Your Monthly Market Newsletter, January 2025

Happy New Year! 2025 is here, bringing optimism about the year ahead (thanks to a resilient economy). It also brings some uncertainty about stubbornly-high inflation and how policies proposed by the incoming Trump administration could impact the economy.

At its December meeting, the Federal Reserve (Fed) cut rates by 25 basis points, cutting a total of 100 basis points, or 1%, in 2024. The Fed is expected to make additional cuts to interest rates in 2025. However, indicated rates will continue to linger higher for an extended period. At the Fed's September meeting, officials initially suggested rates would be cut four times in 2025; now, officials anticipate there will be two cuts this year. As the economy continues to remain strong despite higher inflation, the Fed is moving forward cautiously regarding additional rate cuts. Fed Chair Jerome Powell said, "When the path is uncertain, you go a bit slower. It's not unlike driving on a foggy night or walking into a dark room full of furniture." However, he remains optimistic that inflation is moving in the right direction, albeit slower than investors would like.

The cautious pace of interest rate cuts is likely to continue to impact the real estate market into 2025 as mortgage rates hover above 6%. The Fed's cuts can reduce borrowing costs, but mortgage rates track more closely with 10-year Treasury bond yields. These yields remain elevated as concerns about inflation persist. However, homebuyers seem less patient in waiting for mortgage rates to come down. November marked the fourth consecutive month of increasing home sales (and 8.7% more homes pending in sales compared to November 2023).

As we embark on a new year, now is the time to establish or review your budgeting habits and make necessary changes to help you stay in control of your finances. Building and sticking to a budget can seem daunting. Whatever tools or methodologies you choose, all budgeting concepts start with the same goal: defining how you spend your money. Here are three steps that can set you up for budgeting success:

• Track your spending. Get a clear view of where you're spending your money -- and how much -- by recording your expenses. A simple spreadsheet or even pen and paper works great, or check out more high-tech options such as these personal expense tracker apps.
• Group your expenses. Group all your expenses in a way that makes sense to you, such as household necessities, auto maintenance, dining out, etc. Once you have everything grouped, find the average amount spent for each group. From there, you can decide if your monthly average expenditures align with your overall financial goals.
• Follow a plan. Establish a system to help you cut back on spending, though be sure to weigh your options. If you love purchasing a morning coffee, it's okay to keep it, but you might need to balance that against your budget for dining out. Creating a budget system that's easy to maintain will help you stay on track toward reaching your goals.

The hardest part is getting your budget set up. Once that happens, it's just updating the expenses and comparing the current month's spending to the last few months to see how things tallied out. Stick with it, and soon it will become a habit! If you need help creating a budget or have questions about your overall financial goals for 2025, just give us a call. We're here to help. Wishing you a happy and prosperous January!

Stocks

Stocks did not experience the anticipated Santa Claus rally in December, as two major equity indices declined; only the NASDAQ achieved a positive gain. An uptick in inflation and the Fed signaling likely fewer 2025 interest rate cuts led investors to reevaluate valuations in the context of higher financing costs. This, along with an overstretched rally earlier in the year, led to a modest adjustment in market enthusiasm. Despite a less-than-stellar monthly performance, all three equities ended the year positively - both the S&P 500 and NASDAQ gained more than 25% for a second consecutive year. While the Dow Jones lagged in the final month, it still finished the year nearly 15% higher.

Sector Performance

Only three of the 11 sectors ended December in positive territory. These sectors had significant exposure to Group of Seven mega-cap tech stocks (dubbed the "Magnificent 7") and were the driving force behind the market's impressive performance throughout 2023 and 2024. Conversely, sectors sensitive to interest rates, such as Materials and Real Estate, faced the most pressure as investors were concerned with the Fed's narrative of "higher for longer" interest rates. The eight sectors posting negative returns saw declines exceeding -5%, underscoring a highly bifurcated market where winners surged and losers suffered substantial losses. Nonetheless, all but one of the sectors finished 2024 with gains - only Materials recorded a negative annual return.

