2025 First Quarter Commentary

As we close the books on 2024, I can’t help but reflect on the past five years. What a turbulent period it has been: COVID-19, supply chain disruptions, soaring housing prices, an historic rise in inflation in 2022, extreme Federal Reserve policies with the steepest interest rate increases in modern history, and now an awkward normalization (if anything can be considered “normal” anymore).

Top Financial Takeaways for 2024

Stock Market Surge: The S&P 500 rose 23%, with the Nasdaq up nearly 29%, driven by robust economic growth, enthusiasm around Artificial Intelligence (AI), and Federal Reserve rate cuts.
- Source: yCharts
Economic Resilience: U.S. GDP grew by 2.9%, defying high interest rates and unemployment, while inflation slowed significantly, supporting a "soft landing" scenario.
- Source: yCharts
Global Growth: The global economy expanded by 3.2%, with easing inflation and stronger trade, although geopolitical risks and elevated interest rates persisted.
- Source: KPMG Global Economic Outlook Dec 2024
AI and Tech Boom: AI innovation fueled gains in tech stocks, boosting investor optimism throughout the year.

Interest Rates and Inflation

Interest rates and inflation have been major areas of concern for the economy and markets. COVID-19 caused significant shifts in demand, extreme stimulus measures, and stress on global supply chains. Add the war in Ukraine, and the result was a massive spike in inflation followed by a surge in interest rates.

As 2024 progressed, demand normalized, stimulus effects waned, and global supply chains began to stabilize. Consequently, the Federal Reserve reduced the overnight borrowing rate from 5.25–5.5% at the start of the year to 4.25–4.5% currently. They have signaled plans for further rate reductions over the next 12 to 18 months.

However, markets remain unconvinced that the fight against inflation is over. Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) data suggest that inflation remains somewhat "sticky" at around 2.7%, still above the Federal Reserve’s long-term target of 2%. There are also concerns that the new administration’s policies—such as tariffs and changes to immigration policy—could impede inflation’s march back to target levels.

The chart below illustrates the gap between market expectations (yellow dotted line) and the Federal Reserve’s forecast (blue dotted line) for future rate cuts. Markets are pricing in 50–75 basis points in cuts, compared to the Fed’s projection of closer to 150 basis points.

The U.S. Stock Market

The S&P 500, introduced in 1957, has delivered an annualized total return of 10.5% over its 67-year history (assuming dividend reinvestment). Of course, returns have varied significantly by decade:

1960s: 7.8% annualized return, driven by moderate growth and a challenging end to the decade.
1970s: 5.9% annualized return, hindered by high inflation, an oil crisis, and declining valuations.
1980s: 17.5% annualized return, fueled by strong economic growth and low valuations at the start of the decade.
1990s: 18.2% annualized return, supported by a strong economy and the dot-com boom.
2000s: −0.9% annualized return, weighed down by the dot-com bust and the 2008 financial crisis.
2010s: 13.6% annualized return, marked by recovery from the financial crisis and zero interest rate policies.
2020–2024: 14.8% annualized return, despite two major market corrections.

It’s worth noting that the strong returns of the last 15 years can largely be seen as a natural rebound from the challenging decade that preceded them. History shows that periods of significant economic and market stress—such as the high inflation of the 1970s—can be followed by extended stretches of robust growth, as evidenced by strong performance during the 1980s and 1990s. This pattern reminds us that recovery and growth often emerge after difficult times.

The S&P 500’s 28% total return in 2024 follows a 24% return in 2023. Such strong back-to-back years are rare, making it reasonable to approach 2025 with some caution. While 2023’s rally stemmed partly from the dramatic selloff in 2022, 2024’s gains were driven primarily by a robust economic environment, Federal Reserve rate cuts, and excitement surrounding AI.

Election Impact

2024 Presidential election results sparked immediate market reactions. Since Election Day, the market has gained 5–6%, slightly above the median post-election return of 4%. Some sectors have emerged as clear winners based on anticipated policies of the new administration, including financials, cryptocurrencies, and mergers and acquisitions.

Source: Goldman Sachs, “How Trump’s election is forecast to affect US stocks.”

Looking Ahead to 2025

Concerns:

Global Trade Risks: Potential trade wars and tariffs under the new U.S. administration could disrupt global markets and increase inflation.
Inflation Persistence: Despite moderation, inflation remains above central bank targets, complicating monetary policy and potentially keeping interest rates elevated.
Valuation Challenges: High equity valuations, particularly in tech, face risks from slowing earnings growth and waning AI enthusiasm.

Optimism:

Economic Growth: The U.S. economy is expected to grow steadily, supported by strong consumer spending and a resilient labor market.
Technology Trends: Continued innovation in AI and tech could drive productivity and market gains.
Monetary Easing: Central banks are likely to maintain accommodative policies, supporting equities and bonds.

Artificial Intelligence and Innovation

AI dominated corporate America in 2024, surpassing even the election in importance. This trend reflects broader innovation themes, including big data, mobile technology, and automation, which continue to drive the U.S. economy.

One intriguing insight from a recent AI-focused talk suggested that manufacturing and production-oriented businesses, rather than traditional tech companies, may be the early beneficiaries of AI advancements. As corporate profits begin to shift, investors may need to adapt equity allocations to capture emerging opportunities.

Final Thoughts on 2025

The stock market remains in a strong uptrend, but signs of potential new leadership are emerging. Industries burdened by regulation and those with strong merger and acquisition potential may take center stage. Optimism among CEOs, both public and private, suggests a “pro-business” shift in sentiment.

At the same time, significant policy shifts from the new administration and the Federal Reserve could create market volatility. By viewing volatility as an opportunity rather than a threat, we can navigate these fluctuations and position ourselves for long-term success.

