“It’s no surprise to me, I am my own worst enemy. Cause every now and then I kick the living heck out of me.” -Lit
The recurring headlines on Wall Street and the economy in 2024 were a tug-of-war between optimism and apprehension. While investors cheered the Federal Reserve’s new rate-cut cycle, many were also bracing for the proverbial “next shoe to drop.” Themes of irrational exuberance often found themselves evenly matched with irrational anxiety, reflecting the uncertainty that defined much of the year.
After a cumulative 1% rate cut in 2024 brought the federal funds target range to 4.25%–4.50%, Fed Chair Jerome Powell, in December, highlighted the robust performance of the labor market and resilient consumer spending. However, he hinted at adopting a more cautious approach to additional cuts in 2025. Markets started the year on shaky ground, with major indices in the red and the 10-year Treasury yield climbing ominously toward 5% following a stronger-than-expected jobs report—an indicator that sparked reinflation concerns. This serves as a reminder that in markets, good news can sometimes be bad news for stocks.
Looking Back
If the past year has taught us anything, it’s that market uncertainty is the price of admission for long-term gains. While sitting on cash or attempting to outguess the market might feel like the safer bet, the opportunity cost of sidelining your portfolio can be staggering. As we roll into 2025, expect a familiar refrain: market challenges, shifting narratives, and opportunities for the disciplined investor. Partnering with a trusted advisor to fine-tune your financial plan will be your edge in navigating what’s next.
When it comes to managing our investments, we can, as the 1999 song by Lit reminds us, be our own worst enemies. Behavioral finance research has revealed how emotional and cognitive biases can lead investors to make financial decisions that harm rather than benefit them. From panic selling during brief market downturns, overreaction to Armageddon predictions, to overconfidence in bull markets, ingrained behavioral patterns frequently result in inappropriate asset allocation, poor market timing, and reduced long-term returns.
This is especially relevant as we enter 2025. With the stock market and many other asset classes near all-time highs after two years of strong returns, understanding these biases is more important than ever. What stands out most is recency bias or focusing too much on recent events rather than long-term patterns, can lead investors to make bad decisions.
Over the past two years, despite widespread concerns about a recession, the Federal debt, inflation, interest rates, shifting Fed policies, the presidential election, two wars, and general fears of volatility, the stock market delivered exceptional returns. This underscores how markets often climb a ‘wall of worry,’ thriving even in the face of significant challenges.
The Market Backdrop for 2025
As we turn the page, it’s worth reflecting on the factors shaping the investment landscape. Positioning for a new year starts with maintaining perspective and sticking to a solid, long-term game plan. Here are a few key themes to watch:
The accompanying chart (below) highlights the power of diversification, showing how a balanced (60/40) portfolio approach has consistently delivered more stable returns than relying on individual asset classes. Many expert outlooks now forecast underperformance of U.S stocks over the next decade which may not be surprising after the over performance over the past few years.
As always, the goal isn’t to time the market or chase last year’s winners—it’s to build a portfolio that reflects your financial goals and risk tolerance. The road ahead may have its twists, but with a clear plan, 2025 can be another step forward in your financial journey.
Three Points to Carry Forward into 2025
2024 was a year of unexpectedly strong market performance. Major stock market indices generated historic gains for a second year in a row while bonds again have been treading water for a few years due to the headwinds of interest rates and inflation.
Intermediate and long-term bond indices are greatly underwater for the past four years, placing more emphasis on equities for balanced (60/40) diversified investors to meet or beat their 7-8%/year target return goal. Still bond yields, low a bit lower over the past year like cash instruments, are still providing yields north of nearly 4.5% in many fixed income sectors.
Happy Birthday! The bull market Turns Three in October 2024
As discussed, the S&P 500 reached 57 new all-time highs during 2024 and ended near all-time highs, although markets did pull back slightly at the end of December. This performance adds to the remarkable gains since the market bottom in late 2022 which, in hindsight, marked the beginning of the current bull market. The market has experienced the best two years of performance since the late 1990s.
The accompanying chart (below) puts bull and bear market cycles in perspective. History shows that bear markets are unpleasant, but they tend to be brief compared to bull markets. While it’s hard to say how long the current expansion will last, it’s important for investors to position for the full cycle and not just for downturns.
Of note, policy rates did decline a full percentage point due to Fed rate cuts, despite longer-term interest rates remaining elevated. The 10-year Treasury yield, for instance, ended just under 4.6%, after fluctuating between 3.9% to 4.7% throughout the year. The overall bond market was slightly positive with a gain of only 1.3% due to these rate movements.
Most sectors experienced strong returns last year
Markets did not just perform well at the broad index level – many sectors benefited from the strong positive trends as well. Markets have been driven by artificial intelligence and technology stocks over the past two years, and sectors such as Information Technology and Communication Services did outperform again. However, many other sectors experienced strong double-digit returns as well, including Consumer Discretionary, Financials, Utilities, Industrials, and Consumer Staples. In fact, the Financials sector was the best performing sector during the middle of the year.
This emphasizes the importance of diversifying across various parts of the market. It’s difficult to predict which asset classes, sectors, and styles will outperform in any given calendar year. Having exposure to each of these areas in a diversified portfolio is often the best way to stay balanced.
Waiting for pullbacks can be counterproductive
With markets near all-time highs, it’s natural for investors to wonder if they should “wait for a pullback or crash” and sit on the sidelines in cash. It is certainly true that markets never move up in a straight line, and there can be periods of volatility and short-term market declines.
The challenge is that these periods are difficult to predict and waiting for them can be counterproductive. Markets naturally achieve many new all-time highs during bull markets. And while there were two meaningful market swings this past year, major indices continued to achieve new highs throughout the year. Even when the market did pull back, it was at a higher level than where it began. In other words, it would have been better to have simply been invested the whole time.
Of course, the past is no guarantee of the future. So, perhaps most importantly, the history of markets shows that there are always concerns that prevent investors from being fully committed to their portfolios and financial plans. 2025 will likely be no different, whether the concerns are over a Fed policy mistake, the high level of stock market valuations, the growing national debt, geopolitical conflicts, or completely new and unforeseen issues.
The bottom line? As cash yields gradually retreat to 2-3% and the Fed navigates potential rate cuts in 2025, remember that equities remain one of the most reliable ways to outpace inflation, taxes, and meet your investment or retirement income goals over the long run. Cash may not help you keep up with your cost of living over the long run.
Our Wall Street 2024 Year in Review story serves as a powerful reminder: staying invested in a thoughtfully diversified portfolio is your best strategy for achieving lasting financial success. These principles will continue to guide us in 2025, no matter what twists and turns the new year has in store.
For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com.
Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Note: This content is for informational purposes only and should not be construed as financial, legal, or tax advice. Please consult your financial advisor, attorney, or tax professional regarding your specific situation.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.