Q1 2025 Quarterly Market Update



Market Update Q1 2025

Hi everybody. Good afternoon. My name is Zach Harrington, and on behalf of Rise Advisors, I'd like to thank everybody for taking the time to watch our market outlook for what is the first quarter of 2025. It's hard to believe that we sit here in January of 2025. Holidays are behind us, elections behind us. I will say it feels like the cadence of these videos. It feels like we're doing them more and more frequently, but I think it's just how quick time is going. 2025 has presented some really interesting circumstances that we're going to talk through today in a, in a bit of length.  You know, a lot of what has shifted as far as market expectations from the last video we did in October through the election and through year end has created some, some unique situations that we're going to talk through.


So, we're going to talk through things like yields in the bond market, the employment market, you know, a lot of things around US versus Europe and abroad, some of the things around growth versus value, the big tech companies, and then kind of just what to expect and think of throughout 2025.


So, one of the first things I want to touch on is yield volatility. So it seems counterintuitive when the Fed began cutting interest rates. A lot of folks seem to think like, oh, interest rates are coming down, so therefore yields should come down. That isn't necessarily the, the true behavior early on in a rate cutting cycle. And so there's a couple of dynamics that we need to take into consideration as to why yields will remain sticky or have remained sticky here over the last six months or so. So, every chart you're looking at here, except for the blue line, is the last, you know, six rate cutting cycles from the Fed and in the, you know, business days to follow the rate cut. How have yields fluctuated? Most of the time when we're looking at 10-year treasury yields or what is known as the belly of the curve, you know, those tend to remain a bit resilient a little bit longer. When you think about what the Fed fund rate is and what rates are being cut, the Fed fund rate is arguably the shortest term rate. It's what banks are borrowing from the Federal Reserve for in order to complete their lending activities. So we're talking about stuff that is overnight transfers of money, let alone stuff that's handling more long term. So we have seen two-year yields come down, rightfully so, the shorter term side of the curve, which has a little bit less uncertainty about it based on the Fed fund rate has come down. But that 10 and longer has remained a bit sticky. It's not, it's not the worst case, but it is something we have to keep an eye on here.


We do expect it to remain high and elevated, if not even higher, creeping back to that almost 5% high by middle of the year. But as some of these other dynamics we'll talk through today play out, we do expect them to kind of start to cool off here on the back half of the year. It doesn't change anything we're doing, but it's something we're keeping a close eye on.


One of the big things that I think is important to look at is what the market is expecting or what the sentiment is around the Federal Reserve's policy. I think we as investors and as humans get so caught up on government policy, we kind of sometimes lose sight of all of the innovation and all the positive things are taking place, but nonetheless, things like elections and Fed policy and all these things kind of remain in the forefront and we're all kind of guilty of, you know, getting sucked into it. But if we go and look at what the market expectations were for Fed rate cuts back in December of ‘23 versus where they sat in December of 2024, those are dramatically different market expectations. And a lot of that variance has to do with the outcomes of what took place in November's elections.


So, when we go into basically 2025, we are getting into an administration that good, bad or indifferent is anti-immigration, is pro-tariff, is pro-deregulation, and a lot of people just have some reservations around how that is going to impact inflation, which is the big driver of the Fed's mandate. But I think there's another piece of the Fed's mandate that's even more important, and that's the job market.


 And so we've talked about this in previous quarterly market updates where we've talked about the fact that the Fed keeps touting this dual mandate of we can keep rates higher to battle inflation as long as the job market remains resilient. I shared a chart with you all right, around this time last year that has shown that almost all of the job growth from basically the start of the pandemic through the end of 2023 was predominantly job growth that took place via immigration. And so for a lot of folks who were US citizens, they weren't experiencing this wage inflation and this job growth that keeps getting touted in the economy.


