Another New Year

Happy New Year! I hope your holidays were joyous and warm, and you’re enthusiastically headed into 2025. Personally, I think things always seem a little frantic at the beginning of a new year. We all have new dreams, but many of us also have new year needs. Our phone usually stays a good bit busier, and the level of paperwork runs a bit higher. This year, a lot of people seem to be starting the new year off with one sickness or another as well. My Christmas was extended for two additional weeks because Carter decided to unveil a fever and cough Christmas morning. That didn’t get in the way of opening presents of course, and he remained excited throughout the holidays, albeit a tad slower than usual.
 
While there is a lot of change in the air, I am still looking forward to a good year. As I’m sure I’ve said countless times, most of us aren’t all that well equipped to enjoy changes from the start. However, even if we continue to hold on to “the good old times” and the way things were, when pressed it’s usually easy to find things we admit are better now because of the changes that occurred.

As you all know, we just had two years of above-average market returns. The S&P 500 rose roughly 24% two years in a row, with the Dow Jones Industrial rising roughly 13%. The big reasons for those returns are multi-faceted. Economies rebounded following the pandemic, low interest rates spurred borrowing and business growth, the advent of artificial intelligence increased business investment, and corporate earnings and profits have been high and increasing. Things have been good, and are still good, on many fundamental fronts. America has a strong job market, with low unemployment and continuing job growth. Inflation, although slowing in its decline, is holding steady. Consumers are confident, and earnings and profits are continuing to increase.
 
But just as I have noted in many of my Intelligent Investing radio shows recently, investors seem to have grown a bit too complacent. It is easy to forget the normal risks and volatility of investing when times have been good for so long. I would assume very few people even stop to remember 2022, when the S&P 500 declined 20%, growth stocks declined 30%, and the bond markets declined between 15 and 30%. I always worry that when I pass on a warning like this people think I’m calling for a big market downturn, which is not the case at all. Could there be a correction? Of course, because that is the natural behavior of all markets. But forward growth and optimistic momentum is also the natural behavior of markets, and people have a bad track record of trying to predict when that behavior ends as well.
 
I do believe a little knowledge can help in understanding the reasons for how the market could potentially “correct,” and what it would mean for our investments. First off, although “the markets” of the news have had these stellar years, the high returns have not been broad based. Right now, the top 10 companies of the S&P 500 account for 40% of the entire S&P 500’s market cap. Market cap is the value of a company found by multiplying its number of shares by its share price. Apple (AAPL) has 15.04 billion shares at $237 a share, giving a total market cap of roughly $3.5 trillion dollars. So, the performance of those 10 biggest companies has a much bigger impact on the total S&P 500 compared to the combined 400 bottom companies that only represent 25% of the total index. A good point of comparison is the Value Line Geometric Index. This index has roughly 1,700 companies, representing 90% of the U.S. investable market. Last year this index only increased 2.88%.
 
Although more and more pundits continue to whisper the fearsome “bubble” word as they describe the state of the markets, especially in reference to those largest and most purchased companies, more and more money managers are mentioning a “broadening of stock market returns” and a “rotation” from the AI and technology stocks to less expensive and defensive stocks. It is possible that we could see a heightened rotation of interest from the large growth companies to “everything else.” In other words, a possible scenario could be falling markets on the news, but a filling out of those previously ignored positions and sectors. We continue to see this on the most volatile days when the Nasdaq may drop much more than the S&P 500, and even more than the Dow Jones Industrial. That would be a “better case scenario,” and one to hope for, but not something we are currently counting on for any type of planning.
 
In conclusion, while 2025 will likely be volatile, I believe volatility is only going to continue to increase into the future. We have so many more people investing today, with so many more access points for investment, that we will just have to accept that things go up and down faster than they used to. From one perspective, that can increase investor anxiety, but from another, it offers more frequent opportunities for major rebalancing. Even with the heightened volatility, I believe many of the major strong fundamentals of our economy and business landscape will remain close to the same as they are now. Obviously, the uncertainty from the changing of the guard on the political landscape will be a focal point for change, but I believe a lot of the predictions on what that will bring have been more overblown than not.
 
I had some other interesting things I was going to share with you all regarding crypto currencies, artificial intelligence, and employer and employee ghosting, but I’m guessing that what I find interesting might not be interesting to all of you, and I already made you suffer through all those numbers and percentages. If you were able to make it through that, thanks for hanging with me, and if not, that’s okay too. Feel free to reach out by phone or email for a summary. We always delight in hearing from you and are always willing to do our best to translate what little part of the crazy world out there we can.
 
May you all have an excellent 2025.
 
Justin Anderson