January 27th, 2025
Navigating the Peaks – Fourth Quarter Review and 2025 Outlook
Dear Client,
As we strap on our skis at the peak of the winter season, the pristine vistas from the mountaintops offer a moment to reflect on the exhilarating yet precarious ascent of the markets this past year. The S&P 500, having climbed to historic highs, presents us with a landscape that is both exciting and intimidating—much like the steep slopes that thrill and challenge even the most seasoned skiers.
Standing at these heights, we assess the paths before us, finding opportunities amid challenges. As we prepare for 2025, the terrain ahead resembles a complex network of ski trails—complete with hidden moguls and dense tree paths—that requires careful planning and adept maneuvering. Similarly, the markets, now at elevated levels, continue to offer opportunities but also demand a nuanced approach to navigate potential volatility and sidestep precarious zones.
While the current market heights may seem daunting, the incoming presidential administration’s economic policies could serve as a ski patrol for the financial markets, ensuring safer passages and timely interventions. By extending tax reliefs, implementing pro-growth reforms, and easing regulatory burdens, they are effectively grooming the trails before us, smoothing out potential disruptions and clearing the way for a more stable and predictable descent.
However, not all uncertainties are eliminated. These policies could reignite inflationary pressures. Much like a skilled skier facing a slope that steepens unexpectedly—accelerating the descent—investors must remain agile, adjusting their strategies to evolving conditions and ready to pivot smoothly around obstacles. Our goal is to guide you through these potentially turbulent times with expert navigation, ensuring your portfolio is strategically positioned to both seize opportunities and maintain stability.
As we look forward to the new year, let’s continue our journey with focus and determination, ready to skillfully tackle the dynamic path that lies ahead.
With our strategies laid out, let’s carve through the details of last quarter’s performance and explore the strategic moves we’ll make to navigate 2025.
The S&P 500 rose to an all-time high in the fourth quarter and extended 2024 gains as the election results raised expectations for tax cuts and other pro-growth policies in 2025, while the economy remained on solid footing and the Fed continued to cut interest rates. The S&P 500 logged a modestly positive return for the fourth quarter and an annual return greater than 20% for the second straight year.
While the fourth quarter was positive for most of the market, it didn’t start that way as anxiety over the election and an increased focus on the fiscal state of the U.S. weighed on sentiment in October. Presidential polls tightened materially in October and left the race too close to call, increasing political and policy uncertainty. Additionally, much of the financial media’s focus in October was on the potentially negative fiscal consequences of both candidates’ policies. Specifically, a Wall Street Journal article focused on possible large future increases in the deficit and national debt that could cripple future economic growth. Those fiscal concerns, along with stronger-than-expected economic data, pushed Treasury yields higher and the 10-year Treasury yield rose from 3.75% at the start of October to over 4.20% by Halloween. That rise in yields combined with political and policy uncertainty pressured stocks and the S&P 500 finished October with a modest decline, falling 0.91%.
Those headwinds on stocks were short-lived, however, as Donald Trump convincingly won re-election while Republicans took control of both houses of Congress, completing a “Red Sweep.” Reminiscent of 2016, the Trump and Republican victories proved to be bullish catalysts as investors embraced the idea of future tax cuts, deregulation and a pro-business administration. That helped the S&P 500 rise above 6,000 for the first time. Shortly following the election, however, investors were reminded of the volatile nature of a Trump presidency, as the president-elect nominated several unorthodox supporters to prominent cabinet positions. These surprises caused investors to contemplate policy risks to the pro-growth agenda and stocks dipped mid-month. However, the withdrawal of Attorney General nominee Matt Gaetz and the nomination of Scott Bessent as Treasury Secretary helped to calm investor nerves about the president-elect’s cabinet and stocks resumed their rally in late November and closed the month near all-time highs.
In December, renewed focus on the potential economic benefits of an incoming Trump administration combined with the “Goldilocks” economic environment of solid growth and continued Fed rate cuts to send the S&P 500 to yet another all-time high near 6,100. However, that rally stalled mid-month as President-elect Trump doubled down on his support for other unorthodox cabinet nominations and lobbed tariff threats at major trade partners including Canada, Mexico and China. Market volatility increased as the Federal Reserve cut interest rates at the December meeting but also reduced the number of expected cuts in 2025 to just two (from four). That sparked a sharp selloff in stocks that continued into year-end, causing the S&P 500 to finish slightly positive for the quarter, but well off the highs.
