2024 Market Review & 2025 Outlook
2024 Market Review & 2025 Outlook
2024 was another impressive year for the U.S. economy and financial markets. Equity markets (especially U.S. domestic markets) fared especially well, while fixed income faced some challenges with the Federal Reserve’s attempts to curb inflation via a series of interest rate cuts.
The S&P 500, specifically the cap weighted index, performed exceptionally well, driven primarily by the mega-cap technology technology stocks. In fact, in the two year period from Oct ’22-Oct ’24 the S&P 500 posted a return of +60%. That ranks above the 95th percentile relative to all other two year periods. In every previous instance of the S&P two year return eclipsing the 95th percentile, the following year’s return has been below the long-term market average.
From a historical perspective, the equities markets are expensive. The S&P 500 PE (Price to Earnings) ratio is currently well above the 30-year average. In fact, as shown in the graph below, it is reaching valuation levels similar to those seen during the dot-com bubble.
In the fixed income markets, mid-December marked the first time since November ’22 that the 3 month Treasury yield traded above the 10 yr yield. As seen in the graph below, there is a pattern of yield curve inversions pre-dating recessions. While this is not an absolute pattern of recessions following inversions, it does portend an increased recession risk.
While the preceding paragraphs may not portray a positive outlook, it is far from ‘doom & gloom.’ Most signs point to a healthy U.S. economy. Inflation levels are down near pre-pandemic norms. We have a stable employment level with unemployment below the 50-year average and increasing productivity. Perhaps most importantly, we are still in a bull market.
In fact, as shown in the graph below, since 1928 the S&P 500 has been in a bull market on nearly 80% of all trading days. That does necessarily mean that the market returns in 2025 will be equal or better than 2024. However, it does mean that statistically speaking the likelihood that the market will be positive is relatively high.
One of the primary drivers of a continued bull market will be economic growth (as measured by the GDP). The GDP (Gross Domestic Product) is measure of the total market value of finished goods and services produced within a country’s border. Growth in the U.S. GDP is a function of an increase in both productivity (how efficiently we make stuff) and the working age population (how many people are making stuff). Factors that will influence these two drivers of economic growth are U.S. immigration policy changes and potential for productivity gains from breakthroughs with Artificial Intelligence.
While the markets face some headwinds, and achieving the lofty returns of the past two years will be a challenge, the numbers indicate that the U.S. economy is functioning well. At AP Denver we focus on executing financial planning strategies that increase the likelihood of long-term financial success. Strategies such as: investing in a diversified portfolio appropriate to your risk tolerance, maintaining a sufficient emergency fund, living within one’s means, and matching investments to your time horizon.
If you have any questions or concerns about your current financial plan and would like to discuss them, Contact Us to schedule an appointment.
