Market Update: Dear Bond Investors, Please Calm Down

January 24, 2025

Download the 1.24.25 Dynamic Market Update for advisors’ use with clients

By Kostya Etus, CFA®, Chief Investment Officer, Dynamic Investment Management

After a rough month, the markets finally had a great week last week, ending January 17, posting the strongest weekly performance since November. The main reason for the weakness is that interest rate expectations for higher-for-longer may have been overblown as the 10-year Treasury yield hit a 14-month high of nearly 5%. Some of this was driven by expectations for a stronger economy and higher inflation. When inflation came in below expectations last week, rates shot down and the market shot up.

Inflation and economic growth don’t change overnight; investors need to remain calm and moderate their expectations for the future. This will help stabilize bond prices. Also, let’s not forget that stock prices are more importantly driven by earnings. Here are a few things to keep in mind:

  1. Inflation Steady. While the headline CPI inflation for December has increased for the third consecutive month to 2.9%, it was largely driven by the more volatile energy and food price components (as reported by the U.S. Bureau of Labor Statistics). The more important Core CPI figure (which excludes food and gas) went down to 3.2% for the first time since September, beating expectations. This bodes well for expectations of stability in inflation and potential for lower rates ahead.
  2. Unemployment Steady. The Labor Bureau also reported a lower-than-expected unemployment rate at 4.1% for December. This points to continued economic strength and may be viewed as inflationary, or a detractor from lowering interest rates. But I think the market, and all of us, would appreciate a scenario of lower inflation and a strong economy.
  3. Earnings Strong. Interest rates aside, a primary and more stable component of market growth is corporate earnings. And earnings for the fourth quarter have come out of the gate with a boom. Particularly, several big banks have blown away already lofty expectations for earnings and provided positive guidance for future quarters.

As small fluctuations in inflation and unemployment may happen, they don’t need to disrupt financial markets. With bond yields at elevated levels, it presents an attractive opportunity for bond prices going forward. Similarly, if earnings continue to exceed expectations, it could spell more market strength to come.

Can the Market Keep Going Strong?

As we have discussed in the past, the stock market has had historically high back-to-back annual returns. This may be giving some investors pause in terms of what to expect for the future. To help answer the question whether the market can keep going strong, the chart below compares the current length and strength of the bull market to history and can be used to draw some conclusions:

  1. Bull Markets Can Be Long. Going back to 1926, the median bull market lasts 55 months. With only 26 months in the current bull market, we are only about halfway there. There could certainly be more gains ahead.
  2. Bull Markets Can Be Strong. The median bull market returns over 200%. This is an astounding number but makes sense if you consider the median length. That said, the current bull market is only 74% strong. On a per-month basis, we are behind historic averages (less than halfway there). There could certainly be more gains ahead.
  3. Bulls Beat Bears. Finally, did you know that bear markets are typically shorter and less severe? The median bear over this period has only been about 15 months with a median loss of about 30%. This is quite a difference from bull markets and points to the benefits of staying invested for the long-term.

 Stay diversified, my friends.

Bull Market Length and Strength
Historical Median of U.S. Stock Market Returns 1926-2024

Source: BlackRock January 2025 Student of the Market. Morningstar and BlackRock as of 12/23/24. Stock market represented by the S&P 500 Index from 3/4/57 to 12/31/24 and IA SBBI U.S. Large Cap TR Index from 1/1/26 to 3/4/57. This illustration assumes reinvestment of dividends and capital gains. Assumes investor stays fully invested over the full period. Index performance is for illustrative purposes only. Past performance does not guarantee future results. It is not possible to invest in an index.

As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.

Should you need help navigating client concerns, don’t hesitate to reach out to Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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