01/2025 - 2025 Outlook
Full written article below with sources.
Disclaimer: Because of the increased regulation and compliance in the financial industry, I want to start with saying everything in this newsletter is based on my opinion and is not predictive in any way.
With 2024 now in the rear-view mirror, I’m happy to report on another positive investment year. Like all years, we need to be long-term financial plan focused as opposed to the shifting sands of unpredictable investment returns. This idea will be the same in 2025 and each year that follows.
Twice a year I like to restate some of the core beliefs we all should be following.
General Principles
We are long-term, goal-focused, and plan-driven investors
Creating broadly diversified portfolios is central to Investment Policy
The economy cannot be consistently forecasted, and the markets cannot be timed. Because of this, the only practical way to capture the long-term, historic investment returns is to ride out the frequent, but historically short, market downturns. Put another way, there are no facts about the future.
As your long-term financial goals change, so should your investment allocation
2024/2025 Comments
- The investment returns in 2024 were largely fueled by a handful of technology companies – one such company close to tripled its stock value in 2024.
- The economic backdrop continues to be favorable with a strong job market. Although we may be seeing signs of cooling off with a relatively stringent monetary policy from the Federal Reserve.
- Corporate earnings and dividends reached records highs in 2024 and are forecast to increase further in 2025
- Current valuations are high, when compared to longer term averages. However, valuations have not proven to be a historically accurate indicator of market returns.
- Inflation is sticking around longer than anyone would like and just in December 2024, Fed Chair Powell shared he doesn’t see inflation going away anytime soon.
- Since March 2009, the S&P 500 has enjoyed annual returns of close to 16%. This trendline is not the go-forward expectation and in our financial plans assume a much more conservative return figure.
- Finally – let us never forget the intense volatility of market returns. In 2020, the S&P 500 dropped by over 30% in about 30 days and in 2022 with high inflation the S&P 500 dropped close to 25% over a 10 month period. In 2007-2009 the S&P 500 dropped by over 50%.
More on 2024
We’ve had back-to-back great years in the S&P 500.
In 2023 - S&P 500 was up over 25%
In 2024 - S&P 500 was up over 25%
Using history as a guide, this has only happened three other times since 1928.
- 1935 and 1936
- 1954 and 1955
- 1997 and 1998
So the next question is commonly…. So what happened in the year that followed? Well, unfortunately, we got a little bit of everything.
- 1937 was down 35%
- 1956 was up 7%
- 1999 was up 21%
It’s important to keep in mind that the “great” years, like in 2023 and 2024 typically come on the heels of a “terrible” year, like 2022 – down close to 25% at one point in the year.
These up years have historically outpaced the down years and this is why we have 30 year+ long-term S&P 500 averages of close to 10%.
When thinking of back-to-back great investment years, it’s common to think, why don’t we just have a 100% allocation to the S&P 500? Because heck… the S&P 500 is at about 6,000 with annual returns since 2009 of about 16%. You all know the thought process here. But let me share where most get the cart before the horse.
Someone who buys the market today doesn’t get any of the historical return. Someone who buys today is buying into a market with a historically high valuation, close to 22 times the next 12 months forecasted earnings. Sourced from JP Morgan
Please click on link for full disclosures: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
And as Warren Buffett said - “The investor of today does not profit from yesterday’s growth.” This idea is one of the reasons it can be so hard to implement a disciplined investment and disciplined diversification strategy. Because keep in mind, the proof-point of diversification is knowing that some of the portfolio is going to out-perform and some of the portfolio is going to under-perform.
Last word on this – when building investment portfolios, it’s critical to remember not to own enough of something to make a killing in it, because if you do, you also own enough to get killed by it too.
Last data point I’d like to highlight is a chart I’ve shown numerous times before – it’s shows the regularity of market declines
Additional Data: Each month I get asked by clients what additional resources I’m looking at. Please hear me in stating I’m not trying to predict anything whatsoever, just some of the interesting data I’m watching.
- Tariffs – I’ll confess – I do not understand the tariff idea that President Elect Trump is touting. To me, a tariff is simply a tax that gets passed down to the consumer, people like you and me. This article from Warren Coats summarizes my simplified view.
- What Happens when China starts selling their held US Debt? – This was a question recently posed by a friend. If you think about this question too, the article from VisualCapitalist does a wonderful job of showing that China holds just 2% of outstanding US debt
- Trillions in Money Markets – At it’s highest level ever reported, there’s now 6.8T in money market funds. In the investing market, this is called “Dry Powder.” These are dollars enjoying higher levels of interest than in years past. But ask yourself, what do you think will happen when/if the Federal reserve starts to cut interest rates and banks start paying less in interest on these accounts? Do you really think people will just continue to hold their funds with less interest, or do you think they’ll look for other alternatives to make money? My guess is assuming interest rates come down, these people will start to move some of these funds back into the broader market. So what do you think would likely happen to market prices if this does occur?
- Breakeven Inflation Rate - 5-Year Breakeven inflation rate is now 2.40%. When you study this chart, you’ll see it goes back to 2004.
- Federal Reserve Balance sheet – The Fed continues to follow through on it’s statement of reducing the balance sheet. We’re now down to $6.8T dollars in the balance sheet, last time we saw this was May 2020 levels and declining.
- Debt Interest Payments – Most in this country would agree that the Federal Debt is just too high, but did you realize that the interest payments on this debt is now over 1.1 trillion a year? What should we do about it? My guess is we should balance the government budget…. But no one is asking me.
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
**Case Study Disclosure** The case study presented is purely hypothetical and does not represent actual client results. This study is provided for educational purposes only. Similar, or even positive results, cannot be guaranteed. Each client has their own unique set of circumstances so products and strategies may not by suitable for all people. Please consult with a qualified professional before implementing any strategy discussed herein. No portion of this case study is to be interpreted as a testimonial or endorsement of the firms' investment advisory services.
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
This report was prepared by Hobbs Wealth Management a State registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. For more information please visit: https://adviserinfo.sec.gov/ and search for our firm name.
This newsletter is prepared to provide a degree of insight into the analysis used by Hobbs Wealth Management to make investment decisions. It is not a complete description of all factors used by Hobbs Wealth Management to make decisions on behalf of clients. The opinions included are not intended to be taken as fact, but are Hobbs Wealth Management’s interpretation of the impact of external events on investments.
The information herein was obtained from various sources. Hobbs Wealth Management does not guarantee the accuracy or completeness of information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. Hobbs Wealth Management assumes no obligation to update this information, or to advise on further developments relating to it.
This article contains external links directing you to a third-party website. Although we have reviewed the website prior to creating the link, we are not responsible for the content of the sites.
An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation. The specific securities identified and described herein do not represent all of the securities purchased or sold for the portfolio, and it should not be assumed that investment in these securities were or will be profitable. There is no assurance that the securities purchased remain in the portfolio or that securities sold have not been repurchased. For a complete list of holdings please contact your portfolio advisor.
Hobbs Wealth Management may discuss and display, charts, graphs, formulas, stock and sector picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. This specific information is limited and should not be used on their own to make investment decisions. This information is offered as educational only.