This is another chart that looks at it differently, separating it into what job growth took place via private industry, a private company that is not affiliated with a government agency or a government agency that took place. So if we go back to basically June of 2021 through basically the fall of 2024, private industries have had negative job growth for the better part of three calendar years. So private companies are not hiring nearly the clip they were prior to the pandemic.


That makes sense, right? Over this time period, you basically look at, if you put a chart of the Fed's rate cuts or rate hikes, excuse me, on top of this, it almost is an inverse. So as rates went higher and money became more restrictive, private industries were not hiring at the same clip that they were when basically money was being thrown away.


 Think about, for example, Amazon. To me, Amazon's a perfect example of this dynamic. The world kind of shuts down. Everybody switches to wanting to use home delivery and Amazon cannot hire enough people. The amount of Amazon trucks you've seen, seen coming through your neighborhood over the last four years is astonishing. If you go back to where we would've been pre-pandemic levels. So, it's makes sense that job growth has slown in the private market with some of the boom we saw when money was incredibly cheap, and rates were lower.


The government piece though, which is where a lot of the job growth has come over the last three calendar years is an area that concerns me. So, if we think about it, if once again we're getting into an administration that is anti-immigration, that is pro-deregulation, that is pro-budget cuts and deficit spending, we need to pay attention to the fact that the labor market may take a slow down here. Almost all of our job growth is coming from government spending and we're cutting government spending. The labor market should start to soften here a bit, which leads us to kind of our base case of we think that the labor market softening is going to force the Fed to maybe be a little bit more aggressive than what they put onto at the end of 2024. Not a bad thing, not a good thing. it's just, it's the reality of the situation. The Fed expectations that we were seeing that we outlined on this site, I think these might be a little bit too conservative, especially if some of these labor dynamics pan out the way we expect them to.


 So, getting away from the bond market and going to the equity side of things, a dynamic that took place in 2024 and arguably has taken place over the last decade plus has been the outperformance of US stocks relative to European stocks and emerging market equities. And one of the conversations we have all the time with clients is like, you know, why does this keep happening? Why does this dynamic take place? I, I joke with Stephanie and Mark all the time, we sit down in meetings with fund managers and things like that, and we've heard this storyline of what's called relative valuations, which basically is the US equity markets are expensive, international markets are cheap, you should move money to international markets. And we haven't done that because we just haven't felt that the growth is there to justify the increase in investment in international and emerging markets.


This chart, to me, was a perfect depiction of that dynamic that's taken place over the last, you know, 10 to 20 years. So what this chart is showing you is the creation of new public companies in the 21st century. So, from 2000 through the end of 2024, you are looking at the cumulative market cap and number of companies that have basically gone public in the Eurozone and in the US. And when you look at the innovation that has come in public markets in the United States in the 21st century, there's no argument as to why this outperformance has existed and why the growth versus value metrics haven't really mattered when you look at international versus developed markets. So when you look at the fact that in the last 25 years, the US has rolled out companies publicly, like Visa, MasterCard, Netflix, Tesla, Alphabet, which is Google, and Meta, which is Facebook, Instagram, and all of those names, it, it's no wonder why we've seen the growth that we've seen of US equities. And our argument would be when you look at where the AI innovation is coming in, this dynamic should continue and it's something we're keeping an eye on.


Bringing it back domestically. The growth versus value debate, has been one that we've talked about a lot on these videos. We think that as interest rates gradually come down, the appetite for value stocks is going to increase. But at the same token, when you have a growth side of the market driven by, you know, the Magnificent Seven that we'll get to here in a minute, there's no surprise that we're seeing these stretch multiples because we're expecting these earnings per share to be delivered on. Right now, we're looking at a 29 times price to earnings ratio on the growth side of the S&P 500. Last time we were at those levels was right around middle of 2021, which we had a growth sell off. We had a tech sell off going into a rising interest rate environment. Now, earnings growth has been persistent. We'll talk about that in a minute here, but the last time we saw this dynamic take place, you did have a bit of a, a spending bubble take place with companies like Meta, like Amazon, and like Google and Microsoft where they had spent all this money post pandemic things had started to tighten up a little bit. Earnings didn't come through, valuations receded.


