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by Mike Maehl
The year 2024 was full of many surprises—both positive and negative—that seemed to come out of nowhere. Just like every other year. A common theme was that the US economy, while not perfect, sidestepped a recession yet again while largely beating expectations.
Choppiness in the New Year is being driven by the U word: uncertainty. Uncertainty as to policies, regulatory changes, inflation, share price valuations and, oh, yes, let’s not forget about the Fed and rates. These are bricks in the wall of worry – which is a function of bull markets.
Prices have changed, but they always do. Fundamentals remain pretty strong, providing us with a foundation for a good market. Markets and, therefore, prices fluctuate – it’s what they do. Don’t make long-term decisions about your investments due to short-term noise…
2024 RESULTS
The S&P 500 surged 23.3% last year, building on the gain of 24.2% from 2023. The two-year gain of 47% is the best since the nearly 66% rally in 1997 and 1998. The Dow put up an increase of 12.8%, with the NASDAQ having the best result, being up 28.6%. S&P added that the market has ended the year higher than it started 63 of the last 91 years.
A couple of points as you consider the past investment year.
First, you can’t get these index returns. The investments designed to track them have a bit of friction due to internal fees so, assuming you were in one for the year, you still wouldn’t get the exact results. Further, unless you were exclusively in index-type funds, your returns will be a direct result of the makeup of your portfolio.
More importantly, don’t use short-term market results, whether by index or specific asset, to decide your long-term strategy. Long-term stock market results are your key. Don’t let the newsyappers lead you astray short-term and cause your long-term results to be penalized.
So, it says here that about one-fourth of the S&P 500 was up 24% or more in 2024. Meanwhile, in terms of overall breadth, two-thirds of the index was up last year, leaving one-third in the red.
Creative Planning’s Charlie Bilello wrote that,” Including dividends, the S&P 500 was up over 27% last year. That sounds abnormally high, but it’s actually more common than you might think. The S&P 500 finished with a total return above 25% in 26 out of 96 years since 1928.”
By the way, in case you missed it, the new, cool trader’s way of referring to the mega-techs is not to call them the Magnificent 7 but, instead, as BATMANN. This includes Broadcom, Apple, Tesla, Microsoft, Meta, Amazon, Alphabet A, and, of course, NVIDIA.
FYI, Apple, Google and Tesla all hit new 52-week highs just before year-end. Nvidia has been the best performing stock in the S&P 500 over the last 5, 10, 15, and 20 years.
If these tech companies were themselves a separate stock market, they would be nearly as valuable as all the rest of the companies publicly traded around the world. Hum-azing!
Back to the market. The US inflation rate averaged 3% in 2024. The unemployment rate came in at an average of 4%. Real GDP growth was roughly 3% annualized in the 2nd and 3rd quarters.
And stock prices didn’t – and don’t – go up just for the sake of going up. Rather, they’re supported by fundamentals. Specifically, the economy usually grows, which then helps earnings to usually grow. But it’s important to remember that “usually” doesn’t mean “always.” The hard part about investing is no one knows the future.
For instance. The stock market does experience a lot of down-days. In fact, historically, prices fall on 47% of trading days annually. (BTW, historically, that also means that 53% of market days have seen gains.) This makes the case against looking at the markets too frequently. There are no one day trends…
The longer term can prove much more valuable to you. Charlie Bilello determined that the average growth of $100k, having stayed invested in US Stocks over 30 years, was $2.5 million versus $395k for the same initial investment in Treasury Bills. No risk – no reward.
Earnings drive stock prices – no matter where you are in the world. Bloomberg noted how badly foreign markets have lagged: Over the last decade, in price terms, the MSCI Europe has lagged the S&P 500 by an average compounded rate of 7.7% per year, while the MSCI Emerging Markets has lagged by 9.6%. That’s terrible underperformance.
2025 THOUGHTS
The stock market kicked off this year mixed, falling on the first trading day while bouncing back on the second. The result – as of this writing – had the S&P 500 up 1% “year to date” and up 66.1% from its October 12, 2022, closing low of 3,577.03. Already something for everyone…
The major uncertainty that had hung heavy over us for some time was resoundingly resolved on Election Day. The election of a presumably far more capital-friendly, economically aware administration had set off what to me seemed to be something of a speculative surge.
