January 2025

This year, we are excited to bring market insights, news, and planning tips to followers and clients. We will try to bring you the things that matter in a way that you can understand.

We're officially into the thick of 2025. The holidays are over, New Year resolutions have already been broken (or is that just me?!?), and we are back to business as usual. That said, let's start with a bit of market commentary, looking back at 2024 and ahead into 2025.

Taking the time to recognize what we just went through can help give perspective and provide a big-picture view that can help ease concerns and reduce the potential impact behavioral biases have on our portfolios moving forward.

Running It Back In 2024

After a strong 2023 with a 26% total return from the S&P 500, I don’t think anyone had a repeat performance on their 2024 bingo card. Yet here we are at the end of 2024, having gone back-to-back like Jordan ’96 ’97.

Not only did the S&P rip again, posting 25% returns for the year, but the index reached all-time highs. Together, 2023 and 2024 form the best two-year period since the aforementioned duo of Jordan and Pippen hung them up in the late 1990s.

However, it's easy to see those numbers and forget that it wasn’t smooth sailing to the top—there were plenty of moments when, if you turned on CNBC, doom and gloom for the markets were being preached.

There were inflation worries and subsequent interest rate cuts. There were some massive geopolitical events, devastating natural disasters, and a contentious election here at home. Below, you can see the entire year's events and how the markets reacted along the way.

One key area to highlight is that the Bank of Japan boosted interest rates in August, causing a ‘sky is falling’ reaction that saw a full 3% drop in a single day, only for the market to bounce back to all-time highs by September.

Why point this out? Because it highlights one of the most essential lessons in long-term investing:

short-term volatility ≠ long-term risk

Market corrections with declines of as much as 10-20% are not rare or unexpected (in fact, they occur approximately every 2 years). However, historically, they have been temporary and last only a few months at most. As committed long-term investors, we see these times as an opportunity - not a problem.

We can look to strategically sell off investments that have losses to offset future gains and rebalance to buy at ‘discount’ prices. This is also why we believe in continuously updating financial plans and ensuring clients have cash available outside the market so there is no fear of corrections impacting their short-term goals.

The other major topic de jour to start 2024 was how the Fed would handle inflation. Jerome Powell received criticism throughout the year from both sides of the aisle, but in Q3 and Q4, we saw action as cuts came, and the inflation rate moved closer to the 2% target without cratering unemployment.

All in all, while much was made of the month-to-month change in the economic data, the U.S. economy closed the year on solid ground — a simple reminder to ignore the political talking heads and follow the old Wall Street motto, ‘Don’t Fight the Fed.’

Who would have guessed that J.Powell, despite all the political turbulence, would have stayed on course for a Captain Sully soft landing as we hit 2025.

Full Steam Ahead in 2025?

The election is over, inflation is calming, and there is significantly less talk of recession, so there is nothing to worry about, right? Can we stop the hysteria?

News networks make money by attracting eyeballs, and chaos brings a crowd. What we can do is mentally prepare for the uncertainty and volatility that comes with the territory, and as long as we stay disciplined, the odds of coming out on top over the long-term are high.

We will continue to watch for things that could cause significant shockwaves in the market and cause momentum to reverse course. We have a close eye on the possible extension of the Tax Cuts and Jobs Act (TCJA) tax rules, which are set to expire in 2025. We will also be intently monitoring the economic impact of potential tariffs and immigration policies.

Even if we experience a down year, the RSW ‘boring with a purpose’ strategy of keeping costs low, doing what we can to minimize taxes, actively managing cash positions, and maintaining diversification will keep a positive long-term outlook.

Speaking of diversification, we need to make a final point heading into 2025.

We have recently noticed many other wealth managers talking about the lack of need to diversify internationally. After all, we are America!

It's true that since the 2008 financial crisis, the U.S. stock market has slapped international stocks (measured by the MSCI World ex-USA Index) — over the past 10 years, annualized returns have lagged U.S. stocks (measured by the MSCI USA Index) by 7.2%.

Seeing the chart, it’s not a surpise that other wealth managers are eating up U.S. stocks like Nathan’s hot dogs and warm apple pie. U-S-A! U-S-A!

But at RSW, we aren’t interested in riding the ‘Hot Hand’ like gamblers at a blackjack table. We listen to the statistics and try not to let bias impact our decision-making.

Looking at the entire chart, two key items stand out.

1. There were plenty of years when U.S. stocks underperformed our international counterparts.
2. The annual gaps between U.S. and International stocks are often significant.

This all points to the reasoning for maintaining diversification and investing with your financial plan in mind.

-1-

China's AI firm DeepSeek released an open-source AI model that not only rivals GPT-4's capabilities but achieves this with greater efficiency and lower computing power requirements, causing significant market reactions across tech stocks.

