Jessica Gibbs, CFP® [00:00:55] Welcome back to Off the ball and happy 2025. Before we jump into today’s episode, I just thought it would be great. You may have noticed that we have a whole new look and vibe here at Off the Wall, which we’re very excited about. Dave Right. You love this?
David B. Armstrong, CFA® [00:01:08] Yes. I love the new music. It was tested out with my wife, and she agreed that it was uplifting and danceable. So hopefully.
Jessica Gibbs, CFP® [00:01:18] Right.
David B. Armstrong, CFA® [00:01:18] Or movable. Yeah. So, she’s excited. So, I’m excited. Yeah.
Jessica Gibbs, CFP® [00:01:23] And for those of you who have been following along off the wall for a while, you may know that this is our fourth year of doing this podcast. So, it’s definitely time for a refresh to celebrate that, to celebrate this exciting milestone. I think back to our first podcast, Dave, where I actually sat in my closet in order to get the best sound.
David B. Armstrong, CFA® [00:01:46] Yes.
Jessica Gibbs, CFP® [00:01:46] It was a little silly, but you know, it sounded good so.
David B. Armstrong, CFA® [00:01:48] Right, right. No, it did. It sounded good. But we have elevated our game and continue to elevate our game. We’ve got the new tile that gets shown when the podcast in the in the different players a new logo for the podcast. It’s an exciting little refresh to our four-year anniversary.
Jessica Gibbs, CFP® [00:02:05] Yeah. So, Dave and I would really like to thank the team at Pod Pony, particularly Broderick, for spearheading this podcast refresh. I think they’ve done an incredible job and we also really heartfelt want to thank you, our listeners, for supporting us for these past four years. I think you’re the reason that we keep doing this show. We keep pushing forward with our mission to help people build wealth with purpose. So thank you. And on that note, if you are a fan of the show, please consider leaving us a five star review if you haven’t already. And don’t forget to subscribe and tell your friends so that we can reach more people.
David B. Armstrong, CFA® [00:02:46] Yes, A huge help.
Jessica Gibbs, CFP® [00:02:47] Yeah. So, with that, I do want to jump into the great show that we have planned for you guys today. We will be breaking down what happens in the markets and the economy in the fourth quarter of 2024, but also the year as a whole, as we typically like to do in January. So as usual, we have our amazing asset management team here at Monument Wealth Management. So, Dave Armstrong, my co-host, obviously, but also Erin Hay. Hi, Erin.
Erin M. Hay, CFA®, CMT® [00:03:15] Hey, guys.
Jessica Gibbs, CFP® [00:03:16] And Nate Tonsager. Hi, Nate.
Nate W. Tonsager, CIPM® [00:03:18] Happy 2025, everyone.
Jessica Gibbs, CFP® [00:03:20] Yeah. So, in addition to looking back at what happened in 2024, we are for the sake of fun, we are going to be looking forward to 2025 and we’re going to be pulling forward. What you guys predicted you think would happen if we sort of wind back the clock to January 2024 or what you guys thought would happen for the year and see if you were right or not. So, last note before we dive in, I just want to make a note that we are recording this episode on January 13th, 2025. Things may have changed by the time you listen to this. So, let’s kick things off with a recap of the fourth quarter, but also 2024 markets in general. Specifically, I want to ask each of you what caught your attention. And Dave, I’m going to start with you.
David B. Armstrong, CFA® [00:04:05] Yeah. So, first, let’s talk about the fact that it’s 2025, the year. But I would like to talk about at least some math that goes into the number 2025 the year. Okay. So, here’s a couple of little interesting nuggets that are useless but interesting. So, first of all, if you add the number 20 and 25, you get 45. Okay.
Jessica Gibbs, CFP® [00:04:32] Okay.
David B. Armstrong, CFA® [00:04:32] 45 squared equals 2025. Kind of interesting. And then if you square the sum of all ten digits from 0 to 9, do you know that you get 2025? Here’s another one. If you sum up all the cubes of all those ten digits.
Jessica Gibbs, CFP® [00:04:58] Okay.
David B. Armstrong, CFA® [00:04:58] You get 2025.
Jessica Gibbs, CFP® [00:05:00] Wow.
David B. Armstrong, CFA® [00:05:01] So anyway, thanks to Scott Grannis, who writes as the and I may slaughter his name a little bit for either the Calipah or the Khalifa Beach Pundit. He writes there at Scott Grannis at sorry, ScottGrannis.blogspot.com. I just happen to come across all that interesting information. I don’t want anybody listening to this thinking that I actually sat down and was figuring all those things out with a calculator. I was probably binge watching something over the break. So but anyway, okay, so so the SMP 500 finished up the year, let’s just call it 25%, just rounding to 25%. And if you break down the SMP into two baskets of cyclical and defensive, which are standard kind of things that people talk about, Right. The cyclical stocks and the defensive stocks, those two baskets, the 292 cyclical stocks were about 60% of the entire SMP 500 market cap were up 35% of 2024, 35% for 2024. While the defensive basket, which is about 209 stocks or the other 40% of the SMP market cap was up 16%. So another interesting way to break down the SMP 500 for the year is by services and goods producing stocks. And here we see something interesting in that the 268 service producing stocks were 48% of the overall S&P market cap, though that basket, those stocks were up 24%. While the 232 goods producing stocks are 52% of the S&P market cap which and emphasizing that because pretty equal, right 48% 52% of the market caps was kind of even those stocks were up 26%. So 24%, 26%. So if I were asked without knowing the answer, I would not have guessed that the market caps and the returns between goods and services were so equal, not only in market cap but in performance return. Because I just would have said, okay, I think the service the service stocks massively outperformed the goods producing stocks and they weren’t there. They were pretty close, a lot closer than the previous statistic between the cyclical and defensive baskets. I thought it was kind of interesting. Look, looking at the 11 sectors of the SMP 500, the communications sector was the top performer, up 40%. And that was followed closely by the tech sector, which was up 37%. And while the communications sector was the best performer, it’s we as a sector, if you add up all the stocks, its weighting in the SMP only accounts for 9%, whereas the tech sector is weighted at 32%. So even though the communications sector was up 34%, it was the tech sector that carried the performance for the S&P 500 for 2024. And other heavy weighting sectors or heavily weighted sectors are the health care sector. That’s at a 10% weighting, and that had an annual return of only 3%. So that was essentially a drag on the overall performance of the SMP 500. Well, financials at a 14% weighting had a return of 31%, which was may have been the biggest surprise sector of the year. Well, to me anyway, so that’s that’s kind of my overview of some of the higher level SMP 500. I know Erin, you probably have some thoughts there.