So that's one side of the equation that we think could take place. And that goes into the next piece of this was looking at earnings per share growth. And as we noted, earnings per share growth up until basically the midpoint of 2021 was unbelievably strong. Part of that was depressed earnings from the start of the pandemic and the government shutdown. The other piece of it's how cheap money supply was during that period of time, as soon as money started becoming more expensive and as soon as things started reopening, you saw some of the Magnificent Seven, which is the Metas of the world to Googles, the Apples, the Teslas, the Nvidia, so on and so forth. We saw some earnings recessions there that really started to pick back up at the end of 2022 and start of 2023, which is why we've had two really great years of US equity performance because those seven companies specifically have really expanded well on their earnings per share piece.


 When you look at the rest of the S&P 500, which we've talked about this dynamic ad nauseum over the last four or five quarters, they have not had positive earnings per share growth. The remaining 493 companies over the same period of time have had a decline in earnings per share. So, we think it's really important that we pay attention to what those earnings are and expect some volatility here in equity markets because the big thing that moves markets higher or lower are surprises. If we look at the rally in markets post-election, basically through early December, it was the surprise of a kind of Trump victory landslide and what came with that. And so, we saw crypto rallies and tech rallies and all of these things, and that kind of says subsided, and the market's going to need another surprise to keep pushing things higher.


Those surprises can also be negative though. When we got to the summer of 2021 and a lot of these guidance started getting lowered on the tech side, the markets really struggled and that led to a, a pretty strong sell off in tech names something we're keeping a very close eye on.


We talked about this I think a quarter or two ago, but kind of the fact of the matter of nobody knows what markets are going to do. We don't know if some of the legislation the Trump administration's going to put in is going to be great. We don't know if it's going to be bad. We don't know what's going to take to place geopolitically. We don't know what's going to take place with the yields and the Fed and all these factors.


All we can do is be patient and be resilient and know that we need to be market participants. So we always talk about on these videos, I think it's really important though, and I couldn't get a good screenshot of this chart, but I thought this really played off of the thing we talked about in the last quarter of the likelihood of returns being repeated or highly unlikely. And so what this does here is this goes and it looks at the pretty much 10 instances historically in which two consecutive years the S&P 500 was up 20 plus percent in consecutive years. So that's what we had in ’23 and in ‘24, US equities were up significantly in those two calendar years. When we look at the subsequent two calendar years, in most cases, the market takes a breather. So if we look at what took place throughout the fifties, sixties, eighties, seventies, the market takes a nice breather.


There are two anomalies here though that I don't think are terribly far off from where we sit today. So if you go and look at the twenties, the roaring twenties as they were known, you had a six consecutive year period, 1924, 1925, 1926, 1927, 1928, and then only into 1929 did the market finally take a breather. A lot of this was driven by industrial process. A lot of this was taken place by manufacturing booms, and I would argue we're in a similar spot of what we're seeing right now as far as productivity expectations and healthcare innovation and AI innovation. Feels like we're in this run here that could continue. But it's important to remember what happened at the back part of that decade with the Great Depression and being patient and not being greedy and sticking to the plan.


 The other time we've seen this was in the late nineties, so you had four consecutive years, 95, 96, 97, 98, which then ended up leading to the dot com bubble. And so what's really important here is now is not the time to go chasing returns. Now is the time to make sure you're appropriately allocated, make sure you're owning quality, make sure we're paying attention to what's going on in markets, and also just resting assured that cash flow is being met as you are in those phases of starting to be in Decumulation. For those of you who are retired, for those of you who are still working, it's just continuing to stick to the plan with what your savings targets are. But as far as whether or not this party is going to roll on or Semisonic “Closing Time” is going to start firing up on the jukebox. It’s going to remain to be seen. And a lot of it's going to be how the economy responds to some of the Trump administration. A lot of it's going to be tied to some of the geopolitical risk.


