As we celebrate the holiday season, the team at Bauer Heitzmann extend our warmest wishes to you and your families. We are deeply grateful for your continued trust and partnership, and we value the opportunity to be a part of your financial journey.
At the beginning of 2024, JP Morgan predicted a down year for the stock market. They mentioned inflation data and economic demand softening, monetary headwinds, geopolitical risks, and expensive asset valuations all as catalysts for a difficult year. They were not alone, in fact, most wall street firms were in agreement. Even though many of these risk factors were spot on and did occur during the year, the S&P 500 is going to return around 23% in 2024, in spite of this consensus view.
Here is a brief snapshot of the major indices as of this writing on 12/31/2024:
Stocks:
S&P 500: 23%
Dow Jones Industrial Average: 12%.
Nasdaq 100: 29%.
Bonds:
Aggregate Bond Index: -2%
Short-Term: 0.25%
Long-Term: -11%
I’ll also point out that many Wall Street firms entered the 2022 year very bullish and optimistic for positive growth, failing to see the inflation risk that would cause the worst stock market performance since 2008 and simultaneously cause the worst year in the bond markets since they starting tracking it in 1976. Did we see this event unfolding beforehand at Bauer Heitzmann? Of course not.
My reason for pointing this out is to highlight the unpredictability of the markets over the short run. However, the market is quite predictable over the long run!
In fact, we are blessed in the U.S. to have a stock market that historically goes up about 80% of the time (in spite of a wide variety of risk factors) which I think is shown nicely in the image of the S&P 500 below:
And while it’s rare for bond markets to have a negative year (only 5 going back to 1976), 2024 is going to end negative due to medium and long term rates pushing much higher in the 4th quarter. Our last writing showed a lot of data that indicates this should be a short term phenomenon, but again, predictably in the short term is futile and we continue to rely on good data, discipline, and strong investment allocations based upon your individual goals and tolerances to give us the highest probability of positive outcomes.
The primary purpose of bonds in most portfolios is to be a less volatile asset that is generally uncorrelated to other more volatile positions in the portfolio. For this reason they lower the overall volatility of the portfolio and can also easily be tapped into for liquidity needs. The secondary purpose is to provide income (interest) in excess of the current inflation rate, which outside of the last few years, does happen consistently.
Looking Ahead to 2025
Of course there is no shortage of predictions for 2025. A popular economist from Apollo, Torsten Slok, published his list of risks and it’s been circulated widely across the internet. I’ve included his image below.
He is likely going to be right about many of these, but there is no telling what the result will be in the markets. We do know that historically the stock market has done very well in the year following an election year, with the average return being 10.7%, and when a new president beats an incumbent, that average increases to 12.6%.
We will be making some adjustments to the stock portfolios to reduce exposure to our health care fund and increasing the weighting towards the financial sector fund. We will also continue balancing the risk between keeping exposure to the more highly concentrated technology sectors and more defensive areas of the market.
We will keep our core bond holdings weighted heavily in investment grade domestic areas and look to increase yield through high quality structured income bonds, senior bank loans, and private credit.
We have engaged in thoughtful tax loss harvesting throughout the year and are always vigilant to discover and research additional tax-efficient strategies like direct indexing and tax-aware investing.
We will continue to provide creative financial planning with each of you to discover the most impactful ways to structure your investment allocation, asset location, tax-efficient distribution strategies, and manage your sequence of returns risk.
Our aim in 2025 is to be a beacon of clarity in an ever-changing, complex financial world. In a life devoted to service, we stand as your vigilant guardians of wealth. We are grateful for each of you, the most productive people on earth.