Erin M. Hay, CFA®, CMT® [00:08:26] Yeah, I’d say most of my thoughts for 2024 are going to be kind of backloaded here. So 2024 in the fourth quarter while we kind of went out with a whimper. I know we talk about and have talked about small caps a lot on this podcast and our monthly podcasts as well. Going back for our long, you know, November 2024 was a really good month for small cap. Small caps ended up in that month, up over 11%. And that was mainly attributed to that really big post-election pop. Unfortunately, we didn’t get a continuation of that in December, so we did go out with a whimper there. So what’s interesting about this is when we look at November and small caps, November was the 22nd time in history that the Russell 2,000 that ended up at least 10% in a month. And when you start the clock on those types of positive months, the Russell 2,000 is higher, six months out 90% of the time and up 11% from there on average. So, we’re really putting history to the test on that. And of course, the market has a tremendous amount to digest right now when it comes to valuations and particularly policy with the incoming administration. And what I think this all really boils down to right now, when you combine all of that is interest rates. So, you can see here on the screen right now, this is a graphic from high now research, which basically shows the ten year Treasury note and then a. A calculation for basically trend. And what’s notable here is the ten year peaked just shy of 5% back in October of 2023. And that’s when we really started to see stocks kick back into gear. And you can see this. It’s basically at the end of the graphic here. This goes all the way back to 1980, but you could see there that 4.93% on the right side basically shows where the ten year topped out back in the fourth quarter of 2023. And what we’re seeing now and I think this is why we saw a pretty bad December in stocks in general, and particularly small caps is we’ve seen that ten year Treasury trending higher in terms of yield. So, this appears to be where we’re back in an environment of elevated stock bond correlations, much like we had in 2022. So, it’ll be interesting to see what happens with with yields from here on out going into 2025. But right now the trend in yields is higher. And if that continues higher, it’s likely going to have implications for the US dollar. And of course, having a strong US dollar has historically been a headwind for stocks. So, TBD on that. This is another graphic I’ve got hold up here on the screen. I think this is something that’s sort of evergreen. So, not necessarily looking back at 2024, but I think it’s a good graphic to look at as we kick off 2025. This is a graphic from Nasdaq North Sea, right. Which is one of our preferred data providers. And this just shows the probability of hitting a specific percentage decline in any given calendar year going back to 1928 and then going back to 1970. So, if you look to see what’s the percentage probability of hitting a certain percent decline, which just call out, you know, 20% going back to 1970. So there’s usually about a 20% probability of having 20% decline in any given year. So that’s just some helpful context as we as we start off 2025 here. And then I want to close out here kind of what I’ve looked at in 2024. And then as we sit here starting 2025, I want to look at starting valuations in yields, because this is very important, I think, for expectations going forward for stocks and bonds. So, what I’ve got hold up here on the screen right now is basically looking at PE ratios in the SMP 500 and subsequent one year and five year annualized return. So, basically says, hey, if you are at a starting valuation of X, what can you expect from history for returns going forward? And that would be your Y axis here. So, as we ended the fourth quarter, we’re sitting at about 21.5 times forward earnings in the SMP 500. And if you look at forward one year returns sort of a crapshoot. Just sitting at this type of valuation doesn’t necessarily mean that you’re going to have bad returns going forward for the dispersion of returns going over the next year based off history is a scatterplot and you can see that by the really low R squared statistic right there. Of course, as you go out further and look at five years and ten years and and even further than that, the relationship gets a little stronger. But what I think is really interesting and I saw a post from Jim Bianco on LinkedIn, he showed a variation of this exact same graphic. And I’m going to be quoting him here because I think this is really helpful and a really good way of looking at these types of charts. He says that valuation isn’t a timing tool, but it’s an expectation tool. Maybe this year is another good year, but based on history, you should expect the next 5 to 10 years to be a struggle with regard to U.S. equities. So, I think that’s some helpful context as we sit here early in 2025. And then closing things out, we look at stocks. Let’s take a look at bonds now. This is a variation of the chart we just looked at, but looking at bonds and fixed income. And this just shows that starting yields are typically the best predictor of forward returns in the bond market. And this is what I mean when I talk to clients about locking in yields. If you look here, there’s a really strong relationship based off of starting yields and forward returns. And so this is what I mean when I talk to people about, hey, if we lock in yields and we assume no defaults on principal or coupons, you can expect the starting yield to be your actual return going forward. So some good charts from JP Morgan Asset Management and High Mount as we start the year. But that’s what I’m really looking at. It’s basically interest rates and valuations.