The US economy continues as the global powerhouse. In addition to having a $170 trillion private sector net worth, there’s also the fact that the market capitalization of US stocks is greater than the sum of all other global stock markets market cap…
We have quite a still-strong economy, with 3% GDP growth. Second, record profits are expected for a second year in 2025 – and not just from the tech sector. Undervalued sectors like health care and materials and industrials are also expected to see profit increases in the high teens.
And it’s not just profits that are up. Profit margins are expected to remain near a record 12%, which means corporate America is keeping a large portion of the revenues it takes in as profits, which, in turn, drives earnings. Interestingly, earnings forecasts have been relatively accurate, as opposed to price targets, which can often miss the mark by a wide margin. And repeat that mantra—earnings drive share prices…
As one would expect, pretty much every institution is currently warning investors not to expect another year of returns topping 20%, just like they did a year ago. 17 major firms have their 2025 forecasts in with gains of 7% at the low end and 17% at the high end. Interestingly, there’s not a single down year on the list.
I’m reminded of something the economist John Kenneth Galbraith observed. He noted that, “The only function of economic forecasting is to make astrology look respectable.”
An unfortunate example was given in October 1929 by Professor Irving Fisher who stated, “stock prices had reached what looks like a permanently high plateau.” Prices then proceeded to fall 80% from that plateau. There are few certainties in the markets. One thing I’m certain of is that no one can call tops (or bottoms).
With confirmation bias operating as it does (i.e., “the tendency to search for, interpret, favor, and recall information in a way that confirms or supports your prior beliefs or values”), many investors almost can’t help but fall back on that bias to some extent, given the ongoing daily firehose of negatively slanted so-called “news” and commentary to which they’re always exposed.
If anything, late last year, many investors feared that the stock market had gotten ahead of itself, as evidenced by somewhat stretched valuations. Since valuations have never proven to be a reliable timing tool—any more than anything else has—we encourage our clients to just stay with their strategy.
It probably is not reasonable to suppose that the broad stock market can go on indefinitely compounding at the nearly 16% it’s been producing since the 2009 lows. Our long-term strategies assume the hundred-year return of the S&P 500 at around ten percent.
Inflation hasn’t gone away. Nor, as Fed Chair Powell observed in mid-December, is it going away in the foreseeable.
The consumer is in very good shape. The household debt service ratio (debt payments as a percentage of disposable personal income), at 10.1% in the third quarter of 2024, is near 40-year lows.
SUMMARY
BofA’s Savita Subramanian said, “For US stock returns, Fed policy moves take a backseat to the scarcity or abundance of corporate profits.” She believes that it could be a mistake to compare today’s P/E ratios to those in the past.
“Today’s S&P 500 companies are just better.” She adds: “The S&P 500 is less levered and of higher quality than in prior decades. The makeup of the index has shifted from 70% asset-intensive manufacturing, financials and real estate in 1980 to today’s 50% asset-light innovation-oriented companies.”
“The S&P 500 remains in a bull market, and for all periods since 1928, the S&P 500 has been in a bull market on nearly 80% of all trading days,” Bespoke Investment Group analysts wrote in their annual outlook report. “Bull markets have historically been much more prevalent than bear markets, so if you bet against the market, the odds are stacked against you.”
No one ever makes the right decision at the right time with every investment. The only people who flawlessly time tops and bottoms are either lucky or highly accomplished liars.
When it comes to long-term investing, it’s both my experience and firm belief that optimism is the only reality.
Have a financial strategy, stay with it, manage your behavior, practice good information selection, and let the markets work for you over time.
We wish all our clients and friends—because to us they’re the same—a healthy, happy and very prosperous 2025. We’re always here to answer your questions or address your concerns.
Thank you for being our clients. It’s a privilege to serve you.
Michael J. Maehl, BFA™, CRC®
Senior Vice President
Retirement Income Specialist
509.944.1790
14 East Mission, Suite 4
Spokane, WA 99202
Email: [email protected]
Website: www.opus111group.com
This commentary contains forward-looking statements. The economic forecasts set forth in this commentary may not develop as predicted. Investing involves risk including the potential loss of principal. Past performance is no guarantee of future results.
Michael Maehl uses the trade name/DBA, Opus 111 Group. All securities & advisory services are offered through Commonwealth Financial Network©, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network.
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