January 2025 Market Outlook
The fourth quarter of 2024 was defined by two major events: the U.S. Presidential Election and Federal Reserve rate cuts. While stocks were unable to sustain their post-election highs, all major indices managed to close the quarter with modest gains. The Federal Reserve’s December decision to cut the Fed Funds rate by 25 bps—the second cut of the quarter—highlighted its ongoing commitment to supporting economic growth amid a challenging macroeconomic environment. However, persistent inflation, rising deficits, and escalating geopolitical tensions weighed on bond markets, leading to a significant sell-off. Looking ahead to 2025, the Federal Reserve may need to adjust its interest rate forecasts as inflation remains stubbornly higher than anticipated, creating a complex backdrop for both equity and fixed income markets.
Portfolio Highlights
Despite the possibility that the Federal Reserve may curtail or pause its easing cycle in 2025, we remain positive on U.S. equities. Our allocation to large-cap stocks remains unchanged, particularly in light of potential tax reforms. At the same time, we are broadening our exposure to small-cap stocks, which are well-positioned to benefit from deregulation and an anticipated increase in M&A activity. In contrast, while international and emerging market equities present attractive valuations, we are refraining from adding exposure due to persistent economic headwinds, including the risk of tariffs and global trade disruptions. On the fixed-income side, we maintain a constructive stance on the short-term bonds as we await further inflation data. Our decision last quarter to avoid the long end of the curve has proven prudent, as 10-year Treasury yields rallied more than 80 bps. We will continue to monitor fiscal and legislative developments before extending duration further.
Risk Management for 2025
The coming year brings both opportunities and uncertainties, with a new Presidential administration, potential corporate tax reform, and evolving global monetary policies shaping the investment landscape. Maintaining a diversified portfolio across asset classes will be essential in navigating potential volatility. Staying invested and avoiding reactionary moves during periods of uncertainty remains a cornerstone of long-term success, especially as geopolitical tensions and post-election policy adjustments unfold.
Market Review
The fourth quarter saw a modest finish for U.S. equity markets, as none of the major indices could hold their post-election momentum. The S&P 500 rose 2.07% in Q4, bringing its annual return to approximately 24%. The NASDAQ outperformed with a 6.07% gain in the final quarter, ending the year up around 31%. Meanwhile, the Dow Jones Industrial Average posted only a modest Q4 gain but finished the year up around 13%. Technology, financial services and consumer cyclical sectors were standout performances, particularly following the Presidential election.
In the bond market, 10-year U.S. Treasury yields surged in Q4, ending the year at 4.573%, close to their highs in Q2. Despite starting the quarter in positive territory, Treasury prices were negatively impacted by the rally, which saw yields rise by over 80 basis points. As a result, 10-year Treasury bond prices ended the year down by approximately 2%.
The Fed and Looking Ahead
These moves were in line with market expectations; however, at their December meeting, the Federal Reserve signaled that the pace of future rate cuts in 2025 could be slower than previously anticipated. This shift, coupled with a strong December jobs report, has led the market to revise its expectations, pushing rate cuts into the second quarter of 2025. Some market participants are even speculating about a potential rate hike at the end of the year, but that will be highly data dependent.
Given that each investor's risk tolerance and objectives are unique, we encourage you to consult with your financial advisor to assess how this information might affect your overall investment strategy.
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