Wishing you a happy and healthy New Year!

Jordan Kaufman
Chief Investment Officer
Green Ridge Wealth Planning

Disclosure:

This commentary is provided for informational purposes only and reflects the opinions of the author as of the date of publication. The views expressed may change without notice and may not reflect the opinions of Green Ridge Wealth Planning as a whole. The information presented is not intended to constitute investment, legal, tax, or other professional advice and should not be relied upon as such. Past performance is not indicative of future results. Readers should consult with a qualified professional for guidance tailored to their specific circumstances.

Green Ridge Wealth Planning is an investment advisor registered with FINRA and the SEC. Registration does not imply a certain level of skill or training. For more information, please refer to our Form ADV, which is available upon request.

Green Ridge Wealth Planning, LLC is a registered investment adviser. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment / tax advice. The investment / tax strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment / tax strategy for his or her own particular situation before making any investment decision. You are responsible for consulting your own investment and/or tax advisor as to the consequences associated with any investment.

The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of AUTHOR, may differ from the views or opinions expressed by other areas of Green Ridge Wealth Planning, LLC, and are only for general informational purposes as of the date indicated.

Notable Trends Entering Year End: 4th Quarter Commentary

The U.S. Stock Market has been roaring this year, up more than 20% year to date.

The Federal Reserve has kicked off a rate-cut cycle with a half a percent cut in September. The market is expecting another rate cut in November and more rate cuts in 2025.

China went through an aggressive policy shift to jump start their economy and markets. The Chinese stock market has been one of the worst performing post-COVID. These policy changes included a rate cut, stimulus, and removing restrictions and regulations.

The stock market has performed well so far this year, and with an upcoming election and global uncertainty, people are wondering what will happen next. Many tend to believe that gravity will soon take hold and bring about a big correction. We think it is best to be careful about letting imaginations run wild, and instead focus on what we are seeing rather than what we are thinking.

A good portion of the rally earlier this year was celebrating the decline of inflation and chants of a “soft landing” where the Federal Reserve successfully stopped inflation without destroying the economy. At the beginning of last quarter, we received some economic data that pointed to a slowdown. The market got spooked, anticipating a “hard landing”, where the economy would suffer from the fight against inflation. Concerns grew about a possible recession. Recently, that data has improved, and we are back to talking about a soft landing… if you are feeling manic from the back and forth, we are with you! But it is typical for emotions to bounce between euphoria and despair in the middle of a market cycle. Just like the show Game of Thrones, things tend to get weird and complicated in the middle with a lot of head fakes.

Three big positives that investors should be thinking about:

In case you missed it, China made a large announcement this week. They cut short-term interest rates, announced a planned two trillion-yuan stimulus (~$285 billion US dollars), reduced the reserve requirement for banks, lifted real estate restrictions, and talked about implementing fiscal measures to focus on consumers. It seems the Chinese leadership recognizes there is a problem and are serious about turning things around. Some pundits have called this “the bazooka approach”, or you might call it “kitchen sink stimulus.” Either way, when one of the largest economies in the world goes all in on growth, it is an important piece of news that I would not ignore.
The Federal Reserve also had a big announcement this month when they cut interest rates by 50 basis points (bps). While the market fully predicted an interest rate cut, we weren’t sure if they would cut 25 bps or 50 bps. The fact that they chose 50 bps has been interpreted as an attempt to get interest rates back to neutral faster than some had anticipated. It also shows that they are not as concerned with inflation, and more focused on growth. Either way, we have entered a rate-cutting cycle and there is no recession or major event to which the Fed is reacting. The market has reacted very favorably in the past when they cut for stimulus reasons and not to cure a crisis.
The election is nearing an end (thank goodness), we only have a little more than a month to go. We have been saying for a while that the market tends to like closure on the issue and is less concerned with the results. Once we know the outcome, investment managers will feel a little more confident deploying money. They have more conviction in the narrative and move forward accordingly.

Interest Rates are Coming Down:

One of the negative consequences of the interest rate-cutting cycle is that you will no longer get 5% on Treasury Bills, CDs, and savings accounts. As interest rates go down, those options will be less appealing. So, what happens to the mountain of cash sitting in savings, CDs, and Treasuries? They tend to find a new home, and that new home tends to be stocks, bonds, and real estate.

What you will see unfold over the next 12 months is going to be the adult commerce version of musical chairs. As interest rates fall, people will jump out to other assets, and as those assets rise, people will feel more inclined to jump out of cash. This has the potential to become a vicious cycle to the upside and if you ask me, the recipe is just right to create a bubble in the future (declining interest rates, stimulative efforts, and just a pinch of A.I. euphoria).

If you are one of those people sitting on a lot of cash and wondering what to do about it, the question I would ask is how you would feel in the likely three outcomes. One outcome is the market keeps going, never looks back and in two years is hitting fresh highs day after day. Second, is that the market turns course right here, drops by 20 to 30%, before rebounding and moving on at a more muted pace. Or third, is the market just keeps trudging along and going up, and you either chose to hop on now or waited a little longer.

The point of that little exercise is to highlight the concept: “think about what can go wrong, but then spend EQUAL time thinking about what can go right!”. That is the problem most people run into; they only see the risk and don’t jump on opportunities when they present themselves. That, or they wait for perfect conditions where everything lines up and there is little to no risk present. Of course, we have the other side of the pendulum where people will spend no time thinking about the risks and only think about how rich a particular investment will make them. They too should spend time thinking about the other side. The key word here is equal; spend the same time on the good outcome as you do on the bad outcome. This works for life, not just investments. Give it a try, let me know how it works out for you!

Jordan Kaufman

Chief Investment Officer

Green Ridge Wealth Planning