Appreciate Newsletter

Will Stocks Move Higher In 2025?

Hello subscribers,

Here’s what we’re covering in this edition:

?? Wall Street is bullish on 2025

?? A Santa Claus rally in 2024?

?? Why diversification matters!

So, let’s go!!

2024 was characterized by significant political transitions and persistent geopolitical tensions, with markets showing remarkable resilience.?

The year saw two major electoral events:?

• Donald Trump's victory in the US presidential race and
• India's general elections?

Both events triggered notable capital flows, particularly with foreign investors redirecting funds to the U.S. markets post-Trump's win.

The global monetary landscape witnessed a pivotal shift as central banks, led by the Federal Reserve, began unwinding their aggressive rate-hiking cycles as inflation moderated. While the U.S. initiated rate cuts, India's RBI maintained its hawkish stance, highlighting diverging policy paths among major economies.

The market performance revealed interesting patterns:?

• The Nifty 50 delivered a 9% return in 2024, moderating from the compounded annual growth rate of over 14.2% in the last five years
• Meanwhile, gold emerged as a standout performer, surging over 20% to around ?78,000 per 10 grams
• Despite ongoing geopolitical tensions in Ukraine and Gaza, oil prices remained relatively stable, helping contain inflation
• Indian retail investors showed mature market understanding, evidenced by consistently rising SIP numbers despite market volatility, suggesting a growing sophistication in India's investment landscape
• The year also saw robust IPO activity with 87 main board and 245 SME listings, reflecting strong primary market sentiment

Is a Santa Claus Rally On the Cards?

The U.S. stock market showed resilience amid a thin holiday trading period. The Dow Jones gained 1.65% over the past five trading days. In comparison, the S&P 500 and Nasdaq Composite indices have returned 2.2% and 2.8%, respectively.?

The timing of the recent momentum is particularly significant as it coincides with the start of the period traditionally associated with the Santa Claus rally.?

Historical data since 1950 shows that the Santa Claus rally (the last five trading days of the year and the first two of January) typically delivers a 1.3% return, significantly outperforming the average seven-day return of 0.3%.

Mixed economic signals add complexity to the market narrative. Initial jobless claims (219,000) came in better than expected, but continuing claims reached their highest level (1.91 million) since November 2021, suggesting a potential softening in the labor market.

Wall Street Remains Bullish on Tech

According to a FactSet report, the analyst sentiment for the S&P 500 index shows a cautiously optimistic outlook, though slightly below historical averages.?

The current 54% Buy rating composition is marginally lower than the 5-year average of 54.8%, suggesting a slight tempering of analyst enthusiasm despite the market's recent gains.

A notable sectoral divergence emerges in analyst sentiment:?

• Sectors such as Communication Services, Energy, and Information Technology lead with 61% Buy ratings each, reflecting strong confidence in near-term growth prospects. The strong showing of tech stocks is particularly significant given their market leadership in 2024
• The defensive Consumer Staples and Utilities sectors face the most skepticism, with only 41% and 48% Buy ratings, respectively. Lower confidence in defensive sectors, combined with the Consumer Staples sector having the highest Hold ratings (53%), suggests analysts favor growth over safety – a typically bullish market signal
• The inclusion of three Magnificent 7 companies (Amazon, Microsoft, and NVIDIA) among the most highly-rated stocks reinforces the market's continued confidence in leading tech companies. It also indicates that despite some concerns about tech valuations, analysts believe these companies still have room for growth

The modest increase in Buy ratings from 53.6% to 54% since October, accompanying a 3+% rise in the S&P 500, suggests analysts are gradually gaining confidence but remain measured in their optimism.?

Diversification Always Wins

We have analyzed The Asset Allocation Quilt chart by Mint, which shows annual returns across different asset classes from 2015-2024:

Here are the key insights:

1. Performance Variability

• No single asset class consistently leads or lags - there's significant year-to-year variation
• Best performers in one year often become poor performers in subsequent years, demonstrating the difficulty of timing markets
• The spread between best and worst-performing assets in any given year is substantial, often exceeding 30 percentage points

2. 2024 Leadership

• Small-cap and mid-cap segments dominated with returns of approximately 26%, suggesting a strong year for smaller companies
• With a 26.9% return, the S&P 500 outperformed all asset classes this year, highlighting the strength of large-cap equities

3. Long-term Patterns

• The 10-year CAGR column shows mid-cap as the strongest performer at 16%
• Gold has shown relatively stable but moderate returns over the period
• Real estate and corporate bonds have generally been in the middle to lower range of returns

4. Notable Trends

• 2020 saw an extreme divergence in returns, likely due to the pandemic impact
• 2022 was predominantly negative across asset classes, reflecting broader market stress
• Credit risk assets tend to move together directionally but with different magnitudes

The Key Takeaway:

• The chart strongly supports the case for diversification rather than concentration in any single asset class
• Regular rebalancing appears important, given the frequent leadership changes
• A balanced portfolio across these asset classes would have helped smooth returns over this period