🍔No One on Wall Street Expects a Bad 2025

What happens when sentiment is unanimously bullish?

Happy New Year, MktContext family! A lot of investors, expecting a year-end Santa Clause rally, have been shaken out in this week’s SPX fake-out. We are at a crucial juncture right now; the next couple days’ price action will determine whether 2025 sees new highs or it breaks below long term trends entering bear market territory. Let’s dive into it…

2024 in review: A remarkable year

Overall, 2024 was another strong year for asset returns. Economic growth surprised on the upside and central banks finally started to cut rates. That drove SPX to return 25%, after the strong 23% return in 2023. This is the first time since the 90’s we’ve seen back-to-back huge annual returns.

2024 was a remarkable year in more ways than one. The dispersion amongst groups and sectors was dramatic, leading to massive underperformance in certain investing styles. For instance, stocks outperformed bonds by 28%. Growth outperformed value by 31%. US stocks outperformed global peers by 24%. It is easy to understate just how incredible 2024 was, if not placed in the proper context.

US stocks experienced a blockbuster year and yet many investors have been disappointed when opening up their brokerage statements. The non-market-timer is rarely 100% invested in one asset class like we are. A few innocuous diversification decisions had astounding detrimental impact on your returns for the year. For instance, the “typical investor” in 60/40 stock/bonds, further split into international, would have generated a meagre 9% return, versus the SPX’s 26% and QQQ’s 31%. Non-US investors with a heavy home country bias would have gotten less than 9%.

Many investors favored those underperforming areas because they were beaten down and out of style. In essence, they were betting on mean-reversion. And yet, 2024 was a reminder that valuation is not a good timing tool, and things can stay stretched for very long periods. That’s why our mantra at MktContext is “don’t fight the trend”. There may come a time when we want to be in international stocks or bonds, but now is not the time.

Moving on: Bonds were flat on the year, as rate cuts are delayed and there are lingering concerns about inflation. The recent run-up in 10Y yields (now at 4.6%) has not been driven by economic strength; that much is clear from the below chart…

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The rest of this article is for paid subscribers. You don’t want to miss this week’s topics:

• No one on Wall Street expects a bad 2025

• Our outlook for 2025

• As January goes, so goes the year

• Key macro themes for 2025

Start timing the market today!