It's an exciting time to be an investor, with opportunities across various asset classes. Does that mean coupons are flying around with discounted stock prices? Well, sometimes it does. However, it's also a time of uncertainty, as several factors could significantly impact market performance in the coming months. It can be looked at with two different lenses, those that see opportunity and those that are terrified! Let's jump in and look at recent trends and try to uncover some upcoming positive or negative movement. Basically, try to makes sense of it all.
Recent Investment Trends Across Asset Classes
Stocks
The stock market ended 2024 on a high note, with the S&P 500 up by 25% for the year. Yay, I think any investor would call that a huge win. Several factors contributed to this strong performance, including the continued growth of artificial intelligence (AI) and strong economic data. Keep in mind company profits and earnings are what truly drive stock prices higher. Yes there can be some euphoria that propels stocks higher, but one day it's going to come down to earnings. Companies like Nvidia, a leading AI chip manufacturer, saw their shares surge by over 170%. Wowzers that's a massive move! However, some experts suggest that the market may be due for a correction, as valuations are high and investor sentiment is stretched. We've started to smell hints of that starting last week.
Bonds
The bond market experienced volatility in 2024, with yields rising due to fiscal burdens, uncertainty in the inflation outlook, and monetary policy. Nobody likes uncertainty and that includes fixed income investors. Despite the Federal Reserve cutting interest rates, long-term Treasury yields have increased 6. This unusual trend suggests that investors are demanding higher yields to compensate for the risk of holding long-term bonds. People don't know what to expect in the next week so they better be compensated if they are required to hold onto an investment for a number of years down the road. That's not too crazy to ask. However, some experts believe that a new bull market in bonds may be on the horizon as interest rates return to historical norms. Fixed income in general has certainly taken a back seat in the past several years. It's hard to compete when stock returns have averaged over ten percent.
Real Estate
The real estate market is gradually shifting toward balance after a period of intense competition and rising prices. Having money in the sector the past few years felt pretty painful, but this is an asset class that can be impacted by a number of factors beyond your control. Mortgage rates have risen, making homes less affordable for some buyers. However, housing inventory has increased, creating better opportunities for buyers and potentially leading to more stable prices. Experts predict modest price gains in 2025, with CoreLogic forecasting an annual growth rate of 2.3%.
Commodities
Commodity prices as a broad asset class are expected to decline in 2025, with the World Bank predicting a five-year low. This decline is attributed to an oil glut and weak demand. I'm not so sure that applies to every aspect of commodities though. One thing I think we can all agree on is the demand for more energy sources. That could mean continued growth in alternative energy sources. I'm not talking about wind, solar and other energy sources we've been working for the past 20 years. Think cleaner and more efficient nuclear and hydrogen. The energy transition is driving demand for metals like lithium, cobalt, and nickel, which are used in batteries for renewable energy storage. Let's not forget about good old fashioned gold; it's up almost 9% as of this blog year to date and that's nothing to sneeze at. It's added on to the monster gains seen in 2023, pretty much keeping pace with the overall stock market.
Historical Data and Market Patterns
Stock Market
Historically, the S&P 500 has experienced an annual dip at some point in every year since the 1980's. That's why it's hard to predict where the market will finish with only a couple of months into any year. Market corrections, defined as declines of 10% or more, have occurred every 1.84 years on average since the 1950's. The most difficult times for a loss is when you happen to look at your statement or glance at your balance. Then it becomes real. Additionally, there has been a pattern of market crashes every seven to eight years since 1900. Some call it a crash, others call it a correction and for a few it can be one of the most costly times in their life. Selling in the midst of panic and fear just after a market drawdown has never helped a single client; ever.
Bond Market
The bond market has historically thrived during economic contractions. It's why so many firms develop balanced or asset allocation models to help combat times when stocks are down in an effort to have their bonds save additional loss and kick off some income. In every recession since 1950, bonds have delivered higher returns than stocks and cash. This is partly because central banks often cut interest rates during recessions to stimulate economic activity. Although the Federal Reserve doesn't "control" the market of stocks and bonds, they do play a pretty big role in how things get impacted so it is important to pay attention.
Real Estate Market
Historical housing data shows that real estate markets are cyclical, with periods of growth and decline. Factors such as mortgage rates, housing inventory, and economic conditions can significantly impact market trends.
Commodities Market
Historical commodity prices generally fell in the 19th and early 20th centuries, punctuated by supply disruptions due to wars. Prices rose significantly from 1945 to the present day, with energy prices showing the largest inflation. Metals and other minerals needed for chips and some of the newer technologies have driven prices higher as well.
Conclusion
The investment landscape in early 2025 presents both opportunities and challenges. A shift in political power in various aspects of our government changes the way we spend, budget and enforce laws. Change alone does not typically have a positive impact on the market because it creates uncertainty and nobody likes uncertainty. I would expect some early market volatility to continue throughout the first half of the year and start to level out once we have a better understanding of how things will be managed.
While the stock market has shown strong performance, high valuations and potential risks warrant caution. One misstep on earnings and it could send a heavily favored stock tumbling. The bond market is sending mixed signals, with uncertainty surrounding interest rates and fiscal policy. One minute the Fed is saying they're going to lower rates several times then they decide at the vary next meeting that they're going to raise. Say what?! The real estate market is gradually stabilizing, with potential for modest price gains. Commodities prices are expected to decline, but demand for certain metals remains strong.
Investors should carefully monitor the potential market indicators identified in this post and meet with your financial advisor if it's not with me or anyone else on our team. Consider diversifying your portfolios across different asset classes to mitigate risk and potentially enhance returns. That's a lot in a nutshell, but that's the economic data and positioning I'm taking with my clients at this time.
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