In sum, 2024 was a very strong year for the broad markets as the Fed seemingly achieved a soft economic landing and aggressively cut interest rates, while foreign and domestic political risks and drama failed to derail the rally.
Q4 and Full-Year 2024 Performance Review
Despite the late year dip in stocks, all four major U.S. stock indices finished the quarter with a positive return. The Nasdaq was the best performing major index in the fourth quarter and outperformed the other three major indices on a combination of earnings-driven AI enthusiasm combined with growing uncertainty on when future pro-growth economic policies could actually be enacted. For the full year, the Nasdaq also was the best performing major index although it only slightly outperformed the S&P 500, as that index benefitted from the large weightings to tech stocks and financials. The Dow Industrials and Russell 2000 both also finished the year with solid gains, but they relatively underperformed the Nasdaq and S&P 500.
By market capitalization, large caps outperformed small caps in the fourth quarter and for the full year, thanks mostly to strength in large-cap tech stocks on the aforementioned AI enthusiasm and strong earnings. Small caps did see a solid rally initially in the fourth quarter on hopes for pro-growth policies from the incoming administration, but the Fed’s guidance to fewer rate cuts in 2025 weighed on small caps later in December and the Russell 2000 finished the quarter with only a slight gain.
From an investment-style standpoint, growth significantly outperformed value both in the fourth quarter and for the full year. The reasons were familiar: Artificial intelligence enthusiasm powered tech-heavy growth funds early in 2024, while in the fourth quarter solid AI chipmaker earnings extended those gains. Additionally, doubts about the timeline for implementation of pro-growth policies from the incoming administration weighed on value stocks late in the year.
On a sector level, only four of the 11 S&P 500 sectors finished the fourth quarter with a positive return, although all 11 sectors ended 2024 with gains. The Consumer Discretionary sector was, by far, the best performing sector in the fourth quarter thanks in large part to a big Tesla (TSLA) rally and as the outlook for consumer spending remained solid, with low unemployment and the prospects of tax cuts and other pro-growth measures coming in 2025. The Communication Services and Financials sectors also performed well and benefited from expectations for less regulation given the incoming administration. For the full year, Communication Services and Financials were the best performing sectors and both benefited from strong earnings as well as general AI enthusiasm and an un-inversion of the yield curve, respectively.
Looking at sector laggards, Materials was the worst performing sector in the fourth quarter and posted a substantially negative return while Healthcare also declined sharply. Those two sectors were the worst relative performers for 2024 as the Materials sector was only fractionally positive for 2024 while Healthcare logged a small gain. Concerns about regulation and poor earnings results weighed on the Healthcare sector in 2024 while the Materials sector was consistently pressured by concerns about the Chinese economy, tariff and trade risks as well as general global demand concerns.
S&P 500 Total Returns by Month in 2024 | |||||||||||
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
1.68% | 5.34% | 3.22% | -4.08% | 4.96% | 3.59% | 1.22% | 2.43% | 2.14% | -0.91% | 5.87% | -2.38% |
Source: Morningstar
US Equity Indexes | Q4 Return | 2024 Return |
S&P 500 | 2.41% | 25.02% |
DJ Industrial Average | 0.93% | 14.99% |
NASDAQ 100 | 4.93% | 25.88% |
S&P MidCap 400 | 0.34% | 13.93% |
Russell 2000 | 0.33% | 11.54% |
Source: YCharts
Internationally, foreign markets badly underperformed the S&P 500 in the fourth quarter and produced solidly negative returns thanks to lackluster growth prospects and surprising bouts of political uncertainty in developed and emerging markets. Emerging markets and foreign developed markets saw similar negative returns in the fourth quarter as the South Korean political crises and worries about Chinese growth pressured emerging markets while political turmoil in France and Germany weighed on developed market performance. For the full year, foreign markets again badly lagged the S&P 500 but did finish with modestly positive returns. Emerging markets outperformed developed markets on a full-year basis thanks to Chinese stimulus announcements in the second half of 2024, which raised investors’ hopes for an economic rebound and boosted emerging market performance relative to those foreign developed markets.
