At the start of 2024, most large banks projected the S&P 500 would finish around 5200, forecasting a 10% gain for the year. However, U.S. stocks had other plans. What followed was stronger-than-expected consumer spending, steady earnings growth, declining inflation, and a Federal Reserve loosening monetary policy. As a result, the market exceeded expectations, delivering solid returns across key indices. While December—traditionally the second-best month for the S&P 500 since 1950—brought added volatility, the market still managed to outperform expectations.

 

As we look ahead to 2025, volatility seems inevitable. While the economy is showing resilience, we might finally see that long-predicted recession, which has so far failed to materialize. The key question remains: why hasn’t the recession hit, despite tighter monetary conditions and reduced money supply? The answer may lie in the U.S. government’s ballooning deficit, which has propped up the economy longer than expected. With government spending and employment (especially in sectors like healthcare and public services) growing, any contraction could trigger market turbulence in the short term.

 

That said, while a potential recession looms, it’s unlikely to be a repeat of the 2008 financial crisis. Recessions are a natural part of the economic cycle, and this one may not be as deep as feared.

 

Despite some bumps in the road, 2024 ended on a positive note. The S&P 500 closed up 25%, the NASDAQ rose 30%, and the Dow gained 13%. The Communication Services sector led the way with a 40% increase, followed closely by Information Technology at 38%. On the flip side, the Materials sector posted a slight decline of -1.2%, while Energy barely eked out a 1% gain.

 

Many investors look to January as a time for the so-called “January Effect,” where mutual funds often re-enter the market after tax-loss harvesting. However, looking at the past 35 years, the average return for the S&P 500 in January has been a modest 0.5%, suggesting that January may not offer much more than any other month.

 

Amid all the market noise and short-term trends, it’s crucial not to lose sight of your long-term financial goals. Your strategy should be centered on aligning investments with your personal objectives, risk tolerance, and time horizon—not on chasing short-term profits. While cash-raising strategies are important, they should always be about staying true to your long-term vision.

 

At the start of 2024, nearly 79% of S&P 500 stocks were above their 200-day moving average. As of December, this reading had dropped to 58%, signaling some weakening in market breadth. The Bullish Percent Index (BPI), which measures the percentage of stocks on buy signals, has also dropped from 80% in January to just 41%, its lowest level since November 2023. These are signs of a market under pressure, though not necessarily a crash.

 

The U.S. dollar ended the year up 7%, and the U.S. economy, based on GDP growth, outperformed all other G7 nations. Despite some challenges, the economy continues to hold strong, albeit with signs of slowing growth.

 

November’s data showed personal income, personal spending, and personal savings all came in below expectations, which may signal a cautious consumer. However, inflation continues to trend downward, with core inflation at 2.8%—still above the Fed’s 2% target, but a positive development.

 

Looking toward 2025, the U.S. faces growing debt concerns, and over half of the job gains over the past two years have been in the government or government-dependent sectors, like healthcare. The government is expected to attempt spending cuts, which could lead to market volatility. However, these cuts may ultimately benefit the private sector in the long run.

 

Inflation is likely to stabilize between 2% and 3%, and while a recession is probable, it’s unlikely to be a deep or prolonged one. That said, 2025 will likely bring a mix of economic slowdown, market volatility, and continued inflationary pressure.

 

Despite the potential for volatility, stocks continue to be one of the best long-term investment vehicles. While market fluctuations can be unsettling, the most effective strategy is to stay committed to your investment plan, particularly if you’re focused on long-term growth. See the chart below from JP Morgan, which illustrates the value of time in investments. Remember, if you can’t tolerate the risk, you won’t reap the rewards. The key is to keep your portfolio aligned with your goals and avoid reacting to short-term market noise.

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