Click here to download the Q1 ‘25 MoneyMatters brochure.
Happy New Year to you and your family.
2024 delivered a dynamic, record-breaking market environment, building on the many successes of 2023 despite risks from various significant global elections, continued geopolitical tensions, and concentrated markets with high stock valuations.
After an impressive 2024, the 2025 outlook is full of new themes, potential opportunities, and a few uncertainties.
The US economy appears strong in many ways. As of December 2024, the unemployment rate remained relatively unchanged at 4.1%, and 256,000 jobs were added in December, starkly contrasting the 12,000 jobs added in October (Source: Bureau of Labor Statistics). A tight housing market is contributing to historically high home equity values buoying wealth creation, and consumers are showing resilience. However, credit card defaults spiked 50% year-over-year in the first nine months of 2024 (Source: FDIC).
A recession was avoided in 2024, and an above-trend real GDP growth is expected to reach 2.4% for the year (Source: The Organization for Economic Co-operation and Development).
Inflation has become a thornier conundrum than anticipated for the Federal Reserve. A cooler CPI stood at 2.9% (over the past 12 months) but remains higher than their preferred target of 2% (Source: Bureau of Labor Statistics). While the December 25 basis-point rate cut was widely expected, what was not expected was the insinuation that rates may not necessarily follow the downward trajectory. The Fed’s 40-year playbook has been to cut rates at every sign of weakness or crisis, but persistent inflation coupled with large government deficits makes this approach problematic and outdated. While Jerome Powell expressed reluctance to reduce interest rates aggressively in 2025, time will tell.
As of the publication of this MoneyMatters Market Update, President-elect Trump will have been inaugurated. His supporters have lofty expectations for the next four years, and we could see a business-friendly environment, helpful developments from the Department of Government Efficiency (DOGE), permanent tax cuts, a revised energy policy, and a boon for the private equity and real estate sectors, to name a few.
The new administration’s policies, however, remain unknown. The clarity in some areas is offset by anticipation in others, such as new approaches to trade and illegal immigration mitigation, which could be inflationary over time. Though labor and wage inflation has generally decreased in recent years, it could become an issue again.
Our hearts go out to those who have lost homes, property, and loved ones in the recent Los Angeles-area wildfires, whose estimated damages eclipse $250 billion (Source: Business Insider). As the state rebuilds, the federal government will offer aid at a delicate time when budgets are strained.
We will continue to monitor events both global and domestic, and their influence on instability and our nation.
While 2025 is shaping up to be a year of great evolution and optimism, always approach your portfolio and financial goals with a long-term strategic lens.
MARKET RECAP
Stock Market
With a 25.02% return for 2024, the S&P 500 enjoyed its best two years since the late 1990s. The Russell 1000 Large-cap Value Index rose 14.37%, the Russell 1000 Large-cap Growth Index was up 33.36%, and the Russell 2000 Small-cap Index increased 11.54%. Emerging markets stocks had a solid return of 7.50% although it significantly lagged the US market. (Source: Morningstar).
Bonds were mixed, with more rate volatility expected and the potential for higher Treasury yields. Still, Wall Street agrees that fixed income may provide relatively attractive returns. Bonds were on their way to a solid year until interest rates rose in the 4th quarter, leaving bonds down 3.06% with a final increase to 1.25% for the year in the Bloomberg US Aggregate Bond Index. The 10-year treasury bonds fell 1.57%. (Source: Morningstar).
Higher Returns Appear in All Flavors of Stocks
It was a good year for US stocks across the board, with all sectors in the black, including the technology, financial, and utility markets. Communication services and technology led with 39.7% and 37.6% returns, respectively, while consumer discretionary, financials, and utilities all had returns of over 20%. The following table highlights the substantially higher returns for growth versus value, with the largest growth stocks contributing the most to the S&P 500’s 25%+ return (Source: Morningstar).
US Leapfrogs Nations in Stock Market Value
Various nations across the globe saw a wide range of returns in 2024, with the US near the top, just under Argentina. Argentina saw the highest stock market returns due to investor optimism surrounding the new president, Javier Milei, who has promised significant economic reforms. China, whose financial woes include a real estate market correction, weak consumer spending, and overextended local government, came in third. A relatively strong US dollar hindered the poorest performers.