Jessica Gibbs, CFP® [00:14:11] Nate what caught your attention?
Nate W. Tonsager, CIPM® [00:14:13] I think kind of a similar theme to what Erin was just talking on. I think there’s two major things that really caught my attention. The first was just yields. You know, I think we were in such a extended period of 0% interest rates from after the financial crisis so early 2010, 2009-ish. Really, 0% rates lasted ten years until Covid inflation came back in the 2020s. And I think what a lot of people are starting to realize and seeing is that, yes, the Fed has some impact on yields, but they only really affect the shorter end of the curve. And I think what really gets lost in the shuffle is what’s happening in that ten year treasuries like Erin was showing some of his charts. You know, that’s driven by market dynamics and predictions. And for a lot of 2024, I’ll get into it a little bit deeper. Get into my predictions because something I’ve been harping on a lot is that I think the markets and the Fed were very disconnected this past year where the Fed was signaling we’re going to maybe cut rates a few times while the markets were pricing in a significant more aggressive cuts. So what that caused is some kind of shifting. And so what we saw actually in 2024 was the yields on U.S. treasuries, both on the short end and a two year, but also on the ten year and the 30 year which aren’t controlled by the Fed, actually rose in 2024. So, the Fed cut rates by 1% throughout the year and yields across the U.S. Treasury curve went higher, meaning borrowing costs were raised over the past year. Mortgage rates are now about roughly the same, but let’s call them slightly higher than they were to start the year. I think that surprised a lot of people who have been kind of waiting on the sidelines for, hey, like the rate cuts are going to drop rates and lower my borrowing costs. That didn’t happen, which you would think would be a negative. But as Dave said, the markets were up 25% in a year like that. And I think there’s something to break in deeper for 2025. So I’m going to hold off there on exactly what kind of that means is that higher rates maybe aren’t a bad thing for the economy if they’re higher for the right reasons. But what that kind of I think leads me to my second point here is, well, the expectations. And when investment managers, we call that active management, you know, you’re actively taking a position that’s different than the market. So you can invest like the market and just get market returns. But a big piece of the industry is about active management. And what’s interestingly interesting about 2024 is for the third straight year active funds, some major outflows. And so, I have a chart here which kind of shows the kind of the pace of it. But we had the largest record outflows for actively managed funds In 2024, of $450 billion were pulled out of actively managed funds higher than last year, which was 413 billion. And it’s mostly looking at active mutual funds. You know, I think some clients were mutual funds where the active management has mostly been. So, just as a quick jargon, break down mutual funds basket of individual stocks that are run by investment companies. So, you buy one share of the mutual fund, but you get broad exposure to various stocks. And what you’re doing is you’re trusting the manager of those active mutual funds to really outperform the index. Well, since the launch of ETFs and index tracking products, I think there’s been some big shifts within the asset management industry and there’s been more focus on, you know, moving away from higher cost, actively managed mutual funds into kind of passive investing in index tracking. And when you look, you know, last year with the index up 25%, you know, a lot of that money that was coming out of actively managed funds was going into index funds. Well, if people are just buying index funds with that 450 billion, I think that contributed to the outsized returns that the index saw versus, you know, the broad market maybe overall. And, you know, when you look at it, I think it’s a little bit about performance, honestly. You know, active managers have really struggled against the benchmark for some period of time, and 2024 was no different. You know, as Dave said, the SMP 500 was up 25%. Well, if you look at the Morningstar Large blund, large blend fund category, so about 1301, 1400 mutual funds ETFs that are within this large U.S. blend group. So, large U.S. cap stocks, you know, the average return of that group, of those 14 stocks was only 21.5%. So, 3% behind what the index did. You know, if you’ve just got index like returns, you were in the top 25th percentile of that whole group. So, just buying the index, you beat 75% of all those other active managers, those 1400 funds in that same category. And I really think that’s something that’s getting lost in the shuffle is I think a lot of people like to think that they need to outperform the SMP 500 by this wide margin at all times. Well, really, I think what drives long term success or maybe I shouldn’t say that, because a lot of things drive long term success, but a big contributor to that is consistently outperforming. So maybe performing every year by just a little bit over time or even looking like the index, you can get much better results than trying to, you know, swing for homeruns in any given calendar year. And I think the data really bears that out. You know, if you look at the annualized 15 year return of the SMP 500 ETF, so Ticker SPY. Looking at that same 1400 groups of mutual funds, you’d be in the 13th percentile, so you’d be better than 87% of other managers if all you did was just get index like returns. So, in a year where, you know, people are trying to figure out what’s going on in active management, is it really beneficial? You know, is this the death of active management? I don’t think so personally, because I think there’s ways to outperform by small margins over time. But looking for just giant alpha or outperforming strategies has really been a tough kind of hill to climb. And so I think you’re going to see more of than what we do at Monument, as I would say, is what we’re doing is we’re actively managing passive investment funds. So, we use lower cost ETFs that look like indexes or other factors, but they’re making shifts or tweaks using those cheaper funds than those actively managed mutual funds. Now, a lot of advisors were just putting their clients in actively managed mutual funds, paying high internal expenses and then charging an asset management fee as the advisor. So, what you’re doing is you’re helping clients by charging less overall when they look at their total net investment costs, but also then to still having that active management to hopefully get index like or even just slightly better than the index performance. So, I think that’s an interesting shift that we’ve seen over the past. You know, if looking at the chart, it goes back to all the way 2008, but you see a lot of in the past three years significant outflows of active funds because overall people I think, just kind of want to have passive investments and manage their portfolios. So, not necessarily always take the passive approach, but you know, actively managing those passive funds and exposures. That was really interesting to me in 2024.
