Why Did 2024 End With A Whimper, and What Could Be Expected in 2025?

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Equity markets ended 2024 with a whimper. The S&P 500 was down 4 of the 5 final trading days of 2024. Yet, equities are still finishing 2024 up 23%, making two back-to-back annual gains of 20% (2023 and 2024).

• Notably, the S&P 500 had 4 consecutive declines in the final week of 2024. – since 1928, in the final week – there are 10 instances down 3 consecutive days – there are 3 instances down 4 consecutive days

• For 3 consecutive declines, the forward returns are strong: – 3 consecutive declines – next 1M gain +3.6%, 80% win-ratio – next 12M gain +12.4%, 80% win-ratio

Why did markets falter at the end of the year?

• Foremost, to me, this can be attributed to profit taking. After all, markets were so strong throughout 2024 (and 2023). Is this period of weakness a sign of a turning point? We don’t think so.
• Interest rates are up but they are hardly pushing levels that should undermine markets. And keep in mind the Fed doesn’t want financial conditions to tighten. This would offset any actions of Fed easing. This is the Fed put. The market is anticipating a flood of Treasury issuance in 2025 as a third of the U.S. debt will have to be rolled over in 2025, essentially a glut of supply which may not have sufficient demand to absorb it at current rates. The bond market is clearly concerned about the ballooning U.S. debt, expected to clear $40 trillion in less than 400 days from now (that’s a little over a year).
• This will in turn necessitate a massive wave of new Treasury supply that the government will have to sell in order to fund the debtor’s mess it has created. Thus, higher yields may be necessary, to reel in the mass of new buyers needed, and this may be a critical theme in the New Year as the Fed realizes it cannot dictate to the market what interest rate the government will pay on its massively ballooning debt pile.
• Moreover, the fundamental picture remains strong for 2025, and tailwinds are arguably stronger in 2025 than 2024. The new incoming administration is a positive. The Fed is dovish. The industrial side of the economy is bottoming and should turn up.
• Mark Newton, Head of Technical Strategy at FundStrat, warns that weakness might continue into early January. So be mindful that we could see some early spillover into 2025.
• But we would view that pullback as a buying opportunity. Buying the dip continues to make sense, in our view.

Positive Post-Election Years

For the bull case that it appears we are still in the throws of, the US Presidential cycle supports a positive year in 2025, based on historical precedent. We utilize this cycle because it has historically overlapped with a four-year equity cycle with major market lows often occurring in the mid-term year. More so, the Presidential cycle has realigned with the equity cycle following the Q4'22 mid-term year low meaning this year’s post-election year is appropriately aligning with year-3 of a bull cycle. Looking, specifically, at post-election years with a second-term president, the S&P 500 has averaged a 9.8% gain and traded higher 75% of the time vs. a 5.1% gain and 50% positive hit-rate in a post-election year with a first-term president. This indicates year-3 cycle weakness has historically occurred more often with a first-term president, not the case in 2025.

As can be seen below, going all the way back to 1929, second term presidents seem to be good most of the time. At a probability of 75%, this is 3 out of 4 times. Not a perfect record, but clearly on the side of more often than not.

Many will then ask, “OK, so 75% of the time the markets are higher, but by how much?” This is also important to ask as it speaks to whether it makes sense to stick around. If the number is small, then maybe the juice isn’t worth the squeeze! But as can be seen below, this is still a very attractive rate of return, particularly taking into account all alternatives.

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Positive Post-Election Years

Beyond looking at the action of the markets in a second term presidency, I wanted to revisit the four-year election cycle as well. A monthly breakdown of returns shows post-election years with a second-term president are typically weakest during the months of February, March, June, and August. This means we see heightened correction risk to start 2025 because seasonals become a headwind in February. Looking ahead, post-election years are meaningfully stronger during the months of September through December with a second-term president vs. a first-term president. This suggests 2025 moderation may develop as a bull correction rather than a bear market, in our view.

Looking again at the four years of the presidential cycle, the first year tends to be another good one followed by more difficult mid-term years. I believe that this could also be the case this time as the new administration will have to give the US economy its poison pill early on to set up its party for the next election. The big things appear to be: Social Security, Medicare expenses, and income taxes at both the individual and corporate levels. Since president elect Trump seems to do things his own way, the markets could be a bit cautious in the first quarter of 2025 as it deals with his statements of how he intends to deal with these things. Below is the picture of how the market tends to perform in the cycle:

My back of a napkin guess tells me that we are entering 2025 following two strong years for US equity markets, yet the international economies, for various reasons, are still in an unhealthy way. Interest rates are not attractive and due to the amount of debt throughout the world without robust economies outside the US, this could mean rates stay higher for longer. Commodity prices seem to be rising at a tame and digestible rate, with oil looking like it moves down to the $50 level. And the US Dollar still appears to be the currency of choice for all investors and should therefore continue to act as a magnet for capital going forward.

In the end, I believe that for the markets to show significant decline it would require an economic slowdown. At present this is not what we are experiencing. As a result, I believe corrections should be limited in veracity to the 10% range instead of major corrections in the 20-30% range. Again, this is really all predicated on how the new administration chooses to tackle the difficult issues.

Happy New Year and here is to a great 2025!

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