2024 INVESTMENT REVIEW AND 2025 OUTLOOK ( are you feeling "irrationally exuberant”?)
Are you feeling “irrationally exuberant”? We were bullish heading into 20241 even in the face of many calls for weakness and reasons (as always) to be “concerned”. For example, recall the hard landing fears for the economy. Any investor that was spooked onto the sidelines by selling their stocks sure missed out because the (domestic) stock market rewarded investors with another strong year of double-digit gains. That now marks two back-to-back years of big double-digit gains. The market has only accomplished this a few times, the most recent being in the 1990’s.
After two big years in the market from 1995 – 1996 Alan Greenspan, then Federal Reserve Chair, famously said the market was “irrationally exuberant”. The market then continued its bull run turning in big returns over the next three years 1997 – 1999 (culminating in the tech bubble in 2000). We see lots of analogues with the current, Artificial Intelligence (AI) tech fueled market, and the internet tech boom of the 1990’s.
One of the big stories driving the market in 2024 was the beginning of the AI build out. Another big storyline was the Federal Reserve pivoting to an easing regime (cutting interest rates) as inflation (seemingly?) cooled.
2025 Outlook and Beyond
After back-to-back years of big returns we are moderating expectations for 2025. We are still positive on stocks as the economy looks strong, the Fed is still easing (albeit maybe less than what market wanted), company’s profit projections look good, and the AI buildout is still intact. However, while we are looking for a positive gain in stocks perhaps a return of mid-single digits is more realistic.
Risks to our outlook could include interest rates increasing and continuing to increase (even as the Fed lowers its shorter-term key rate), political/global instability, company profits disappointing, and speed bumps in the AI story.
Although we see AI as a multi-year story, there are sure to be bumps and hiccups along the way (as was the case in the 1990’s during the internet buildout).
Meanwhile the Fed is talking about “recalibrating”. The markets are absorbing the reality that rates could be higher for longer with less rate cuts in store. But there could be further surprises on this front such as a pause in rate cuts or even a rate hike we don’t think is out of the realm of possibilities.
Finally, the further we climb without a serious correction from the 2022 bear market lows, the chance of a more substantial decline (of greater than 10%) increases. We do expect to see a correction of at least 10% this year (as is usually the case). And as usual a 10-20% decline will seem scary in the moment but is normal, healthy, and likely to be short lived.
Note on International Investing
We continue to be realistic on international investing, particularly China. Shortly after China announced awaited stimulus last year, what some called, (or rather hoped) their “bazooka moment” (think back to Treasury Secretary Paulson in 2009) it quickly fizzled. Economic conditions in China we think are just that bad (particularly surrounding real estate). They conceal data so it might even be worse then we think (a recent Wall Street Journal report supports this view).
One reason given for our outperformance compared to the rest of the world (ROW) is American Exceptionalism. Another is said to be just us being the best house in a bad neighborhood (we are not so great as it is we are just better then ROW). Either way the results are clear and it depends on your point of view.
International, and in particular emerging markets (China), will likely be an area we continue to be cognizant and cautious on. While we generally maintained going lighter on international over the years, we do advocate for some exposure for diversity (and positioning for when it does come into favor). Maybe it will become a case of so bad its good.
Our office and staff wish you much health and success in the New Year! As always we appreciate those who put their trust with us and please reach out if you have any questions.
1https://www.retirement-professionals.com/2023-investment-review
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Lincoln Investment. These views are as of January 2025 and are subject to change based on subsequent developments. The material presented is provided for informational purposes only. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.
International investing involves special risks, including, but not limited to, currency fluctuations, economic instability, and social and political uncertainties, not typically present with domestic investments.