But we'll see what takes place if everything kind of remains status quo, which is the path we're on right now, which is the Fed is going to keep rates higher for longer, which is okay, it's been accommodative, it has not been the end of the world. The market remains pretty resilient. The economy seems to be chugging along pretty well. This is a breakdown of how S&P 500 sectors perform in a soft landing environment. So when we look at it, healthcare is a great place to be in a soft landing. Financial services is a great place to be in a soft landing. These are sectors that most of our clients have, you know, pretty good exposure to and we're really happy with that.


The big one we're keeping an eye on though as well is the energy sector. So there's been this kind of political back and forth here over the last month or so, as Biden starts to restrict or has in place restrictions on some of where the oil and drilling and development can happen along the eastern seaboard. Trump administration, even throughout the election and post-election, has made it very clear that their goal is to kind of reestablish some of the US energy dominance. A lot of the climate initiatives, clean energy and all of those things have kind of gone to the wayside, both internationally and domestically. And so I, I think the energy sector here could have some pretty good opportunities, something we'll keep an eye on.


So when we look at 2025 as a whole, I think it's really important that 2025 is a year of patients. ‘21 and ‘22 people got caught up in the hysteria. Markets ran wild after the selloff in the second quarter of 2020. Things rallied. There was bitcoin hysteria, NFT hysteria, Mean Coin hysteria. The market made people pay for that. People who were patient and stuck to their plant and weathered the storm recovered off of the lows of 2022 throughout 2023 and 2024. And it's really important to not go chasing those same themes.


Right now we're seeing the same cryptocurrencies rally, we're seeing the same type of hysteria on these hopes of, you know, lower interest rates. It's not time for that yet. You just need to be patient in 2025. And we need to see how some of these dynamics play out.


The Department of Government efficiency has these big ideas on how to cut deficit spending. I think most people are in agreement that the government cannot continue to spend and borrow with the clip they have. We'll see what they're able to get done when they run into the bus saw of bureaucracy. We'll see what happens there.


Fed policy shifts like we noted. We're going to pay attention to the labor market. We're going to pay attention to what's going on with Fed policy. Our belief is, is that they're kind of just saber-rattling right now on how high and long they're going to keep things. We still expect probably two to three rate cuts throughout 2025.


 And then we're keeping an eye on continued innovation. AI is something that's going to become a bigger, bigger part of our lives. How disruptive is it when it comes to the labor market? How disruptive is it when it comes to just the overall state of affairs? So, we're going to keep an eye on tech earnings. We're going to keep an eye on the job market, geopolitical risks specifically with China and Taiwan, as well as what's going on in the Middle East. And then we're focusing on those 10 year yields. That's going to be a big driver of what takes place throughout 2025.


 And our stance remains consistent. You want to own quality. US companies don't go chasing the garbage that's on the side of the streets and you want to own investment grade US debt. Staying out of international fixed income is something that we think is important, and staying out of junk debt is important.


That is basically the summary of what we are kind of looking for here early in 2025. As always, as you kind of meet with Mark or Stephanie or myself throughout the year or Angelica, I'm available to meet and be a part of those conversations. We appreciate the trust and confidence that you put in up to your RISE advisors, and we look forward to a really successful 2025. Thank you and have a great start to your year.



 Disclosure: This presentation is for Informational purposes only. All investment strategies including rebalancing and diversified asset allocation have risk. Past performance of our investment approach, component holdings and methods does not guarantee future results. Advisory services offered through Rise Advisors, LLC ("Rise") Registered Investment Advisor. While all data is believed to be from reliable sources, accuracy and completeness are not guaranteed.

Sources:

1,2,4,6,7 - https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/the-alchemists-amv.pdf

3,5 - TCAF outlook –Ritholtz Wealth Management

8 - Torsten Slok good morning briefing 10/23/24 -Apollo