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As we close the books on 2024 and welcome 2025, I’d like to reflect on the year that was and take a peek into the year ahead. As with 2023, 2024 will go down as another solid year for investors, which was not expected. Most of the predictions made by economists and analysts were far more pessimistic, which again proves most of them are pretty much guessing this point.
Volatility
After experiencing sky-high volatility in 2022 and 2023, 2024 had different plans. The S&P 500 experienced only one monthly loss of greater than 1%*, compared with four in 2023 and seven in 2022. While this is a rare feat, even more rare was the lack of daily volatility. While we just experienced the second-worst day of the trading year, there has been only nine trading days as of this writing where the index closed at a daily loss of greater than 1.5%. This pales in comparison with the typical ~15 to 20 trading days we see in most years.
If you think about it, coming into 2024, we had a multitude of things to worry about: the upcoming presidential election, lingering inflation worries, wars in the Middle East and Ukraine, and turmoil within several European governments. Yet the market was able to brush this all aside and notch another solid year of gains. Why? It really boiled down to solid corporate earnings, easing inflation, rate cuts, and AI optimism.
While there are reasons to be optimistic, many markets are priced for near perfection at this point. That does not mean they can’t go higher, but it could mean any bad news could send them down 5% to 10% in short order.
Case in point, the Federal Reserve just announced a .25% rate cut but projected fewer rate cuts in 2025, which sent both stock and bond markets tumbling. Why? Markets were expecting three to four rate cuts in 2025, so this news caught markets by surprise. It’s somewhat of a miscalculated overreaction since the Federal Reserve will likely change their mind multiple times as usual while they try to keep up with the economic data points as they come in.
Investors should expect more volatility in the year ahead, especially with a new administration promising to shake things up. This does not necessarily translate as a bad year for markets, but one should expect more turbulence ahead.
Back to Back
Barring a sell-off in the last week of the year, as of this writing, the S&P 500 is set to finish with back-to-back annual gains north of 25%. Since 1928, this has happened in only three other instances.
1935: +47% and 1936: +32%
1954: +53% and 1955: +33%
1997: +33% and 1998: +28%
What does history tell us about the third year? Unfortunately, nothing really useful. The returns ranged from +21% (1999) to +7% (1956) to -35% (1997). This basically tells us what we already know: Anything is possible. The cause for concern is what happened in the years following each period:
1937: Markets experienced a brutal decline of -35% and then surged by +29.3% in 1938. That was followed by three consecutive down years totaling a -24.5% decline (-1%, -10.7%, and -12.8%). This level of volatility is never easy to stomach.
1956: Markets experienced a tame return of +7.5% and then declined by -10.5% in 1957. This was followed up with one of the best years in market history of +43.7% in 1958.
1999: Markets continued to storm higher with a 20.9% return. This put the total return at ~82% between 1997 to 1999! Unfortunately, this was followed by three consecutive down years to the tune of -43% (-9.1%, -11.9%, and -22%). This was the collapse of the dot-com bubble and caused severe pain for those who were not properly diversified.
Experiencing three consecutive years of declines is extremely difficult and causes many to throw in the towel and sell near market bottoms. There is no easy way out in these situations—you just need time and patience.
The takeaway should be to expect more volatility. This does not mean immediate trouble looms. Instead, this is a perfect time to revisit your risk tolerance and rebalance where appropriate.
Rebalancing is extremely important for those holding a combination of equities, bonds, and cash, which is typically for retirees or those with a shorter investment horizon, as bonds/cash (excluding 2022) act as good hedges and generally increase in value during stock market declines. I know rebalancing can be challenging for some, as selling some of your best-performing assets can seem counterintuitive, but that is exactly what one should do to avoid being too heavily concentrated.
Forecasts
As we always stress, stock market forecasting is nothing more than educated guesses. A majority of Wall Street firms expected the S&P 500 to end the year between 4,200 to 5,200. Seven of them had predictions of 5,000 or below. Well, as of this writing, it sits at nearly 5,920.
What are their predictions for 2025? Most are expecting gains between 7% and 20%. Not a single firm is predicting a down year. This can be a bit worrisome as these major Wall Street firms tend to be wrong far more often than right. While they do employ countless economists and analysts, they still end up on the wrong side of the equation far too often. That just goes to show how hard investing can be, especially in the short term.
In the end, focusing on your personal risk tolerance and financial plan is what should drive your decision-making process.
Discuss your situation with a fee-only financial advisor.
* As of this writing, the S&P was down -1.5% in December with a few trading days remaining.