International Equity Indexes | Q4 Return | 2024 Return |
MSCI EAFE TR USD (Foreign Developed) | -8.06% | 4.35% |
MSCI EM TR USD (Emerging Markets) | -7.84% | 8.05% |
MSCI ACWI Ex USA TR USD (Foreign Dev & EM) | -7.50% | 6.09% |
Source: YCharts
Commodities saw mixed performance in the fourth quarter as a late surge in the U.S. dollar weighed on parts of the complex. Gold finished the quarter with a slightly negative return thanks mostly to a drop in December as the U.S. dollar rose to two-plus-year highs. Oil, meanwhile, saw a solid gain in Q4 thanks to some better-than-expected Chinese economic data, which boosted future demand expectations. For 2024, most commodities saw modestly positive returns on rising demand expectations following global rate cuts. Gold logged strong returns on the year thanks to consistent geopolitical uncertainty and sticky inflation, while oil also rose slightly on OPEC supply discipline and more optimistic global growth estimates in 2025.
Commodity Indexes | Q4 Return | 2024 Return |
S&P GSCI (Broad-Based Commodities) | 3.81% | 9.25% |
S&P GSCI Crude Oil | 5.24% | 0.13% |
GLD Gold Price | -0.38% | 27.19% |
Source: YCharts/Koyfin.com
Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a moderately negative return in the fourth quarter as concerns about U.S. federal deficits combined with expectations for fewer rate cuts in 2025 to pressure bonds, although the benchmark did log a slightly positive gain for 2024.
Looking deeper into fixed income, longer-duration bonds declined solidly in the fourth quarter while shorter-duration debt logged a small positive return. The outperformance by shorter-duration debt was driven by continued Fed rate cuts as well as more resilient inflation and growth metrics (which weighed on longer-duration debt). Shorter-duration debt also outperformed long-term bonds on a full-year basis thanks to the start of the Fed rate cutting cycle, while U.S. fiscal concerns and the resilient growth and inflation outlook weighed on the longer end of the yield curve. Short duration debt finished the year with solidly positive returns while longer duration bonds posted a slightly negative annual return.
Turning to the corporate bond market, high-yield bonds outperformed higher-quality but lower-yielding investment grade debt in the fourth quarter as the election results boosted investor confidence for continued economic growth, resulting in investors accepting higher yields in exchange for greater risk. For the full year, high-yield bonds logged a solidly positive return while investment-grade bonds were only slightly positive, again reflecting investor preference to take on more risk in exchange for a higher yield/return, given underlying economic confidence.
US Bond Indexes | Q4 Return | 2024 Return |
BBgBarc US Agg Bond | -3.06% | 1.25% |
BBgBarc US T-Bill 1-3 Mon | 1.19% | 5.32% |
ICE US T-Bond 7-10 Year | -4.59% | -0.52% |
BBgBarc US MBS (Mortgage-backed) | -3.16% | 1.20% |
BBgBarc Municipal | -1.22% | 1.05% |
BBgBarc US Corporate Invest Grade | -3.04% | 2.13% |
BBgBarc US Corporate High Yield | 0.17% | 8.19% |
Source: YCharts
Q1 and 2025 Market Outlook
Markets begin 2025 with great expectations as anticipation of tax cuts and pro-business deregulation, a continued economic soft landing and ongoing Fed rate cuts helped propel stocks higher throughout 2024 and the S&P 500 completed the best two-year run since the late 1990’s.
Starting with politics, investors are eagerly awaiting the implementation of pro-growth policies from the Republican Congress and Trump administration, which includes an extension of the 2017 Tax Cuts and Jobs Act and possible additional corporate and personal tax cuts, along with sweeping deregulation. If executed, those policies should result in increased corporate earnings, personal incomes and spending (all of which are positive for stocks).