Jessica Gibbs, CFP® [00:20:49] Yeah, I think that’s an interesting trend. Yeah
David B. Armstrong, CFA® [00:20:50] Yeah. I think that the comment about is, is this the death of active management? You know, if you if you look at that comment through a soda straw, it’s a different perspective than if you look at it over a big period of time. Because what you also have to realize that, no, I mean, I’m going to debate this not because I believe, but just because there’s a perspective here that people need to understand, which is, you know, if I just buy the SMP 500 index fund, I’m going to outperform all these active managers. Okay. But the SMP 500 is essentially ten stocks right now. Right. There’s just so much concentration, these ten stocks that you could make the argument that by indexing, you’re actually increasing your risk a lot if there’s a market pullback like 2022. So, there is a balancing act here a little bit. And I think that the if people are interested in active management, you have to be assessing how do they manage risk in a down market and how do they manage their concentration risk across the basket of securities that they own. As another input to just performance, because I am making up a scenario. But it will make sense, which is if you were one of those 1300 plus large blend managers and your average return is 21%, you still had a 21% return when the market had when the SMP 525% return that year. But if those blended active managers had a way bigger or way less concentration risk by having a much bigger, much more broadly diversified portfolio and the market pull back 10%, it’s possible that you’d be happy you were tracking the performance of the index. So there is a balancing act there and there’s no right answer. It’s it’s all a gray area that I think it’s important for people to understand that it’s not just about what the performance return was on an index. It’s also how much risk you’re taking. Because right now, I think there’s a lot of embedded risk in being in the SPY.
Nate W. Tonsager, CIPM® [00:22:59] I couldn’t agree, very well said because Dave, you know, I just talked about that 15-year return. Right. That’s being invested for 15 years.
David B. Armstrong, CFA® [00:23:05] Right.
Nate W. Tonsager, CIPM® [00:23:05] That means you have to get through years like 2020, in 2022. And I know 2020 ended up being positive, but there’s volatility that you have to be able to withstand to even get that. And that’s where kind of, I think active management, like you’ve said, the risk management piece was very undervalued.
David B. Armstrong, CFA® [00:23:20] Right.
Nate W. Tonsager, CIPM® [00:23:20] And just pure performance and keeping people invested. You know, if you sold out of the SPY in 2022 when it was down 35%, your returns are going to look a lot worse in those kinds of situations.
David B. Armstrong, CFA® [00:23:30] Right.
Nate W. Tonsager, CIPM® [00:23:30] And got back in.
David B. Armstrong, CFA® [00:23:31] And I’m going to introduce a term here because I’m making it up on the fly, but there’s active management and then there’s active advice, right? So, if you look at the 15 year time horizon, I will I will guarantee you that over 15 years, a majority of people who are index fund owners are going to look at a pullback in the SMP 500 or 20 or 30% and say, I can’t take this bleeding anymore. I’m selling everything and going to cash. And then they miss some sort of rebound eventually, and they they end up doing more damage to their portfolio by not seeking active advice in a passive investment and selling out of it. And then all of a sudden that 21% return looks really good because they only had a 15% return, because they tried to time the market and they let their behavior and their emotions get involved in the actual investment decision. Because the SMP 500 is a is an emotionless device. Which your ability to be in it or out of it is not. It’s completely controlled by your emotions of behavior.
Jessica Gibbs, CFP® [00:24:29] Right. Well, I want to, that was good, but I want to switch gears for us a little bit. I think as I previewed kind of in the beginning, I want to get to those predictions because, you know, it’s the new year. This is the time when analysts are putting together their thoughts for the year ahead. And I think listeners to this podcast, they tune in to these quarterly market episodes because they want to know each of your unfiltered opinions. So let’s have some fun. I’m not holding anyone to it. There’s no sandwich bets. For those who have listened for a long time, there’s no sandwich bets here as far as who got something right or wrong. But I do think it’s kind of fun. If we could pretend in our head there was some magical music to like put us back in time and look back at each of your predictions, you know, from January 20th, 24 what you thought would happen in the year. So each of you, I want you to go over what you had predicted, square yourself, how you think you did. And I want you to couple that with what you think your predictions, what you think might happen in 2025. So, Dave, again, I want to start with you.
David B. Armstrong, CFA® [00:25:34] Great. Because I was the one that was the mostest wrongest in 2024. So-.
Jessica Gibbs, CFP® [00:25:40] You also are really into predictions, and I think you tend to take really bold swings. So, I don’t really know.
David B. Armstrong, CFA® [00:25:44] Well that’s true. That’s true. I have always lived my life by the mantra of like, okay, first of all. Any of my predictions were irrelevant because we weren’t making portfolio tilt or anything-
Jessica Gibbs, CFP® [00:25:58] Right.
David B. Armstrong, CFA® [00:25:59] Based on that. This was just me and what I was thinking at the time. And two I’ll always say this and anybody can challenge me on this if they want to, and then I’ll just block you if you don’t agree with me. But, you know, my predictions are never really grounded in stupidity. I just think that, you know, what I thought was going to happen didn’t happen. But it wasn’t because I was thinking like an idiot. And so my two big predictions from last year, I think I had some micro predictions thrown in there too, but the two were inflation and where the market was going to end up. So, I was wrong in my prediction of where the SMP 500, because I was like, hey, it’s going to be up 14 or 15%. So, I was ten, I undershot that by ten points. But if you remember back in early 24, all the analysts that you were just mentioning, Jessica, were all calling for like single digit returns in the SMP 500. Everybody saying, okay, you know back to back returns. So, my prediction of the market being up twice as much as what everybody else thought was a good prediction. I just didn’t-
Jessica Gibbs, CFP® [00:26:59] Yeah.
