Q1 2025 Investment Update

 

This update is for discretionary accounts.

 

 

Summary:

• The U.S. economy continued to grow in 2024 at a moderate pace.

• The federal reserve has lowered the federal funds rate several times since the first cut on Sept 18, 2024. This suggests they believe the recent inflation issues have been resolved. To date this appears to have occurred without causing a recession.

• Lower interest rates should help the U.S. economy to continue in growth in 2025. There are very few, if any signs of a recession in the near term.

• Steady growth with lower inflation should be favorable for U.S. Stock prices.

•  However, because of high valuations in the U.S. stock market, upside could be limited in 2025 unless earning move sharply higher.

• 2025 could be the year that we see small and mid-cap stocks outperform large-cap stocks for the first time in many years, due to much better valuations in those areas.

• In the last few months smaller and mid-size stocks have begun to participate, while technology stocks have had a correction.

• Lower interest rates should also benefit bonds in 2025.

• Interest rates on Government bonds finally moved above the year over year inflation rate in the middle of 2023. Making them attractive for the first time in a number of years.

• Valuations for short to intermediate term bonds at there best levels in many years.

Economic and Monetary Outlook:

• Prior to 2023, thirteen of the last sixteen times the Federal Reserve has raised interest rates sharply, recession has followed.

• The current economic environment is only the fourth time over the last seventeen times that a significant rate increase did not cause a recession.

• A combination of fiscal stimulus and strong spending from cash rich consumers has kept the economy strong. Making it hard to forecast a recession in the near-term.

• The federal reserve made its first step towards lower interest rates on September 18,2024 when it lowered the fed fund target by a half a percent.

• Additionally decreases in the fed funds rate should be expected over the remainder of the year and in 2025.

 

 

 

Equity Market Outlook:

• In the first half of 2024, the recovery in equity prices had been led by a small number of stocks that have large weightings in the averages, with the majority of other stocks lagging.

• The NASD 100 and S&P 500 averages significantly outperformed in the first half of the year because of there heavy weighting in technology stocks.

• The unweighted version of the S&P 500 is only up about 5% for the first half of 2024.

• In the last six months small and mid-cap stocks’ averages have advanced while the earlier leaders have corrected. We expect this trend to continue into 2025.

• Consensus 2025 S&P 500 earnings estimates are currently $268 a share. This put the S&P 500 at about 22 times 2025 estimates at the current price level. This puts valuation back into the upper end of its historical range.

• This suggests that the upside for large-cap stocks in the S&P 500 may have limited in 2025. However, small and mid-cap stocks are selling at lower valuation and should have more upside potential than the S&P 500.

• We would not be surprised if the S&P 500 suffers a 7-10% correction in 2025. The last 10% correction in the S&P 500 was in 2023. Historically, the S&P 500 averages one 10% correction every 33 weeks according to the Wall Street Journal.

 

Fixed Income:

• Interest rates have declined in 2024 after the sharp rise in 2023

• The federal reserve cut interest rates four times in 2024.

• We should expect additional rate cuts in 2025. However, because of lingering inflation and a stronger than expected economy, rates cuts may be limited.

• Interest rates on government bonds have remained above the year over year inflation for all of 2024.

• This would imply that longer-term government bond yields have returned to fairly valued after many years of being overvalued.

•  Bonds of 2 to 5 years have seen there yields jump significantly. This gave us an opportunity to move from short duration bonds of 1 year or less to slightly longer duration bonds in the two-to-three-year range, to pick up some additional returns.

Investment Strategy:

• We remain over weighted in terms of U.S. stocks and under weighted fixed income.

• Our main areas of focus has been large-cap domestic equities and mid-cap growth oriented domestic equities.

• Valuations appear to be better in small and mid-cap equities, which is where we would like to increase our exposure now that the federal reserve has begun to lower interest rates.

• We used the last years increase in interest rates to add to our fixed income holding and lengthen maturities.

Roy Blumberg,

Partner

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. The economic forecasts set forth in the presentation may not develop as predicted

Stock investing involves risk including loss of principal.

The prices of small and mid-cap stocks are generally more volatile than large cap stocks.

International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

 

Bonds (fixed income) are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

No strategy assures success or guarantees against loss.

                Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of         principal and potential illiquidity of the investment in a falling market. The economic forecasts set forth in this    material may not develop as predicted and there can be no guarantee that strategies promoted will be successful