As one year ends and another begins, it is natural for investors to reflect on the events of the past year and look forward to what awaits in the new year. There was a lot to digest and discuss in 2024, and 2025 promises to reveal its own twists and turns. Let’s take a few moments to review 2024 and look ahead to 2025.
Despite a great deal of uncertainty throughout the year, 2024 turned out to be a strong year for domestic equity markets. Every year involves some economic and market unpredictability, but 2024 brought a great deal of consternation and anxiety to investors. Foremost on most investors’ minds were the 2024 Presidential election between two unpopular candidates, anticipated rate cuts by the Federal Reserve, and stubborn inflation which has not subsided as quickly as anticipated.
Throw in ongoing and deepening geopolitical tensions in Ukraine and the Middle East and investors had a great deal weighing on their minds throughout the year. Despite all these concerns the S&P 500 index posted a gain of more than 20% for the second year in a row, which is the first time that has happened since 1998 and 1999.
2024 in Review
Widely viewed as a barometer for US equity markets, the
S&P 500 index ended the year up 25.02%, including dividends. The strong
performance of the S&P 500 should be viewed cautiously as the Magnificent
Seven stocks (Alphabet (Google’s parent company), Amazon, Apple, Meta
Platforms, Microsoft, Nvidia and Tesla) accounted for 57% of the gains in the
index in 2024, led by Nvidia’s 171.2% return. In 2023 the Magnificent Seven
accounted for 65% of the index’s gains, so while still highly concentrated
there is evidence that returns are broadening.
Beyond the largest 500 U.S. companies, equity market returns
varied widely in 2024. The Russell 2000 index, which measures the performance of
small cap U.S. stocks, returned 11.54% in 2024. International markets fared
worse than our domestic markets. The MSCI World ex USA index, which measures the
performance of large and mid-cap equities in developed markets in Europe,
Canada, Asia and the Middle East, clocked in with a 4.70% return in 2024.
Emerging Markets, as measured by the MSCI Emerging Markets index, gained 7.50%
in 2024.
Looking beyond equity market performance in 2024, mixed economic
conditions contributed to the uncertainty investors faced. The Federal Reserve
lowered the federal-funds rate to the 4.25% – 4.50% range after three rate cuts
in September, November and December. Inflation measures did not drop as quickly
as economists hoped, leading to continued strains on consumers’ budgets and the
Federal Reserve backing away from its aggressive rate reduction forecast for
2025. November’s much-anticipated election saw the Republican party win the Presidency
and take control of the Senate and House of Representatives in Congress.
Despite the prospects of a more business-friendly administration taking over,
stubborn inflation and the Federal Reserve’s announcement of a more cautious
approach to rate cuts led to a sharp pullback in stock performance in the
fourth quarter.
Looking ahead to 2025
At the beginning of each new year, we caution our clients against the folly of basing investment decisions on the market predictions of so-called ‘experts.’ This year will be no different as we enlist the help of Wall Street Journal columnist Jason Zweig to illustrate our point.
In his January 11th article Mr. Zweig compares the aggregate average return forecasts of stock analysts and market strategists to the actual performance of the S&P 500 index in both 2023 and 2024. In 2024 the average return forecast for the S&P 500 was 7.4% by the grouping of stock analysts, and was a paltry 1.3% by the collection of market strategists. As you read earlier, the actual return of the S&P 500 was 25.02% in 2024. 2023’s forecasts were nowhere near as dire as 2024’s forecasts, but they were equally incorrect. The average forecasted return for the S&P 500 was 17.5% by stock analysts and 6.2% by market strategists, while the actual return was 26.29%.
Mr. Zweig also collected forecast data for 2025. The average return for the S&P 500 is 13.4% for stock analysts and 12.5% for market strategists. What are the odds that these experts’ prognostication skills have improved over the past year? It’s not very likely if past results are any indication. So how should investors position themselves for success for 2025?
While nobody can predict what 2025 will bring for markets, we can be prepared for whatever occurs. Financial success is most reliably achieved through diversification and having a disciplined strategy for accumulating and preserving wealth. Part of that disciplined strategy is focusing on what you can control and letting human problem-solving and ingenuity (Capitalism) figure out the rest.
One area we have a great deal of control over is how we contribute, and how much we contribute, to our investment and retirement accounts. 2025 is the last year of lower tax rates the Tax Cuts and Jobs Act of 2017 (TCJA) have brought us. Because income tax rates are significantly lower than they have been before the TCJA became law, many investors may benefit more from making contributions to their Roth IRAs or Roth 401(k)s than they would from making traditional pre-tax IRA or 401(k) contributions. Roth conversions are also an attractive strategy while tax rates are lower. Please see Table 1 for a handy summary of contribution limits and other financial figures of note for 2025.
An extension of the lower income tax rates looks more favorable than it did before November’s election, but there is no guarantee that the low tax rates we presently enjoy will be extended further under the Trump administration beyond 12/31/2025. The countdown for making smart planning moves is on!
A few final words as we plan for 2025 and beyond. Financial peace of mind encompasses much more than a numeric balance on an account statement. True wealth and financial security are being able to focus on the things that matter most – our health, our relationships, and having a purpose-driven life. Nobody can predict what will happen in 2025 or the curveballs that life will throw our way. We can control how we react to these changes. One of the best ways we can do that is to make sure our financial plan is up to date, and we are positioned to weather any storm.
Please be sure to contact our office to schedule a time to meet so we can make sure that your financial plan is up to date, and you are prepared for 2025 and beyond!
Sources: The Wall Street Journal, Dimensional Fund Advisors, Investment News, Kitces.com.
Table 1: 2025 Contribution Limits and Other Important Figures