David B. Armstrong, CFA® [00:26:59] Go three times as much as what everybody thinks.
Jessica Gibbs, CFP® [00:27:00] I think you get a pass on that one.
David B. Armstrong, CFA® [00:27:02] I get. I think that’s a break even. I think that’s a break even. And I was right in the right direction. So, that’s right. If I had said, hey, I think we’re going to have down 5% year this year, I mean-
Jessica Gibbs, CFP® [00:27:12] Right.
David B. Armstrong, CFA® [00:27:13] Totally wrong. So, right. Now, the inflation prediction was where I was where I was really wrong and okay, not catastrophically wrong. I think, like Erin, I probably owe you something on a bet here. And let’s be clear, the sandwich bet. You know, really, Nate won the sandwich bet. But the reality is, any time Nate comes to the office anyway, we’re buying lunch. So, Nate wins the sandwich bet all the time, and so does Erin but. So, I said that inflation was going to come way down, and I thought it was actually we were going to have some deflationary readings in there. We didn’t. It came down. I don’t think by my logic, there was grounded in stupidity. I just really thought that the housing market, which is a huge component to inflation, was going to come down a lot more and impact inflation more than it did just because they were the supply and demand of housing with the interest rates higher, was going to artificially bring down. You know what I got wrong there in hindsight? And this is the most valuable part of the comment I can make. Here’s how I got wrong, which was when interest rates went up, I think looking at the data at a high level, people- okay like me. I’ve got a 30 year fixed mortgage at 2.5%, so I’m not interested in selling my house and moving into something else with a seven handle on a mortgage, a 30 year fixed mortgage. I’m not interested in getting out of the house that I’m in now and moving into a new house. So, when the supply of something housing goes down because people aren’t listing their houses, because everybody’s got locked into these 30 year mortgages, that keeps prices artificially higher than what I was thinking just from an interest rate perspective. I was totally wrong on that. Now, what do I think for next year?
Jessica Gibbs, CFP® [00:29:00] Yeah, you know-
David B. Armstrong, CFA® [00:29:01] It’s kind of hard to follow up with, hey, I was wrong about everything, but here’s what I think is going to happen this year.
Jessica Gibbs, CFP® [00:29:04] Let’s do it again.
David B. Armstrong, CFA® [00:29:05] Here we go right? Right. Because it is kind of fun. And again, just to be clear, we don’t take these predictions and embed them into our models or thinking.
Jessica Gibbs, CFP® [00:29:13] Right.
David B. Armstrong, CFA® [00:29:13] This is just like people who are listening to this podcast or just listening to an everyday conversation that we’re having at Monument. We just happened to be recording it today. So, we talk about this stuff all the time, but I’m gonna start off with an inflation expectation, right? So, here’s what I think for inflation this year. I think, I suspect it’s going to remain flat-ish. At what I’ll call like a new natural level. And again, mostly I’m going to come back to this, mostly because the money supply is no longer contracting like it did after the post-COVID stimulus or said another way. I don’t expect there to be a resurgence of inflation. I think inflation lingers somewhat above target for 2025. So, that’s my one prediction. My prediction for the SMP 500 slash, I’ll just call it equity returns.
Jessica Gibbs, CFP® [00:30:02] Right.
David B. Armstrong, CFA® [00:30:06] To me, there just seems to be a very supportive economic background right now for equities. And I see no reason to think that we’ll have negative returns this year. But I suspect that after two years of plus 20% returns, that it’s more likely than not we see more limited returns this year. Now, if I’m wrong about that and they go higher again, great. Everybody wins. But that’s just- I just think that we’re in the single digit range and I’m guessing in the single digit range of where it’s going to be, just like it’s kind of stupid because that’s what everybody says, like, oh somewhere between 1 and 10%. That’s that’s just the the milkquetoast response. I’m just going to say, you know, limited returns for this year, not negative. I suspect some of the sectors that had muted returns last year will play some catch up in 2025. As you know, initiatives to deregulate are implemented by the new administration. I think small caps, banks, and energy. Those are my predicted sectors and segments of the equity markets that are going to see better returns in 2025 than they and we saw them in 2024. As far as the economy? Look, I think we’re in a post-pandemic productivity lead boom. You know, I just suspect that we’ll continue, the economy will continue to be accelerated by the advent of consumer accessible artificial intelligence. I’m already using it, almost on a daily basis just to research things and ask questions. And that’s just gonna- I think that’s going to filter down into the the economy, if through nothing other than just efficiencies. And I don’t see any reason to expect a recession until there is a receipt, until there is a reason to expect a recession. And right now, I don’t see any reason to expect a recession. So, that’s another one of my calls. This one could be a little bit more controversial. I just don’t think all these tariffs are going to ultimately make any real difference. I think there’s a lot of bluster and negotiating, and it’s just part of the deal type stuff. I don’t think the tariffs are really going to make a huge difference. I already won over inflation market expectation. I mean, I think we see the two Fed rate cuts that the market is expecting, although recently over the past few weeks, expectations for two have become more like one. But I’m going to stick with two just because that’s what I originally said. I don’t want to, you know, have some recency bias and change my opinion. That was my opinion. So, I’m going to stick with it. Yeah. Again, I think the winners for 2025 are going to be the undervalued sectors. I think deregulation is going to come really quickly and easily. So once once the new administration is in office, small cap banking energy, I suspect that we see some excitement there out of those sectors. But I think we see interest rates. I don’t think I think we’ll see 5% way before we see ever see 4% again. I just think that’s consistent with a productivity led boom. And my oil prediction, which I hate predicting oil because it’s just a supply and demand function. But I’ll take a stab at it because, I think it’s as it relates to oil. Oil’s already pretty well supplied globally. I think supply will increase with deregulation, but so will demand. So, I think that oil will stay in the $60 to $80 range, but that the oil companies will see profit growth with oil in that range because of deregulation. So $60 to $80. I don’t think we see any sort of crazy oil swings. That’s kind of it.