On growth, the Federal Reserve appears to have achieved the elusive economic soft landing, as economic activity is solid, unemployment is historically low and inflation has declined substantially. That allowed the Federal Reserve to aggressively cut interest rates in 2024 and investors expect rate cuts to continue in 2025 and to further support continued economic growth.
Finally, geopolitical tensions remained high in 2024 but investors finished the year with hopes for progress on ceasefire agreements between Israel and its antagonists (Hamas and Hezbollah) and between Russia and Ukraine. While hope for progress on resolution of major global conflicts is high, nothing is guaranteed, and the possibility exists that both conflicts spread in 2025.
And, if all these expectations are realized, we should all expect another strong year of returns in the markets.
However, as we all know, nothing in the markets is guaranteed and while the outlook is positive as we begin 2025, there are significant risks to the outlook we must acknowledge.
Politically, Republicans hold small majorities in the House and Senate and large, complicated tax cut bills could easily be delayed (or derailed). Additionally, while investors have focused on potential positives of pro-growth policies, increased trade tensions and possible tariffs could create unanticipated market and economic headwinds.
On growth, the economy remains in a “sweet spot” with solid, but not spectacular, growth and the Fed can claim a soft landing has been achieved. However, growth can still slow as rates remain historically high and elevated stock valuations imply complacency in the markets regarding the possibility of an economic slowdown.
Finally, global bond markets are expected to have a bigger influence on stock returns in 2025 and if bond investors think aggressive tax cuts or fiscal spending will dramatically increase the deficit or national debt, bond yields will rise and present a headwind on stocks (as we saw in 2022).
Bottom line, while the outlook for markets is positive as we start the year, we won’t allow that to create a sense of complacency because as the past several years have shown, markets and the economy don’t always perform according to Wall Street’s expectations.
As such, while we are prepared for the positive outcome currently expected by investors, we are also focused on managing both risk and return potential because the past several years demonstrated that a well-planned, long-term focused and diversified financial plan can withstand virtually any market surprise and related bout of volatility, including multi-decade highs in inflation, historic Fed rate hikes, and geopolitical unrest.
At Professional Planning Group, we remain committed to helping you effectively navigate this investment environment. We continue to believe in the truth of the oft repeated market cliche that “successful investing is a marathon, not a sprint.” In both bull and bear markets, we will remain focused on the diversified approach originally established to help enable you to meet your long-term investment goals.
Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.
We remain focused on both opportunities and risks in the markets, and we thank you for your ongoing confidence. Please rest assured that our entire team will remain dedicated to helping you successfully navigate this market environment.
Please do not hesitate to contact us with any questions, comments, or to schedule a portfolio review.
On Behalf of the PPG Investment Committee,
David G. Aballo, CFA
Professional Planning Group
9 Granite Street
Westerly, RI 02891
(401) 596-2800
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
One cannot invest directly in an index. Bond prices and yields are subject to change based upon market conditions and availability.
If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss.
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The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.
The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P500®, measures the performance of mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada.
The EAFE consists of the country indices of 22 developed nations.
The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. With 6,211 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.
The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index’s three largest industries are materials, energy, and banks.
The NASDAQ-100 (^NDX) is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the NASDAQ. It is a modified capitalization-weighted index. It is based on exchange, and it is not an index of U.S.-based companies.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible. The ICE U.S. Treasury 7-10 Year Bond Index is part of series of indices intended to assess the U.S. Treasury market. The Index is market value weighted and is designed to measure the performance of U.S. dollar-denominated, fixed rate securities with minimum term to maturity greater than seven years and less than or equal to ten years. The ICE U.S. Treasury Bond Index Series has an inception date of December 31, 2015. Index history is available back to December 31, 2004. The Barclays Capital Municipal Bond is an unmanaged index of all investment grade municipal securities with at least 1 year to maturity. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon, and vintage. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations. The Bloomberg Barclays U.S. A Corporate Bond Index measures the investment-grade, fixed rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility, and financial issuers. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. The LBMA Gold Price and LBMA Silver Price are the global benchmark prices for unallocated gold and silver delivered in London. SS&P GSCI Crude Oil is an index tracking changes in the spot price for crude oil. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.
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