Last year, Fed officials indicated the possibility of rate cuts throughout the year, not due to fears of a damaging recession, but because they correctly anticipated a slowdown in the rate of inflation (the “can” cut scenario).
Prices are still elevated, and inflation continues to exceed the Federal Reserve’s annual target of 2%. However, the inflation rate did ease during the year, which encouraged the Fed to take action in September. This led to three consecutive reductions in interest rates.
By the end of the year, the Fed had lowered the fed funds rate by a full percentage point to 4.25 – 4.50%.
Simply put, an easier monetary policy combined with economic growth and rising corporate profits fueled the second consecutive annual gain of over 20% in the S&P 500. This is the first such back-to-back increase since the late 1990s, according to The Wall Street Journal.
Other catalysts added to the advance, but the economic fundamentals played a significant role in last year’s returns.
Nonetheless, we believe it’s important to highlight the difference in performance between the Dow Jones Industrial Average and the S&P 500 Index in 2024. This discrepancy can be attributed in part to the differing methodologies used to calculate these indexes.
Additionally, the surge in mega-cap technology stocks significantly contributed to the growth of the S&P 500 Index this year.
According to Barron’s and Dow Jones Market Data, seven large tech firms known as the Magnificent 7 made up over half the gains in the S&P 500 Index, a carryover of 2023’s performance.
The New Year
As we gear up for 2025, many of the major themes that drove the market higher last year remain in place. The economy is expanding, and corporate profits are expected to remain on an upward trajectory. Although the Fed is eyeing fewer rate cuts this year, it isn’t currently considering rate hikes.
Furthermore, the incoming Trump Administration is expected to promote business-friendly policies such as deregulation, which will likely benefit both the economy and corporate profits. We may see a reduction in the corporate tax rate, while additional corporate stock buybacks are expected to underpin stocks.
Our team believes we will see a more challenging equity environment in 2025 and specifically, according to LPL Research, the S & P 500 is predicted to rise to a range between 6,275 and 6,375. At year end the S&P 500 closed at 5,881, so this would indicate returns in the mid-single digit range for the year.
What are some potential pitfalls that might stymie investors in 2025?
For starters, a rebound in inflation could force the Fed to raise interest rates. Such a move would likely generate uncertainty for a market that is richly valued and priced for perfection. On the other hand, if the Fed is too cautious and misjudges the economy, a deteriorating economic outlook could quickly hamper corporate profits.
Meanwhile, pro-business policies that are expected to be ushered in by the new president bolstered optimism following the election.
But if soon-to-be President Trump enacts sweeping tariffs, we may see a bump in inflation that is accompanied by slower economic growth. In 2018, Trump was more selective as he enacted tariffs, which generated market volatility and uncertainty.
Despite multiple Fed rate cuts last year, longer-term Treasury bond yields turned significantly higher over the last three months amid slower progress on inflation, upbeat economic growth, and a stubbornly high federal deficit.
A continued increase in yields could pose a greater challenge for stocks.
Final Thoughts
A diversified portfolio cannot completely shelter you from market pullbacks, but it can help lower volatility and has historically been the most effective path to achieve one’s financial goals.
Our approach is guided not only by our experience but also by the weight of academic research. We recognize that stocks are not immune to periods of subpar returns, but patient and disciplined investors have historically been rewarded.
Thank you for choosing us as your financial advisor. We are honored and humbled by your trust.
As we bid farewell to 2024, may the New Year bring you excitement, adventure, and fulfillment. May the year create cherished memories and be filled with joy. Happy New Year from all of us!
January 2025
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.