The Importance: While market volatility around AI news is typical, this development highlights a crucial economic reality - AI is not just another tech trend but a fundamental transformation of the global economy. Goldman Sachs Economics Research suggests AI investment could drive even greater economic impact than historical, technological revolutions like electricity and personal computers, which each contributed up to 2% of U.S. GDP growth during their adoption phases. This isn't just about individual company valuations - it's about the broader economic transformation as AI moves from experimental technology to essential business infrastructure.

-2-

The Federal Reserve maintained interest rates at their current level in their first meeting of 2025, keeping the target range at 4.25-4.5%, suggesting they need more evidence before considering rate cuts.

The Importance: While markets had anticipated potential rate cuts throughout the Q1 Fed meetings, Powell’s cautious stance highlights a broader economic reality. The decision will have some key impacts:

• For my Boomers and Millennials, don’t start moving out thinking the kids are finally moving out of the basement - the cost of mortgages and other loans will likely remain elevated.
• The ‘higher for longer’ rate environment means there is no rush to extend the duration (i.e., shift to longer-term bonds) or move away from high-quality fixed-income investments. Instead, at RSW, we continue to look to earn extra yield by owning non-benchmark exposures through active managers. And yes, even I felt a tad gross typing out this bullet, but I can only say there is no simple way to talk about fixed income easily.

Overall, the Fed's patient approach suggests prioritizing long-term economic stability over short-term market expectations. For those planning major financial moves in 2025 - whether that's exercising stock options, buying a home, or rebalancing investment portfolios - this stance requires thoughtful consideration of timing and strategy.

The Nvidia Reality Check

The $600 billion single-day market value loss at Nvidia following DeepSeek's announcement is a powerful reminder about holding concentrated positions in employer stock. Even being part of the "Magnificent 7" and leading the AI revolution doesn't provide immunity from market shocks. The market leader in computer chips had 17% of its value wiped away in hours, and this loss was purely caused by surprise external competition.

The Reality: Working at a successful company can create a false sense of security about holding concentrated positions in your employer's stock. You see the potential firsthand, understand the technology, and believe in the mission. However, external factors beyond anyone's control can dramatically impact even the strongest companies. This isn't about doubting your company's potential - it's about acknowledging that your financial security shouldn't be overly dependent on factors outside your control.

Now, we won’t ignore that those with large concentrations also benefited significantly over the past few years, but the reward comes with huge risk. What we are trying to highlight is that when looking at your employer’s stock holdings (or any individual holding), you should ensure that the amount isn’t too large of a portion of your overall portfolio. We often say for most investors that it should not make up more than 5-10% of your total portfolio value.

-1- Plan Updates

A new year always brings about some reflection, often translating into the desire for life changes. At RSW, we believe one of our many differentiators is that we don’t simply create a financial plan but do financial planning—meaning as life changes, we ensure your plan changes, too.

Look for an email from us with a link to update your profile. This could include changes to income, expenses, savings, goals, etc. We want to capture that information and incorporate it into your plan to give you confidence in your finances for 2025.        

-2- Tax Prep

Now that the most wonderful time of the year has passed, we are on to the least - tax season.

What that means for you:

Check your mail! If you are anything like Mike’s wife, you may have a tendency to throw out mail that even remotely seems like junk mail. The problem is tax forms are being sent over the next few weeks, so make sure you open everything before assuming it's junk. Common forms you can expect:        

Form W-2:

Forms will come from your employer and have all your earned income information.

Form 1099:

There are several iterations of 1099 forms, but expect these if you receive income via investments, dividends, education savings plans, or contract work. Depending on the source institution, they may not appear until the end of February.

• Ensure you have the final versions. Some institutions will send preliminary versions, but only the final version should be used for tax prep.
• Important: For those of you who have equity compensation, if you sold shares, you will receive a 1099-B. A common error that can occur is that the cost basis listed on the form is $0. This should not be the case, and if it's missed, you will pay taxes twice on the vested stock.

Form 1098:

These forms will report mortgage or student loan interest payments made for the year, which is important when determining whether to take the standard or itemized deduction.

For RSW clients, your annual profile update includes a spot to tell us which tax preparer you plan to use this year. We like to think of ourselves as the captains of your financial team, and it will be helpful to understand and potentially connect with whoever else rounds out your squad.        

Have Questions or Looking to Learn More:

Reach Strategic Wealth LLC (RSW) is a registered investment adviser offering advisory services in the State of North Carolina, State of Connecticut, and in other jurisdictions where exempted. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. RSW may discuss and display charts and graphs that are not intended to be used by themselves to determine which securities to buy or sell or when to buy or sell them. Investments involve risk and, unless otherwise stated, are not guaranteed. Readers of the information contained in this Newsletter should be aware that any action taken by the viewer/reader based on this information is taken at their own risk. This information does not address individual situations and should not be construed or viewed as any type of individual or group recommendation.