Jessica Gibbs, CFP® [00:33:42] All right. You got a few swings there, so.
David B. Armstrong, CFA® [00:33:45] Eh you know, I learned from last year or so.
Jessica Gibbs, CFP® [00:33:49] Are you toning it down?
David B. Armstrong, CFA® [00:33:49] Give myself a gate that swings both ways.
Jessica Gibbs, CFP® [00:33:52] There you go. Yeah. All right, Erin, why don’t you take us back? What were you predicting for 2024 and how do you score?
Erin M. Hay, CFA®, CMT® [00:33:59] Before I get into my predictions, maybe we can put this in the show notes, but for anyone who’s interested in all these research groups, predictions and price targets, etc., going into 2025, Bloomberg does a really good job of aggregating every single major research shop’s predictions, and they categorize it by keyword. So, we can put a link in the show notes hopefully if you’re curious about any any hot topic, hot button topic, whether it’s artificial intelligence, tariffs, crypto, you name it. Bloomberg does a really good job of putting it all into one place so. We’ll go share and link to that. So here I, I had two 2024 predictions and this is the first one. I’m just going to read this verbatim here. So, I said I was optimistic on the fact that small caps haven’t completely diverged from large caps and that made me optimistic about the prospects for individual stocks within our models, which I performed very well even in the absence of Microsoft, Nvidia and Apple. And I’d say for 2024 directionally this was accurate. We definitely had some major wins, the biggest of which was super microcomputer SMCI and our growth model. I’m not going to get into all of the other names, but we definitely had some success with some sleepier holdings, some held for the full year, some that we got into entry year. Again, if you’ve got any questions about that and your individual portfolios for clients listening, please you know write in and call us. Let us know if you want to go over performance or we can do that. But this is basically just saying, you know, usually there’s there’s pockets of strength everywhere, no matter where you look. And it’s our job to find it. And I feel in 2024, we did a good job. So, I’d say that first prediction, I was directionally accurate. My second prediction. So I did it optimistic. What was I most optimistic about for 2024? What was I most pessimistic? And again, I’m going to read this verbatim. So, I said I wasn’t necessarily pessimistic, but I was, quote, less optimistic on a recovery and the relative strength race between SPY and RSP. So, let’s caplate SMP 500 versus equal weight. So, and I had also caveated that by basically saying, hey, right now large cap growth and the ticker there for an ETF is IWF. When you view that through the lens of our relative rotation graphs basically said, hey, doesn’t show any signs of slowing down. I’d say on this prediction, I was pretty much right on the nose. You know, the SMP ended up 25% and equal weight SMP ended up basically half of that. And on top of that, going out to end the year in December, equal weight at its worst month versus cap weight since Covid and its third worst month since 1990. So, that prediction definitely went out with a bang. And linking that back again to our relative rotation graph or the RRG framework, RFP, again, that’s equal weighted SMP. It spent every single month in 2024 in the red lagging quadrant. There are definitely some signs of strength in there. The July inflation report post-election definitely gave that some parts, but the near-term picture doesn’t look great. So, that’s actually going to lead into my 2025 predictions. So, I think cap rate continues to outpace equal weight. Again, right now, the picture doesn’t look great for equal weight. And I just think this is likely a function of the interest rate environment. The markets are definitely trying to price in and evaluate the potential inflationary effects of tariffs and the labor supply. So, that’s basically deportation versus, hey, are we going to get any productivity gains from, you know, continued adoption of AI or deregulation or tax cuts? So, that’s still TBD. But going back to that first chart I showed, interest rates are painting a pretty picture right now as the ten year continues to encroach on that 5% level. My second prediction, this is a single stock prediction, by the way, not in our models. Just caveat. This is pure speculation. This isn’t a recommendation to do any sort of buying or selling that. I think Amazon institutes a dividend and or spins off their Amazon Web services group this year. And I say this just because every other mag seven stock, I guess minus Tesla now pays a dividend. And yes, that even includes an Nvidia. So I think Amazon institutes a dividend. And then lastly, this is again pure speculation. But I think health care is the top performing sector in the SMP in 2025. And our individual stock models, which currently own zero health care names, will end up with a combined 20% allocation. Again, that is pure speculation, a pure guess. But I definitely think this this prediction is essentially based off of what’s nobody really talking about right now. It’s health care. So, whether that’s going to be managed care companies, some additional insurance, although I guess technically that’d be financial services or if it’s pharma or biotech, I think at some point we’re going to see some strength within these health care names. And going back to my point earlier, that there’s usually pockets that shrink no matter where you look. In any environment, it’s our job to find that strength. I think we end up with some sort of allocation of health care names to the end 2025. So, quick recap, cap weight outpace is equal weight, Amazon with the dividend, and health care is the top performing sector in 2025.
Jessica Gibbs, CFP® [00:39:21] Nice synopsis.
