Market Update 

Markets outperformed unanimous Wall Street expectations for 2024, and our client portfolios benefitted greatly. Even with all the uncertainty that can come in an election year, the U.S. stock market saw a significant rise, along with several other key international markets. As investors scan financial news heading into the new year, the following are the hottest talking points that we are following as we make tactical shifts in client portfolios.

Post-Election Market Dynamics

The conclusion of the 2024 U.S. presidential election cycle brought about notable market movements. With Donald Trump securing the presidency again, markets reacted variably. Immediately post-election, there was an initial surge in domestic stock prices, particularly in sectors expected to benefit from anticipated policy changes like energy, financial services, and select technology stocks. There has also been significant strength in the U.S. dollar, which has important correlations to fixed income (bond), commodity, and international markets.

However, this was tempered by concerns over potential tariff increases and shifts in regulatory environments, leading to a mixed market response in the final weeks of December. The upcoming inauguration in January 2025 is expected to introduce further policy clarity, potentially influencing market directions in the first half of 2025. Investors are particularly watching for any announcements related to tax policies, trade, and immigration, which could have both short-term and long-term effects on market sectors.

Economic Outlook for 2025

Job Market: The U.S. job market has continued to show strength, with unemployment rates at historic lows. Despite this, there’s increased caution due to possible policy shifts that might significantly affect labor markets.

Consumer Sentiment: Consumer confidence has remained high, buoyed by the economic recovery and holiday spending, which rose by 4.2% year-over-year, reaching a record $1.02 trillion. This supports the theory of a resilient U.S. economy, even in the face of stubborn inflation that has inflected positively with three consecutive months of acceleration since the September 2024 lows.

Consumer Debt: Credit card balances have hit new all-time highs, with delinquencies also on an upward trajectory, signaling potential consumer stress. Savings rates are still below pre-pandemic levels, raising concerns about long-term consumer spending capacity.

Southern California Wildfire

The beginning of 2025 has been marked by a tragic and devastating wildfire in the Palisades region of Southern California. Our prayers are with those who have been directly impacted by this catastrophe, including the individuals displaced from their homes, the friends and families of the affected residents, and the courageous first responders who are tirelessly working to contain the blaze. This event introduces significant uncertainty into the markets in the short term and may have some lagging consequences, especially throughout the state of California. We extend our deepest sympathies and support to all those affected during this challenging time.

High-Level Investment Strategy for 2025

Market Corrections: After a strong year-end rally, we anticipate possible corrections in the early to mid part of 2025, especially in overvalued sectors such as Large-Cap Tech, Consumer Discretionary, and Semiconductors. This could be exacerbated by the initial economic policies of the new administration, as new policies can often create uncertainty initially, fueling increased volatility.

Investment Opportunities

U.S. Small-Caps: With the Russell 2000 lagging all of the main Large-Cap indices, there looks to be potential opportunities for recovery and growth in this asset class. With over 100 years of market data to rely on, small-cap stocks have outperformed large caps in the long term, and we expect a revision to this mean over the next few years.

Emerging Markets: Continued focus on regions like India and Latin America, which have shown resilience and growth in various sectors.

Sectors like Health Care, Biotech, Energy, and Crypto/Blockchain Technology: These sectors could continue to offer growth potential, driven by innovation and demographic trends.

Volatility as Opportunity: The political and economic shifts expected in early 2025 could lead to market volatility, which we view as a chance to secure long-term investment positions at potentially lower valuations.

Conclusion

While the immediate future might present some challenges, the underlying economic indicators suggest a resilient U.S. economy. The key for investors in 2025 will be to navigate through initial volatility with a strategy focused on long-term growth, leveraging sectors and markets that are poised for expansion or recovery. The upcoming inauguration adds an element of unpredictability, but also potential for strategic investment moves as policy directions become clearer. Diversification remains of the utmost importance, and we have no doubt that long-term, we will continue to create value for each unique situation. Remember, while corrections might occur, the broader trend over the next few years could see markets trending higher, offering substantial opportunities for those prepared to act on market dips.