Client Letter – January 2025

Q4-2024 Market Results

Another decent quarter for the U.S. markets and another very good year for the same. For the quarter the S&P 500 was up +2.41%, and up an impressive +25.02 for the year in total return. International markets were down -8.30% for the quarter and up a small +1.14% for the year. Emerging markets were also down for the quarter at -8.05% but up slightly more for the year at +5.16%. Bonds had another disappointing quarter, down -3.06% and up slightly for the year at +1.25%. Short treasuries were down slightly for the quarter at -0.10% and up for the year at +4.05%. 

A closer look at the S&P 500 shows a strong upward move, starting in early August and peaking in early December. The S&P 500 had a lot of volatility to close out the year but ended up slightly for the quarter and very positive for the year. U.S. Technology had a similar run with volatility in December but finished the quarter stronger and the year slightly under the S&P 500. Bonds had another disappointing quarter and a weaker than expected, though positive, return for the year. The bond recovery has not started; more on that below. 

Portfolio Thoughts

Portfolios were mixed for the quarter. Tactical and Strategic portfolios were down, given their exposure to International, Emerging Markets, and Bonds. Strategic outperformed Tactical slightly. Our Momentum portfolio (AAA) was up and outperformed both Tactical and Strategic for the quarter and year. Capital Preservation was down for the quarter due to its heavy bond exposure.

Q4-2024 Notes

The U.S. market, represented by the S&P 500, had another great year. Up +25.02 in 2024 and +26.29% in 2023 is the strongest two-year run in a long time. With 3rd quarter Gross Domestic Product (GDP) at +3.1% and 2nd quarter GDP at +3.0% it seems the U.S. economy is on decent footing. Unemployment remains low at +4.2%, as reported for November. Historically, a low level.

The Federal Reserve Bank (Fed) lowered interest rates in December by 0.25%, or 25 basis points. Market analysts largely expected this move, but we aren’t entirely in line with the decision. The Fed is walking a very fine line between keeping interest rates higher and cooling inflation, and risking recession, or lowering interest rates and seeing inflation not reach their +2.0% target. The reason we aren’t quite in line with the Fed’s decision is that inflation was at +2.4% in September, giving hope that we were headed for the +2.0% target.

Then, in October, inflation went up to +2.6%, and in November, it went up again to +2.7%. We feel this trajectory is not indicative of reaching the inflation target. We think they should have left interest rates where they were. But the Fed has many more resources available to them than we do, so we’ll see how it plays out as we progress through 2025. 

This seems like a good time to talk about market returns and what we should expect from here. Although we believe there is still a chance of a recession during 2025, we only feel it is a 30% chance. The bulk of our sense is that we won’t have a recession. For the stock market, we don’t feel there is a strong reason to believe the S&P 500 will go down substantially. The U.S. economy seems to be in decent shape. But after two fantastic years in a row, it might be naïve to think we’ll have another very strong market year in 2025. We expect markets to be up, but more like +5 to +7% for the year…not +20 or +25%. A more typical year of returns helps bring the overall 3 to 5-year average more in line. But up +5% is still okay, given that it is higher than inflation. Not every year can be a barn burner.

For bonds, we continue to be disappointed that the bond recovery has not started. In truth, the bond market has thrown us and our analytical sensibilities off track. As many may know, 2022 was the worst bond market year in over 100 years. It was bad. For Jim, who has been an active investor since the 1990s, he’s never seen such a drought in the bond markets. He feels it all has to do with interest rates and inflation. And we haven’t seen anything like where we are since the late 1970s. This lack of experience with high interest rates and inflation is our best explanation for why we’ve predicted a bond recovery that still hasn’t happened. Although we believe bonds will recover, it will take more time for this interest rate and inflation situation to calm down. This is the one area, meaning bonds, where having a recession would actually help. 

The U.S. elections are done, and the results are surprising, at least to some. We won’t go into our election evaluations here, but if you are interested in our take, feel free to get on our website and look for the latest Financially Speaking. We think you’ll find some interesting election thoughts there.

Global Outlook

Our global topic for this letter is something no one would have predicted just a couple of months ago. A group of revolutionaries overthrew Syrian President Bashar al-Assad on December 8, 2024. This was after a 13-year civil war in the country and 60 years of rule by the al-Assad family. The group of revolutionaries who took over is called Hayat Tahrir al-Sham (HTS), who took the capital, Damascus, and thus the entire country from Assad’s rule. That group must now find a way to deliver for the Syrian people. Bashar al-Assad was not a good man, and he ran a despotic government, which no one is sorry to see gone. But the leader of HTS, who took over, Ahmed al-Sharaa, now has a lot of work to do. Ahmed comes from a history of being associated with Al-Qaeda and its Islamic roots when he went by a different name. His organization, HTS, is considered a terrorist organization by the U.S. and many other Western countries. The challenge for Ahmed is what government he will bring to Syria. After the 13-year civil war, there is much rebuilding that needs to happen, and Syria is home to numerous ethnic groups who don’t always get along well. Those groups include Arabs, Kurds, and Turkmen. Will he bring another authoritarian government or one that is more secular or even democratic? Will he go more the Islamist route based on his Al-Qaeda background?

So far, Ahmed is talking a good game with his neighbors and asking for relief from sanctions brought on by the Assad regime. But the U.S. isn’t ready to pull back on sanctions until they are more convinced the Ahmed government will bring a better life to the Syrian population. Turkey seems very interested in what is happening in Syria and they seem willing to help Ahmed, but Turkey’s government may not be the best example for Ahmed to follow. No matter what, the situation in the Middle East has changed and we hope for the better. 

As always, we will watch and research the global economy and make investment choices to the best of our ability for each and every client portfolio. If you have questions about your portfolio, our views expressed in this letter, or anything else financial, please do not hesitate to call. 

Best Regards,