David B. Armstrong, CFA® [00:39:22] Good ones.
Jessica Gibbs, CFP® [00:39:23] Yeah, those are good.
Erin M. Hay, CFA®, CMT® [00:39:24] Thanks.
Jessica Gibbs, CFP® [00:39:24] So, all right, Nate, you’re up. Run us out.
Nate W. Tonsager, CIPM® [00:39:28] My least favorite time of the year. The prediction okay, so I’m the anti-Dave in that regard, I have to say, because I always feel like I have strong opinions loosely held. I think it gets back to kind of what Dave was saying is, you know, these we make these predictions, but they don’t really impact our investment philosophy or strategy. You know, we’re relative strength momentum investors over the trend is, as Erin said, we’re going to try and latch on to it. But to recap kind of what I thought about 2024, you know, I was optimistic the housing market wasn’t going to collapse. I think Dave kind of hit on some reasons there. You know, we did not see a big collapse in housing prices. You know, the market still remains. The housing market specifically, remains a very tough market for affordability purposes. And I think we’re I was wrong about kind of that prediction in some ways is even though it didn’t collapse, I really expected the homebuilders to really ramp up building and really increase the housing supply through new builds because as Dave laid out, no one is moving from their dream mortgage. You know, we don’t have dream homes anymore. We have dream mortgages. And what we’ve seen a lot of and I wrote about in our Unfiltered piece at the end of December here, is instead of moving, people are tapping into home equity line of credits in the equity that have built in their house to renovate their house instead of so they can keep that mortgage and only pay a higher interest rate on, you know, a smaller portion than fully moving their mortgage to 7%. But I think, you know, because the housing market remains so strong, you know, my other prediction was I was pessimistic that inflation wasn’t going to come down. So, my other prediction was inflation wouldn’t come down as aggressively as people thought, meaning interest rates were going to be staying higher for longer. And spiritually, again, I was right. I would kind of say in that regard, because at some points we saw the market having six rate cuts priced in for 2024. They for some reason the market was convinced that whether inflation was either going to come down aggressively or the economy was going to go into a major recession. And in either of those scenarios, the Fed was going to respond by just chopping rates aggressively. But really, you know, none of the data. You know, I think, Dave, you said it there at the end in 2025, the data is not pointing to a recession right now. So, if there’s no reason for the Fed to cut, they don’t need to cut. And they’ve ended up the year cutting more than I think I would have expected at the start of the year. You know, I would call it four standard cuts, but 1% overall, a standard cut being about 25 basis points. You know, they started with a 50 and then 25 into 2025. And really, I think the final 25 at the December meeting really got the markets in line, which is kind of what Erin was talking about with, you know, the markets and the Fed are now aligned with. We saw a pullback in stocks and rates move higher in December because the markets finally realized the Fed don’t fight the Fed and the Fed isn’t inherently wrong. You know, the markets in the Fed in this constant balancing act and people always thought the Fed was wrong, the Fed was behind the curve, the Fed was this and the Fed was that. But they engineered a soft landing. Rates are at a stable-ish level, let’s call them at this point and kind of, you know, looking at it, what that does is stable rates allow people to plan. CEOs, business owners, you know, now don’t have to be thinking about, well, if rates go from 0 to 5, I can’t really plan my investments. I’m gonna to wait for them to come back. Well, after a year of little movement, I think we do see economic growth, economic stability kind of out there with ability to plan. And inherently people think higher rates are bad. But we got to remember, why do we have high rates? We don’t have high rates because inflation’s at 9%. Inflation’s come down to about three and is trending slightly lower. And the U.S. GDP is at 2.7%, estimated for 2024. We haven’t got the final numbers yet. So, we have above average GDP growth, which if you look back to 2000, GDP growth averages about 2.1%. We’re going to have 2.7% in 2024. So, higher than the GDP growth of 2023. We have a strong labor market where people have jobs. I don’t know if having higher rates is a bad thing for the economy when you have a strong economy. You know, I think where it can get a little dicey and where I don’t again, this is where I’m in aline myself with Dave. I don’t like making predictions, but I’m actually very much aligned with what he thinks is going to happen in 2025. I don’t see a recession out there based on the data right now. I think the biggest kind of unknown or question is what will the impact of tariffs be? So in Dave, I think that’s really where you and I are a little bit different minded and I could see a big impact from the tariffs one way or another, whether it’s bringing more manufacturing on shore if we do have high end tariffs. But that’s going to drive up worker wages and worker wages cycle into inflationary impacts. You know, I think you could see some element there. It’s not necessarily the price of goods themselves are going to go up, but the amount that we’re going to have to pay the labor force contributes to that inflationary cycle. And usually when you get a pay increase, that drives inflation higher a little bit more longer term because rarely when the inflationary pressures abate. You know, you don’t ask for a pay decrease all of a sudden, you know, once you get that increase, it’s pretty sticky. Well, if a price of Cheerios goes up, well, once the supply chain or the kind of inflationary impacts work themselves out, the price of Cheerios can come back down a little bit. So, I think that’s what kind of major thing that I’m going to say. I don’t see a recession with the Asterix unless we get the aggressive tariffs across all aspects of the economy, from Canada to Mexico to Europe to China. You know, if we have a trade war on every front, I think that’s a little bit scarier if it’s just used as a negotiating tactic. Like you said, I think that’s actually very beneficial in some ways where we can maybe even out the trade policies, because there are some unfair trade practices overseas. And so, hopefully we don’t see inflation coming back because Fed rate hikes and the shift in Fed policy from maybe, you know, stable rates to now raising rates. That’s the nightmare scenario for 2025. But, you know, at this time, I think the Fed can stick to their plans of two rate cuts in 2025. You know, the markets, David, I think you said it just recently as of Friday on January 10th, when they got the recent job report, turned that down to one. So, the market is now pricing in less cuts than the Fed, which is a good thing for stocks because I personally think we are going to get about three rate cuts in 2025. So, I think we’ll have the ability with inflation coming down, a strong economy to cut a little bit more than people are anticipating, which should help kind of alleviate that pressure on stocks. I think why you’ve seen so much kind of declines from December and into the new year is rates are bumping up on that 5% mark. And that’s just a scary mark in people’s minds at higher rates immediately makes people think stocks need to go down. But remember, we have higher rates for good reasons a strong economy, strong labor market, strong housing market, and really all those kinds of factors really do bleed into what I could see as a very strong economy. 2025.