Bonds

Bonds also struggled amid the broader market downturn in December, with every major fixed-income index declining by more than 1.5%. Contributing to rising rates were concerns about inflation and the incoming administration's proposed policies. This, combined with Fed guidance for fewer interest rate cuts, drove yields on the 10-year Treasury and 2-year Treasury higher by 40 basis points and 9 basis points, respectively. The prospect of higher growth and inflation in the coming year and limited rate cuts suggest the potential for a prolonged period of elevated interest rates. These conditions weighed heavily on bond markets as investors recalibrated expectations.

Economic Update

Economic data in December highlighted a resilient economy, signaling strengths and challenges for the year ahead. Inflation measures remained above the Federal Reserve's 2% target, with the Consumer Price Index rising by 2.7% and the Personal Consumption Expenditures Index increasing to 2.4%, indicating faster price growth than in November. The labor market also showed strength, adding 227,000 jobs in November, nearly double expectations, and easing concerns from the prior month's hurricane-impacted reading. Although these indicators reflect an expanding economy powered by domestic service consumption, inflationary pressures are likely to persist through the first quarter of 2025. As markets navigate this environment, the interplay between monetary policy, inflation, and economic performance will be a key focus for investors.

Man's Best Friend: New Research Reveals Dogs Have Been Human Companions for Thousands of Years Longer Than Believed

The phrase “a dog is a man’s best friend” is widely recognized. But how long have dogs and humans truly been companions? Researchers have long sought to uncover the origins of this relationship to determine how the ancestors of today’s dogs began interacting with Indigenous people in the Americas. A recently released study by researchers from the University of Arizona and the University of Alaska Fairbanks found that dogs and humans were companions as early as 12,000 years ago – about 2,000 years earlier than previously thought.

This discovery was made by analyzing canine bones found at two archaeological sites in Interior Alaska. At one site, researchers discovered a tibia, or lower-leg bone, of an adult canine which radiocarbon dating determined to be about 12,000 years old. A separate group of researchers found an 8,100-year-old canine jawbone at a nearby site.

In evaluating these bones, researchers examined the diets of the canines and made a fascinating discovery: both contained salmon proteins. Since canines primarily hunted land animals during that era, the presence of high amounts of salmon proteins strongly suggests humans fed fish to these dogs.

Were these ancient dogs like the modern ones we know and love? Not exactly. While they appear to have exhibited similar behaviors to modern dogs, they are not genetically identical. These ancient canine companions were likely tamed wolves rather than fully domesticated dogs. Nevertheless, the findings highlight the deep bond humans and canines have shared over thousands of years.

If you are interested in learning more about this fascinating study, check out the news releases published by the University of Arizona and the University of Alaska Fairbanks.

THOUGHT FOR THE MONTH

^{Index Definitions}

^{Dow Jones Industrial Average:The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.}

^{Dow Jones U.S. Real Estate Total Return Index:The index is designed to track the performance of real estate investment trusts (REIT) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies.}

^{NASDAQ Composite:The NASDAQ Composite is a market-cap weighted index of all issues listed on the Nasdaq stock exchange. It is heavily weighted towards the technology sector.} 

^{S&P 500 Bond Index:The S&P 500® Bond Index is designed to be a corporate-bond counterpart to the S&P 500, which is widely regarded as the best single gauge of large-cap U.S. equities. Market value-weighted, the index seeks to measure the performance of U.S. corporate debt issued by constituents in the iconic S&P 500.}

^{S&P 500 Consumer Discretionary:The S&P 500® Consumer Discretionary comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.}

^{S&P 500 Consumer Staples:The S&P 500® Consumer Staples comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.}

^{S&P 500 Energy:The S&P 500® Energy comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.}

^{S&P 500 Financials:The S&P 500® Financials comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.}

^{S&P 500 Index:The S&P 500® index is a market-cap weighted index of the largest 500 companies headquartered in the United States. The index covers approximately 80% of available market capitalization.}

^{S&P 500 Utilities:The S&P 500® Utilities comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.}

^{S&P U.S. Aggregate Bond Index:The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt. The index is part of the S&P AggregateTM Bond Index family and includes U.S. treasuries, quasi-governments, corporates, taxable municipal bonds, foreign agency, supranational, federal agency, and non-U.S. debentures, covered bonds, and residential mortgage pass-throughs.}

^{S&P U.S. Treasury Bond Index:The S&P U.S. Treasury Bond Index is a broad, comprehensive, market-value weighted index that seeks to measure the performance of the U.S. Treasury Bond market.}

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