omelet. The same principle applies to your investment portfolio.

Keeping all your money in one basket, whether that's stocks, bonds, or real estate, exposes you to the risk of losing more during a market downturn or geopolitical event. A diversified portfolio, on the other hand, spreads your money across multiple investments. If one drops in value, the others can help offset the losses and stabilize your portfolio. Diversification is one of the most fundamental strategies for building an investment portfolio focused on long-term growth.


What's diversification?

Rather than trying to pick potential winners and avoid potential losers, diversification calls for owning a piece of the entire market to increase your chances of long-term success. As the saying goes, "If you can't find the needle, buy the haystack."

Diversification helps lower your overall investment risk by tapping into a concept known as correlation. Correlation is used to show how different investments move compared with one another. When you combine investments that don't move in the same way, your portfolio has low correlation, which can protect against extreme declines. For example, when stock prices fall, bonds typically (but not always) go up. By owning both, you can reduce big swings in your portfolio's value.

So how can you diversify your portfolio? True diversification involves owning stocks from various industries, countries, and risk profiles. It also means investing in other asset classes beyond equities, such as bonds, commodities, and real estate, whose performance isn't usually in sync with stocks during different market environments. These assets work together to reduce a portfolio's overall risk and volatility.
 

How does diversification work?

Diversification applies to both the stock and bond portions of a portfolio. On the stock side, it means owning shares of U.S. and international companies of different sizes and in different sectors. Bond funds are composed of government bonds, corporate bonds, and municipal bonds, among others.

Having a balance of lower-risk assets like bonds and higher-risk assets like stocks allows a portfolio to grow while providing a cushion against volatility. While stocks offer higher expected returns over the long run, they can experience substantial short-term swings. High-quality bonds, on the other hand, tend to generate lower returns but may provide stability. A diversified portfolio reduces overall risk while still allowing for long-term growth potential. Of course, a diversified portfolio approach may underperform relative to a winning investment, but it may provide stability and can help you sleep at night.

Market factors have changed the dynamics of bond investing and how investors should approach using bonds for portfolio diversification. Higher rates in recent years have created short-term challenges for existing bondholders.

While the bond market has faced headwinds, owning fixed income investments is still an important part of portfolio diversification because these assets may offer stability and can reduce volatility. Bonds generally offer fairly reliable returns and are better suited for risk-averse investors.

How do Build A Diversified Portfolio?

Building a diversified portfolio involves spreading your investments across different asset classes, sectors, and geographies and using different investment styles. Keep these things in mind as you create a diversified portfolio:

Asset allocation:

A diversified portfolio starts with the understanding that you'll have a variety of asset classes. The percentage you invest in each asset class depends on your risk tolerance, time horizon, and goals. 

A common guideline is a 60/40 split between stocks and bonds (NSI- Nelson Securities' Moderate Allocation ,  but other model allocations include:

  • Aggressive. 90% stocks/10% bonds
  • Moderate. 70% stocks/30% bonds (NSI characterizes 70/30 as Moderate PLUS for risk)
  • Conservative. 50% stocks/50% bonds

A higher stock allocation may provide more growth potential but also greater volatility, while a higher allocation of bonds may increase stability but may dampen long-term returns.

Diversify within asset classes

  • Market capitalization. Include large-, mid-, and small-cap companies.
  • Sectors. Spread your investments across various industries like technology, health care, energy, and financials.
  • Geographic regions. Invest in both domestic and international markets, including developed and emerging economies.
  • Investment styles. Balance between growth stocks and value stocks.

For bonds, consider a mix of Treasury, corporate, and municipal bonds.

This multifaceted approach to diversification within each asset class helps ensure your portfolio isn't overly dependent on any single performance factor. It can provide more consistent returns across different market conditions and economic cycles.

Diversification isn't one and done

Building an appropriately diversified portfolio is only the first step. Over time, market movements will cause your asset allocation—the percentage of your money invested in different types of investments—to drift. For example, if stocks have a strong run, the equity portion of your portfolio may grow larger than forecasted.

To maintain your preferred asset allocation, it's important to rebalance periodically by shifting some of your portfolio's earnings into other parts of your portfolio that may not have fared as well. This process of rebalancing your portfolio can help you practice the time-honored "buy low, sell high" strategy, controlling risks and keeping you aligned to your long-term plan.

Bottom line:

Diversification is a fundamental strategy for managing investment risk and building long-term wealth. While it may not guarantee profits or protect against losses, a well-diversified portfolio can help smooth out market volatility and provide more consistent returns over time.

2024 was the Latest example

The table below from JPMorgan illustrates Best to Worst Performing Asset Classes by year from 2010 to 2024. As you can see, no Asset Class is always at the top or bottom from year to year. The results are random and unpredictable. Importantly, a Diversified Portfolio using Asset Allocation is always in between and provides more consistent results over time and can reduce the emotional impact of volatility that can be a detriment to investor results. While a Diversified Portfolio using Asset Allocation will not be the best performing in any given year, most importantly it is never the worst, which can undermine any investor's long-term results. Again, Asset Allocation does not prevent losses nor ensures gains in any given year. Additionally, pullbacks of 5%+ and corrections of 10% in stocks are common in every year, which can test investor's tolerance for risk.  

