January Newsletter to Clients

Enjoy this month’s edition that features a review of 2024, predictions for 2025 and advice from Maya Angelou.

2024 was a terrific year for investing in U.S. stocks! After a really good 2023 as well. So, as 2025 opens, what should we expect? A three-peat of outstanding stock returns or a Minsky Moment? More about Minsky in a, ahem, moment but first let’s review 2024.

Large, U.S. stocks led the way this year with the S&P 500 index racking up over 50 record highs, closing up 23.3%. That means we’ve now had back-to-back years with over 20% annual gains in the index. That’s the best two-year stretch since 1997 and 1998. (What happened in 1999? Up over 20% again.) The tech-heavy NASDAQ was up over 28% and the Dow was up 13%. Small, U.S. stocks gained 11.5% and International stocks as measured by the MSCI EAFE index gained about 5%.

Bonds did their job of preserving capital and providing income with the main bond index gaining right at 1% and producing a yield of just below 5%.

Now, a Minsky Moment is a term named after economist Hyman Minsky, surely you’ve heard of him, that refers to a sudden collapse of asset prices – stocks or bonds – after a long period of growth. It’s often sparked by debt pressures. Essentially, long periods of growth can lead to excess speculation as investors try to keep the good times rolling. Often, investors borrow more to fuel the growth and, when asset prices drop, the investors are in trouble. A good, recent example is the Great Financial Crisis of 2008 when investors bought mortgages of homeowners who couldn’t afford them and stocks and bonds both crashed when home prices plummeted. 

What to expect from 2025? Market strategists, on average, predict the S&P 500 will hit 6500 by the end of the year – an over 10% increase from the index’s close of 5884 at the end of 2024, according to Bloomberg data. Last year at this time economists were on recession watch, stock valuations were relatively low and investor sentiment was reserved. At the start of 2025, stocks are more expensive with the Price/Earnings ratio of the S&P 500 at about 22 times their expected annual earnings. Historically, that’s fairly high. But, Wall Street is looking for earnings to grow by 15% this year so, if true, that could provide justification for an increase in stock prices.

As I’ve written before, stock market predictions are notoriously wrong. How wrong? Paul Hickey, a founder of Bespoke Investment Group, compared yearly Wall Street predictions with actual results starting with the forecast in 2000. First, the Wall Street consensus only predicted gains…never losses. The consensus prediction was an 8.8% return, on average. The variance between what was predicted and the actual results was an average of 14.2%. That’s not just wrong, that’s flying to New York but landing in London wrong.

So, three-peat or Minsky Moment? Even the bond wizards at PIMCO predicted the Great Financial Crisis in 2006….that actually occurred in 2008. Being right two years early is still wrong. So, what do we do with all this information? Repeat after me – diversify! Bonds, large, U.S. stocks, mid and small U.S. stocks, maybe a bit of real estate, international stocks – all mixed into a soup based on the recipe that meets your particular needs. And, as Maya Angelou once said, “Hope for the best, but prepare for the worst.”

Thank you for your continuing confidence.

Ramsey Bova, President & Owner, CFP®