January 7th, 2025
Welcome to 2025. I hope the holidays treated you well.
2024 was a politically charged election year, yet an incredibly expansive year for the US equity market. The S&P grew more than 20%. Investment capital poured in from around the globe – a record shattering $1 trillion flowed into US-based exchange-traded funds. The US economy outperformed the next best economy by orders of magnitude. And, regarding the year ahead, I’ve overwhelmingly heard the phrase ‘financial renaissance’ from some of the world largest asset managers.
I know many folks are concerned about the incoming administration and what their policy changes may bring. It’s not to be dismissed. Proposed deportations, tariffs, tax cuts, regulation cuts, and the many ideas for government restructuring can raise concern. But we will take these changes in stride and make the necessary adjustments as each policy finds its way into existence.
That said, I work actively to leave my political leanings to the side – even though I’m human and I, of course, have political opinions of my own. I’m grateful for my work as it’s always required me to investigate both sides of the spectrum. Being hyperbolic as an investor will most certainly prevent you from making good decisions- which is why I cannot be. I need to see things as they are, so I can win for my clients. Whether I like or dislike a policy, I am required to understand what it may mean for the markets and how best to orient investor capital so we may achieve the best possible outcome.
This year may present challenges, but it also presents opportunities. I feel strongly that, with the incoming policy changes, we’ll see growth opportunities in the financial sector, small-caps, and bitcoin/crypto adjacent companies. We are reorienting our portfolios to reflect this and are looking forward to a prosperous year ahead.
Please do not hesitate to reach out to us with questions or to schedule a meeting with me. I’d love to hear from you.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Market Update
Global Equities: 2025 was an incredible year for US-based equity markets. The S&P 500 grew +23.2%, the Nasdaq grew even more finishing the year up +24.72%, and the Dow Jones Industrial Average finished out the year up +13.25%. Developed International stocks barely squeaked out a positive year, up just +0.8%. While Emerging markets closed the year out up +8.13%.
Economic Update
ISM Manufacturing: The Institute for Supply Management Manufacturing gauge improved from 48.5 to 49.3 in December, still contracting albeit at a slower pace. The reading was better than expected, highlighted by an increase in new orders. A separate report on the Purchasing Managers’ Index Manufacturing component rose to 49.4, also better than expected. Weakness in the manufacturing sector has been more than made up for by strength in the services sector.
Rates Weigh on Mortgage Demand: The average 30-year fixed rate mortgage rose above 7%, worsening affordability for potential homebuyers who were anticipating cheaper mortgages after the Fed cut rates twice. Applications for purchases fell -6.8% during the week and refinancing applications cratered -23.4%. Home prices aren’t getting any cheaper, either. The Case-Shiller Home Price Index rose 0.3% during October and is up 4.2% year-over-year.
Charts of the Month
Mortgage Rates
Our first chart shows a five-year look at 30-year mortgage rates, aggregated by Mortgage News Daily. Shelter has been a major driver of inflation, and the low rates during the pandemic were partially responsible for increasing home prices, something the Fed had hoped to reverse by raising rates. Affordability has not returned to the market, however, as cash-buyers stepped in to buy the limited inventory of homes for sale. Mortgage-holders who are locked in at a low rate have largely avoided selling, further contributing to the undersupply of homes and exerting further upward pressure on prices. Now, the Fed is cutting rates, yet mortgage costs shot up this week to back above 7% because there will be fewer cuts than anticipated in 2025.
Source: Mortgage News Daily
S&P 500
Our next chart shows SPY (Market-Cap-Weighted S&P 500) vs RSP (Equal-Weight S&P 500) since of October of 2024. Equal weight had been keeping relative pace with the S&P for the two months prior to December. In December we saw the “Magnificent Seven” stocks climb by an average of 10% each, while the S&P is down over -1%, and RSP has declined nearly 7% for the month. The “Mag Seven” continue to buoy the market, while equal weight strategies lag. That said, news about rates cut exception gave the markets good reason to reorient their portfolios in anticipation for 2025 – fundamentally, this move lower in December wasn’t structural and we’re already seeing the bullish mentality return to market breadth in 2025.
Source: AllOneWealth via TradingView
Bond Fund Performance
Our last chart is a look at the performance of the iShares iBox US High Yield ETF (blue line, ticker HYG), the iShares Core US Aggregate Bond ETF (red line, ticker AGG), and the iShares 20+ Year Treasury Bond ETF (purple line, ticker TLT). Despite spreads over Treasuries that are near historic lows, high yield bonds delivered solid returns in 2024 amidst a benign default environment. Longer-duration bonds, on the other hand, gave up all their 2024 gains after the Fed signaled fewer 2025 rate cuts. Could there be a bottom forming for longer-duration bonds? Possibly, but with uncertainty over tariffs, tax cuts, and other inflationary proposals, yields could be in store for one more upward move in early 2025.
Source: AllOneWealth via TradingView
