2025 Market Outlook: Are You Ready For The Next Big Shock - What 2024 Taught Us

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January 6, 2025 –

We will see who is wearing a bathing suit when the tide goes out. . .

John Browning, MBA and CSA? | CEO, Principal

Warren Buffet famously said that we will see who is wearing a bathing suit when the tide goes out.? We have enjoyed two years of remarkable growth in the equity markets while the bond markets have languished for many years.? Much as innovation is often slow to be adopted in the tech space it is much slower to be adopted in the investing space.? We believe protecting wealth as much as it is to build wealth is important.?

We also believe that there are much better ways to protect gains than investing all of those gains in what has been an underperforming bond market.? While we are bullish about the year ahead we have our doubts that the extraordinary gains we have seen in the past two years will continue and we see the potential for some significant volatility during the 2025.?

2024 showed us an unexpectedly strong performance for the stock market. Major stock market indices generated historic gains with the S&P 500 returning 25.0% with dividends, the Nasdaq 29.6%, and the Dow Jones Industrial Average 15.0%. This occurred despite concerns about inflation, recessions, Fed policy, and the presidential election.

International stocks also performed well albeit lagging the U.S. markets with emerging markets rising 8.1% and developed market stocks gaining 4.3%.? This past year underscores the importance of staying invested during periods of uncertainty.

Many of my peers suggested that 2024 would be a difficult year for stocks and a great year for bonds, and they did so with great passion.? While trying to time the market or holding cash may often feel more comfortable, the opportunity cost of doing so can be high. There is no doubt that 2025 will present similar challenges for investors.? We highly recommend working with an experienced advisor who is not attempting to time the market.?

The bull market reached its second anniversary in 2024

The News makers love to report the headline "New all-time highs reached . . . "They were able to do that 57 times during 2024 which ended near all-time highs, although markets did pull back at the end of December. This performance adds to the remarkable gains since the market bottom in late 2022 which, in hindsight, marked the beginning of the current bull market. The market has experienced the best two years of performance since the late 1990s, with the stock market gaining 57.8% across 2023 and 2024.

There were only two periods of heightened market volatility last year. This may be surprising given how nervous investors were throughout the year. These occurred in April and August when the market pulled back 5% or more due to concerns around inflation, the Fed, and tech stocks.

The accompanying chart puts bull and bear market cycles in perspective. While bear markets don't seem to be as "fun" as bull markets if you have a well-built portfolio and plan that allows you to consistently invest in both up and down markets the pullbacks should be a time to celebrate the ability to put more money to work at lower prices.? Unfortunately, this discipline is easy to talk about but difficult to do in practice.? I often tell my wife that the only market she does not get excited about being on sale is the stock market!? While it’s hard to say how long the current expansion will last, it’s important for investors to position for the full cycle and not just for downturns.

Of note, policy rates did decline a full percentage point due to the Federal Open Market Committee's (FOMC) rate cuts, however, longer-term interest rates remained elevated. The 10-year Treasury yield, for instance, ended just under 4.6%, after fluctuating between 3.9% to 4.7% throughout the year. The overall bond market ended the year only slightly positive with a gain of only 1.3%.? This continues to show us that the levers the FOMC used in times past do not carry the same impact they once did and as such the bond market is unlikely to perform as it did 10 or 20 years ago as a good risk management program for equity investors.? Other more innovative tools for risk management and income-producing strategies are, in our opinion, underutilized by most investors.?

Best performing market sectors last year

One way to position yourself to profit is to pay close attention to sector rotation.? While many sectors performed well last year healthcare, materials, energy, and Real Estate performed poorly.?? Underweighting, and not eliminating market sectors based on economic trends can be a powerful tool to utilize to not only grow but also protect your portfolio.

Markets continued to be driven by artificial intelligence (AI) and technology stocks over the past two years, and sectors such as Information Technology and Communication Services outperformed again. We expect this to continue and possibly broaden out slightly as profitable use cases begin to emerge for the base technology of AI.? We believe that the underperforming healthcare sector may experience a rebound later in 2025 but would still use caution in moving too quickly in this direction and we have already seen subsectors of the energy space start to show more promise for 2025. None of the sectors is immune from the influence of AI so it is important to analyze the use cases where AI can provide a meaningful increase in profit within a company or sector of the market.?

As always this emphasizes the importance of diversifying across all sectors of the market. I have plenty of experience being wrong on where the next technological breakthrough will come.? The way to be successful is to be right more often than wrong and when you are wrong not to be too wrong which can only be accomplished through disciplined diversification.?

Waiting for pullbacks can be counterproductive:

With markets near all-time highs, it’s natural for investors to wonder if they should “wait for a pullback.” It is certainly true that markets never move up in a straight line, and there can be periods of volatility and short-term market declines.

The challenge is that waiting for the pullback can be extremely counterproductive. Markets naturally achieve many new all-time highs during bull markets. And while there were two meaningful market swings this past year, major indices continued to achieve new highs throughout the year. Even when the market did pull back, it was at a higher level than where it began. In other words, it would have been better to have simply been invested the entire time and you would have needed to have timed your sales and purchase perfectly which simply does not happen.

As always it is important to note that the past is no guarantee of the future. However, it does happen to be a guide the history of markets shows that there are always concerns that prevent investors from being fully committed to their portfolios and financial plans. 2025 will likely be no different, whether the concerns are over a Fed policy mistake, the high level of stock market valuations, the growing national debt, geopolitical conflicts, or completely new and unforeseen issues.

The bottom line? 2024 is a reminder that staying invested in a well-constructed portfolio has been the best way to achieve long-term financial goals. These lessons will likely apply equally well in 2025 regardless of the challenges the new year may bring.

Nothing in this communication should be construed as personal Guidance & past performance is no guarantee of future results. There is a risk of loss associated with investing. No representation or implication is made that any methodology or system will generate profits or ensure freedom from losses. Guardian Rock LLC and its affiliates are fiduciary investment advisors. Please consult with us before making investment decisions and/or attempting to implement the strategies and tactics we discuss in any of our publications.

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