Market Commentary - January 2025
We hope the recent holiday season included time spent with loved ones, and we wish everyone a restful and healthy start to 2025.
Introduction
The economy and markets over the past year have been marked by surprises across multiple areas and metrics (albeit mostly with a positive skew). These included economic growth, inflation expectations, market resilience, and Federal Reserve actions. We address some of these topics below, including the drivers over the past year. We also point out that some expectations may need to be tempered as we turn the calendar to 2025.
Growth & Liquidity
We entered 2024 with materially higher expectations than 2023 – a year in which earnings growth was fairly flat. Based on earnings reports and current fourth quarter estimates, U.S. companies expect to grow profits by 9-10% in 2024. While still lower than expectations a year ago, this is stronger than the historical average. This, in addition to the increasing global liquidity that we highlighted in our prior newsletters, has led to extremely strong market returns for the year.
Consumers and businesses have remained extremely resilient during this prolonged economic cycle. The current cycle has been income-driven, in contrast to the standard debt-driven cycles of the past. The following developments have led to higher consumer spending and less burden from debt payments:
a) tight unemployment and wage increases
b) cost of living adjustments for Social Security
c) higher income from cash balances
d) investment gains
Figure 1 illustrates the debt burden of consumers, corporations, and the government compared to prior notable economic periods.
Figure 1 – Debt to Income Ratio
As it has been widely reported, government debt continues to increase over this cycle. While concerning over the long run, the increase in debt (largely a result of continued fiscal deficits) has enhanced the liquidity cycle and contributed to the expansion of monetary assets (i.e., stocks and digital assets).
Federal Reserve & Inflation
At the end of 2023, markets were pricing in six rate cuts by the Federal Reserve. This expectation was due to slowing growth coupled with inflation declining to their 2% long-term target. In contrast, economic growth was stronger than expected, and while the rate of change in inflation declined during the first half of the year, it remained sticky at higher levels and has recently begun to move higher.
While the Federal Reserve ended up cutting rates four times during the year (including a 0.50% rate cut in September), they seem to have shifted their collective focus back to inflation as they have projected only two rate cuts in the coming year. This is a direct result of their updated inflation forecast for 2025, which increased from 2.1% to 2.5% at their most recent meeting.
Volatility
As shown in Figure 2, U.S. markets typically experience at least one 10% correction and multiple 3-5% corrections, even in bull markets. However, the past year was particularly docile in markets. The S&P 500 had two pullbacks of at least 5% and never underwent the standard 10% correction. Given the inflation and monetary dynamics previously addressed and what we expect to be the tail end of the global liquidity cycle, we anticipate increased volatility in the upcoming year.
Figure 2 – Volatility Is The Toll We Pay to Invest
Source: https://www.carsongroup.com/insights/blog/10-talking-points-about-the-recent-volatility/
Firm Updates
We are grateful for your continued trust and support in our team at Aries Wealth Management. As most referrals come from existing clients, we would like to thank everyone for the introductions made throughout the year. While markets have been a tailwind across the industry, our firm has grown almost 30% over the past year and has experienced the strongest organic growth since our company was founded in 2015. Our upcoming annual compliance filing will note that firm assets under management have surpassed the $530 million milestone. Thank you again for the trust you have put in our team.
In addition to expanding the number of families and institutions with whom we work, we also remain proud of our continued support of the community, both through our involvement in professional organizations (i.e., Maine Society of CPAs, Maine Estate Planning Council) and additional non-profit and educational organizations throughout Maine and New England.
We are excited to welcome Naleen Mitchell Porreco to our team! With growth comes the opportunity to expand our team, adding additional resources, and various perspectives to enhance our processes and relationships. Naleen graduated from the University of Colorado at Boulder and holds Bachelor’s degrees in both Anthropology and Accounting. She has lived in Maine for over ten years and loves exploring our beautiful state with her family. Her background in non-profit and corporate accounting will serve her well as she continues her career at Aries. Naleen will help support the firm from a client service and operational perspective. We look forward to introducing her to you in the new year.
Thank you for your continued support, and we wish you a happy and healthy 2025!
- Jason, Micah, Tim, Matt, Victoria, & Naleen