We limped to the finish but 2024 was still a good year. What does that mean for 2025? Our long-time readers know that I do not give a lot of credence to the calendar; January 2 is not some alternate universe from December 31. Nothing really changed over the one market-closed day that marks the New Year holiday. Still, psychologically, January is when we wake up from our holiday stupor and turn over a new leaf with resolutions we think could actually stick this time. It is a new year, after all.
There is lots of talk about the low odds of the market having three big years in a row, but that is all talk; no one who has actually looked at the data would come to that conclusion. In the 1980s the market, as defined by the S&P 500, had eight years in a row of positive returns. They were not all huge years, but from 1982 through 1989, we had positive years. In the 1990s we had nine years in a row of positive returns. The return in 1994 was only 1.32 percent, but still, that is up. Every year from 1995 through 1999 the market was up at least 20 percent.
The 2000s were a tough period for the S&P 500, but they also marked a good period for stocks outside of the S&P 500 – something we have been unable to sustain since. After the disaster of 2008, the S&P 500 once again went nine years in a row of positive returns. We are so focused on the here-and-now that sometimes we forget to look at the big picture. Yes, we are up considerably two years in a row, but this was after two bear markets within a three-year period.
I know what you are thinking, “But Chuck, the S&P 500 is so expensive.” That is true. Based on our proprietary work, the S&P 500 is two standard deviations above average from a price-to-earnings standpoint. However, this is mostly concentrated in technology stocks, which are almost three standard deviations above average. In plain English, this means the market is this expensive only five percent of the time, and technology stocks are this expensive only one percent of the time. That is not sustainable.
The rest of the market is not exactly cheap, but it is much closer to average. There are two take-aways from our perspective on this setup: First, valuation alone does not cause the market to go down. Valuations may predict how severe a downturn will be, but they don’t cause a downturn. Secondly, for the S&P 500 to continue to climb, we need stocks other than technology stocks to take the lead. Will this happen in 2025? Nothing is guaranteed in this world, but the probabilities are high.
In the third quarter of 2024, the rest of the market took the lead. Honestly, I would have wagered that it would have continued through the fourth quarter as well. It did not, but action in that third quarter certainly showed us that it is very possible for the market to broaden out. The fundamentals suggest this should happen.
I suggested that we would likely have a correction and that is how we ended 2024, but as we open the New Year, we do so still in a bull market. We have two good years in a row, and at this juncture, number three is looking like the most likely scenario. Of course, it is early and 2025 will certainly provide some surprises as most years do. We begin the year with optimism. Happy New Year!
Warm regards,
Chuck Osborne, CFA