THE ECONOMY
The Law of Supply and Demand Proves True for Inflation
The government poured money and stimulus into the economy during and after the pandemic and has yet to tighten the spigot. The well-understood laws of supply and demand have undoubtedly provoked inflation. Dollars not used by productive investment appear to have gravitated to real estate, stocks, bitcoin, and volatility-inducing speculation.
Inflation Impact on Growth Not As Extreme as Predicted
As the global economy approaches the fifth anniversary of the pandemic, it is clear that fundamental conditions have changed. The pre-COVID world of low growth, low inflation, and low interest rates is behind us. Inflation, as measured by the annual core personal consumption expenditures (PCE) price index, was below the desired 2% target in 116 out of 120 months in the pre-COVID decade and has been running above the target for 43 straight months and counting.
In a surprising parallel, US GDP growth has moved upward, averaging 2.3% over the last five years, a much higher level than the 1.8% average from 2010 to 2019 (Source: Bloomberg).
The Reckoning of Government Deficits and Debt
Larger government budget deficits have become the norm in the developed world and must be addressed soon. Aging populations result in relatively fewer workers to generate the economy, which is also expected to put upward pressure on future inflation and interest rates.
The Potential For New Tariffs and Tax Act Extension Create Uncertainty
It remains to be seen exactly how the economy will digest potential changes to tariffs and trade strategies. The middle class could benefit if tax cuts are extended and less meaningful tariffs are enacted. Meanwhile, according to KPMG and the Peterson Institute for International Economics, adding new tariffs could be expected to harm lower wage earners. At the same time, continuing the “Tax Cuts and Jobs Act” beyond 2025 would benefit all earners.
A Brighter Outlook for Entrepreneurship Under New Administration
Since the pandemic, new businesses have formed at a 50% higher rate than pre-pandemic levels, likely due to necessity. Given the new administration’s more business-inclined posture, we can hope that those seeking entrepreneurship continue the positive trajectory we’ve seen.
Roehl & Yi’s Final Thoughts
A new dawn is upon us, and with it may come opportunity and unknowns. US stocks have posted total returns above 20% in two consecutive years (e.g., 2023 and 2024) only nine times since 1928 (Source: BlackRock), so prudence is warranted when anticipating 2025 to deliver another year of outsized double-digit gains.
Consider these four suggestions:
- Manage risk through diversification and lean away from overly expensive assets in favor of more modestly priced investments.
- Seek assets earning at least 4% – 5% on cash and short-term bonds should you desire shelter before other investment prospects arise.
- Do not overthink or overstate the importance of rate cuts in 2025. The economy and markets can continue to perform with or without them.
- Revisit your financial plan with your advisor to meet your objectives. Take a goals-based approach and adjust your investment strategy as needed for the New Year.
THE ROEHL & YI PROMISE
Roehl & Yi is committed to delivering value through enhanced client engagement, new educational videos, resource-filled emails, and more.
As always, we are grateful for your continued trust in Roehl & Yi. Please call us first with any questions or concerns about your investments or other financial matters. May you and your family experience happiness and good health.
This report is provided for informational purposes only. Nothing herein should be construed as the provision of personalized investment advice, nor should it be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice. Third-party data sources contained herein are for illustrative purposes only and are believed to be reliable, but we take no responsibility as to their accuracy. The newsletter contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties, and factors, actual results may differ materially. As such, there is no guarantee that any views and opinions expressed herein will come to pass. Investing involves risk of loss including loss of principal. Past investment performance is not a guarantee or predictor of future investment performance. Any reference to the performance of securities of markets, indexes or specific investments is for illustrative purposes only and does not represent any of R&Y’s recommendations or performance. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index. The figures for each index reflect the reinvestment of dividends, as applicable, but do not reflect the deduction of any fees or expenses, or the deduction of an investment management fee, the incurrence of which would reduce returns. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from R&Y or the professional advisors of your choosing.