January 2025 Client Letter

Stocks followed up a robust 2023 with another very strong year in 2024, making it the first time that the S&P 500 has delivered a +20% gain in back-to-back years since 1997–98. Though, for many reasons, the markets weren't so hot out of the gates last year. The list of worries among stock-market bears included high valuations, rising interest rates, election uncertainty, and a growing national debt to name a few. Stocks rallied through all of that without one 10% correction in 2024.

The stock market’s surprising ascent in 2024 should offer important lessons for some investors:

• The herd is often wrong. Wall Street underestimated the S&P 500’s price at year-end by about 15%. It's worth noting that positive years for stocks are about three times more likely than declines.
  
  
• The trend is your friend. Employing technical analysis can help investors avoid mistakes. In an upward-trending market, don’t take a detour because of some bearish narrative the market may not care about.
  
  
• Bull markets typically run for a while. They last more than five years on average and rarely end when the U.S. economy is growing, especially when the Federal Reserve is cutting interest rates. We are now a little more than two years into the current bull market.
  
  
• Earnings drive stock prices. The fundamental value of stocks comes from a company’s earnings. S&P 500 companies likely grew earnings around 10% in aggregate last year and it's not out of the realm of possibility that they see similar growth again in 2025.
  
  
  

Our domestic economy also offered investors another lesson — that betting against the U.S. consumer is often a losing bet — especially an employed U.S. consumer. Mortgage refinances during the pandemic and the wealth created by higher stock prices likely encouraged more spending, particularly from upper-income consumers.

Given how much good news that is currently priced into the market, 2025 may not bring quite as much joy to your portfolio as 2023 and 2024 likely did. A few reasons being: re-emerging inflation pressures, increasing interest rate uncertainty, and the current geopolitical threats that have been known to upend rallies. But, with steady economic growth, a healthy job market, and growing corporate profits - the ingredients for another profitable year are in place.

Since 1980, the annualized return for the S&P 500 is a little more than 12%. So, for 2025 and beyond it will be important to focus on the long term. Don’t get scared out of the market by the headlines if you’re a long-term investor. Waiting it out through down periods (which is easier said than done) is often the best approach for nearly all investors. Remember the old adage "it's not about timing the market, but time in the market".

As always, please let me know if there is anything that I can do for you or someone that you care about.

Sincerely,

Ed