2024 was widely considered a very strong year for the markets; however, returns varied greatly. As the JPMorgan Asset Class Returns table below illustrates, the diversified Asset Allocation Portfolio came in third place in 2024.

Be sure to discuss how Diversified Portfolios and Asset Allocation with your Nelson Securities Representative best fit your Risk Tolerance and how to implement it with your portfolio.

Call your Nelson Securities Representative Today: 800-345-7593 


Past Performance is No Guarantee for Future Results.


Asset Class Returns - JPMorgan

Source: Bloomberg, FactSet, MSCI, NAREIT, Russell, Standard & Poor’s, J.P. Morgan Asset Management. 

Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg Commodity Index, High Yield: Bloomberg Global HY Index, Fixed Income: Bloomberg U.S. Aggregate, REITs: NAREIT Equity REIT Index, Cash: Bloomberg 1-3m Treasury. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Bloomberg U.S. Aggregate, 5% in the Bloomberg 1-3m Treasury, 5% in the Bloomberg Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. Annualized (Ann.) return and volatility (Vol.) represents period from 12/31/2009 to 12/31/2024. Please see disclosure page at end for index definitions. All data represents total return for stated period. The “Asset Allocation” portfolio is for illustrative purposes only. Past performance is not indicative of future returns. 

Guide to the Markets – U.S. Data are as of December 31, 2024.


*Source: Vanguard

All investing is subject to risk, including possible loss of the money you invest. Diversification does not ensure a profit or protect against loss.

There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.

Financial Insights...

Secure Act 2.0 "Super" Catch-Up
What you Need to Know

Important provisions of the Secure Act 2.0 begin in 2025, including the "Super" Catch-Up for certain retirement plans. Currently, a participant in a 401(k), 403(b), governmental 457(b) plan, or SIMPLE IRA who attains age 50 by the end of a calendar year can make catch-up contributions in excess of the regular deferral limit. Starting in 2025, participants who turn age 60, 61, 62, or 63 (not age 64) by the end of a year will be able to make an additional contribution for that year!

Get the Details from Lord Abbett! 

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Traditional IRA vs Roth IRA
Which is Right For You

Hartford Funds: It's IRA Season and you have until April 15, 2025 to make 2024 IRA Contributions and can start making 2025 contributions as of January 1, 2025.

  • 2024 limit is $7,000 plus $1,000 Catch-Up for Age 50+
  • 2025 limit is $7,000 plus $1,000 Catch-Up for Age 50+

This Hartford Funds piece provides valuable insight into the Benefits and Differences of Traditional IRAs and Roth IRAs, and which may be best for you.

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Expect the Unexpected
with Stocks

Dimensional notes that looking back on the history of investing in stocks, as measured by the S&P 500, from 1926 to the end of 2023 returns have averaged a little over 12%. Can investors expect that year by year? Not even close. 

Since 1926, only 15 out of 98 years had returns within five percentage points of the 12.2% average. In the other 83 years, the average deviation was over 18 percentage points. Talk about an uncommon average!

Read this important perspective from Dimensional to set expectations and why long-term investors must stay disciplined to reap the rewards.

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NOTE: WAA Winter 2025 Model Portfolio Allocations Q1-Q2 2025 (Updated Jan-25: Direct Mutual Fund and Annuity Models Updated) 

Model Portfolio Allocations

Investor Note


Mutual Fund and Variable Annuity investment strategies, which include investing in specific sectors, foreign securities (both developed and developing markets), high yield securities, or small and medium sized securities may increase the risk and volatility of the funds/sub-accounts. Changes in interest rates may affect the performance of fixed income (bond) funds; if rates increase, bond values decrease and vice versa. Investors should consider the investment objectives, risks, and charges and expenses of the Mutual Fund and/or Variable Annuity carefully before investing.

The Mutual Fund prospectus (and summary prospectus, if available) and Variable Annuity prospectus contains this and other information. Please read carefully before investing. A Mutual Fund prospectus and Variable Annuity prospectus and contract can be obtained by calling your Nelson Rep at 800-345-7593 or the Mutual Fund and/or Annuity company directly.

Publisher: Nelson Securities, Inc.

The WEALTH ASSET ADVISOR is published quarterly by Nelson Securities, Inc., a Registered Investment Advisor. All rights reserved. It is a violation of U.S. copyright laws to duplicate or reproduce any article or portion of this publication without the written permission of the publisher.

Information and historical market data contained within this newsletter are taken from sources we believe to be reliable but, we can not guarantee its accuracy. Nelson Securities, Inc., or the publisher, will not be held responsible for actions taken based wholly or partially on information contained herein. Recommendations are of a time-sensitive nature and not a substitute for a comprehensive plan for investing. Each investor must consider suitability with regard to risk prior to investing.