Jessica Gibbs, CFP® [00:46:04] All right. Well, we’ll have to wait a year and see how you guys did. So really good predictions. But I do want to close out by kind of, I think, zooming in just to monuments, investment philosophy. And you know how we think about money management here. And this is a question for for any of you. So, anyone jump in if you want. What is one message that you want listeners and investors to hear as we go into 2025?
David B. Armstrong, CFA® [00:46:34] Yeah. I’ll go ahead and jump on this one and then make you all totally agree with me at the end. So, what one of the thing that’s- okay. I say things my own way. There’s a lot of different ways to say this. I’m just going to say it the Dave Armstrong way, which is the great thing about the podcast, is that anybody who started listening to this and thinks we’re total idiots, they aren’t listening anymore. Okay, so the only people who are listening anymore are the people who probably already kind of agree with the way we think about the world and investing anyway. So, since we got rid of all the people who think we’re stupid and now only the people left are the ones who agree with us here, here’s here’s what I’m thinking. The predictions are always interesting, but you are impeded by the ability, your inability to say your 2025 prediction in August right? So, last year on the on the podcast, we talked about I think it was the Merrill Lynch analyst who changed their prediction in the middle of 2023. We kind of applauded her for doing that. But the thing that makes this artificially constrained is it’s some arbitrary point in time, which is the beginning of the year. And then you’re asked to say like, what’s going to happen for the next 365 days? That was another prediction I got wrong, too. I said I thought Biden was going to win. That was way before the debate. So, I’m off the hook on that one. But so it’s impossible, Right? But here’s the thing that I think I want listeners who are still listening and investors to hear as we go into 2025 is two things. One, there’s a difference between having a prediction at the beginning of the year and then analyzing at the end of the year. And then that’s different from having a prediction today and reevaluating your prediction tomorrow and the next day and the next day and the next day, which is what we actually do here at Monument. Because the way we run our models is, we’re looking at the data. I’m taking some liberties here, but we look at the data and we model it and we say, what’s the probability that what’s working today is going to work by 430 tomorrow afternoon? Pretty high. And we’re just looking at it all the time. And you can think and predict all you want to, but it isn’t anything until it is something. Now, the monument models will never predict the exact bottom of a cycle or the exact top of a cycle, but it will identify when there is a change taking place and we will just naturally get into it. Whether people are talking about it on the news or predicting it. We’re thinking it’s rational or not. We will look at things every single day and adjust. So, we’re predicting every single day. We just don’t talk about it every single day. And then the other thing is that. I want to remind investors that we’re only about two percentage points off of the all time high in the SMP 500. So, let’s just say that the market’s at an all time high. Okay, let’s just say that. My opinion is that it is a very rare occasion that anybody has a surprise need for a sizable amount of cash. Nobody wakes up in the morning and says, I’m going to go out and buy a home and I need $200,000 for a down payment. No one wakes up in the morning and calls us up and says, I’m redoing the kitchen, I need money today. Most of these big cash cash expenditures are always pre-planned. And if you know that you have big cash needs this year and the market’s only 2% off of an all time high, I suggest very seriously, whether you’re a client or just somebody who’s casually listening to this, that you take this as some advice, which is raise the cash now for those known expenses that are coming up this year or even into next year and raise that cash by selling some of your equities now and adhere to time that the time honored principle of buy low and sell high. So, if you have to sell securities to create cash and we’re at a high, you’re doing exactly what you should be doing. The downside is the market goes up a little bit more and you miss out on it. Well, that’s just the trade off for having the peace of mind of the cash is already in your account and there to satisfy that liability when the bill comes in for it. So, that’s how all kind of wrap up, you know, as we go into 2025. The thing that I want listeners and investors and clients to hear more than anything is that, you know, it’s not anything until it’s something. And our models are looking at things every single day. And if you were managing the money based on what’s actually happening, that what we think is going to happen or we want to have happen. And if you know what those big cash needs are, I think now’s a great time to raise money. Plus, you’ll have sixteen months to pay the tax bill on capital gains anyway. So, it’s almost the perfect time of the year to do it.
Jessica Gibbs, CFP® [00:51:15] Right. Well, if things do start to happen or you guys start noticing stuff, we will be talking about it on our quarterly market episodes that we do hear on Off the Wall. So, I think that’s a wrap for today. So, thank you Erin, Nate, Dave thank you. And thank you to our listeners for joining us for this episode of Off the Wall. To get fresh, unfiltered wealth advice in your inbox each month, subscribe to our private wealth newsletter. @monumentwealthmanagement.com/unfiltered.
Jessica Gibbs, CFP® [00:51:49] Your heart, your mind, your wallet they’re going to thank you so, see you guys next time!
