STOCK MARKET RECAP JANUARY 2025

After a positive week in the third week of January, the S&P 500 and the Nasdaq are within 1% of their all-time highs reached in mid-December.  The Russell 2000 (small cap) is still well below (-8%) it’s December highs.

The chart below shows us how all three indices have steadily climbed over the last year.  The S&P 500 has climbed 25.7% since the beginning of 2024.  The Nasdaq has increased 30.7% since January of last year and the Russell is up 12.3%.  This is another data point showing why I steer people away from small cap stocks.  The Russell 2000 still sits below its peak reached in November of 2021.

If you follow our system, you posted another year of exceptional increases.  Just about all investors did very well in 2024.  Even Target Date funds which I don’t like posted 15% gains in 2024.  But remember that back to back years of 20% gains are very rare.

The markets were pleased to hear that the new administration seems to be proceeding more slowly with their threat of large tariffs. 

Interest rates, inflation and recession worries remain the big story for stocks going forward as they have for almost two years.  The consensus is that the Fed will only make two rate cuts in 2025 compared earlier expectations of four or more.  Inflation has been stuck at around 3% which is above their target of 2% so they are going to be cautious with their rate cutting. 

Employment and GDP statistics remain healthy, but most people are expecting lower economic growth in 2025. The market is still betting on a soft landing. Recent earnings reports from the big banks were very strong which is a good sign for the overall economy.

Longer term interest rates have climbed over the last couple of months.  The yield curve is now un-inverted with longer term rates now above short-term rates which is a more normal situation.  Strangely, interest rates on 10-year Treasury notes are a full point higher than when the Fed started cutting rates over a year ago.  Mortgage rates are tied to 10-year Treasuries, and they have climbed as a result.

Net-net, I still expect a volatile and skittish market going forward.  My valuation model still has the S&P 500 at 17% overvalued.  With high valuations and a very uncertain economic picture moving forward, the markets will continue to overreact to any bad news.  The policies of the new administration are another wild card.

We will continue to ignore our emotions and stick to what our models are telling us.  You, too, should stick to your long-term strategy.

Stay Disciplined My Friends,

Phil McAvoy

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