Download the 01.10.25 Dynamic Market Update for advisors’ use with clients

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

The market has done it again. We officially have a 25% return for the S&P 500 in 2024, following a 26% return in 2023. And this is despite not getting a “Santa Claus rally” this year for which many investors were hoping. This gives us a rare feat: Back-to-back returns of more than 25% have only happened three times since the 1920s. What can we expect going forward?

Well, the last time we had consecutive returns this strong was 1997 and 1998, part of a five-year stretch (1995 to 1999) of annual returns of more than 20%. So, strong returns each year or two don’t necessarily indicate poor performance the following year. That said, as valuations continue to get stretched, investors must wonder, how much more can we go? After all, that late 90s stretch was followed by the tech bubble burst. However, here are a few reasons why the markets may keep going: 

1. Supportive Fed. While the Federal Reserve (Fed) may have communicated a more hawkish tone (less cuts going forward) at their last meeting in mid-December, there are still some cuts expected in 2025. And don’t forget we have already had a full percentage of cuts in 2024. Any drop in interest rates translates beneficially to stock performance, particularly to smaller companies which may be more reliant of debt to support their businesses.
2. Strong Economy. The same metrics which supported 2024 continue to hold true going into the new year including a healthy labor market with low unemployment and lower inflation. The figures certainly don’t indicate a recession soon, but instead point to sustained economic growth ahead.
3. Strong Earnings. When valuations are high, the best way for stock prices to go up is to have strong earnings growth. Some tailwinds for earnings growth in 2025 include a healthy and steady economy, stable wage inflation, lower interest rates, productivity gains through technology enhancements, and potential deregulation. Of particular importance is the gap between high-flying tech stocks and the rest of the market, which may narrow as more companies begin to benefit from artificial intelligence (AI).

While the markets may continue their upward trajectory, it is always important to remember that markets are cyclical, and market pullbacks do happen — and happen often. The most important thing is to keep your sights on the long-term horizon. Remember that staying invested and diversified give you the greatest chance to achieve your investment goals.

Managing Emotions

The S&P 500 set an astounding 57 record highs in 2024. At these elevated market levels, investors may be feeling a sense of excitement, thrill and euphoria, believing the market is unstoppable. But as we know, markets move in cycles. Eventually, prices have to come down and reset, before continuing their journey higher. And this phenomenon is not specific to stocks; cyclicality can be exhibited across all asset classes such as bonds or real estate. The “Cycle of Investor Emotions” graphic below can be a great resource to review in good times and in bad ones to remind investors of these key observations:

1. Point of Maximum Financial Risk. The phrase “fear of missing out” (FOMO) is often uttered as we get close to market peaks. Often times, investors feel happy and relaxed, believing they made smart decisions and the market is offering a never-ending free lunch (high returns with low risk), just before a correction happens.
2. Point of Maximum Financial Opportunity. A different type of fear sets in a we near market bottoms. Investors feel like they have made a mistake and worry they will lose everything. These are the most dangerous times when investors start thinking about selling out of the market (or a particular asset class).
3. Long-Term Investing. The fact is, it’s near impossible to time the market. It’s hard to time when the market drops and just as hard to time when it will rebound. The best thing investors can do is put emotions aside and focus on keeping their portfolios diversified and invested for the long-term.

 Stay diversified, my friends.

 

The Cycle of Investor Emotions

 

 

Sources: Modern Time Investors as cited in Milan Aryal.

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.

 Photo: Adobe Stock