While a close presidential election was the main focus going into the fourth quarter of 2024, the results featured a surprisingly clear outcome. We noted last quarter that while we had concerns over a contentiously close outcome, we also noted that the stock market historically rallied following elections. In that regard the stock market did not disappoint. The popular stock market indices registered healthy gains and ended the year on a strong note.
While the stock market rallied following the election, the bond market was on the weak side. Despite the fact that the Federal Reserve lowered the overnight Federal Funds rate three times in the second half of the year, bond market participants have grown increasingly concerned about several key issues. First, some of the proposed Trump policies, particularly increased tariffs and repatriation of illegal immigrants, could help stymie the progress the economy has made on lowering inflation. Second, there seems to be little interest in making progress on the U.S. federal budget deficits. Finally, the Federal Reserve Board signaled concern about lower-than-expected progress on inflation, which may result in fewer interest rate cuts in 2025.
In fact, we are heartened that the Fed has pulled back from some of its dovish rhetoric earlier in the year. Fighting inflation seems to be their main focus, which should help wring out some of the speculative excesses that have become increasingly apparent in the financial markets. Stock prices are elevated by many traditional measures – a continued melt-up in the stock market in the face of a weak bond market reminds us of the surge of stock prices in 1987 that led to a painful sell-off in October of that year. While we do not anticipate a major stock selloff this year, we have become increasingly skeptical of the likelihood of a continued surge in the market leaders including the “Magnificent Seven” (Apple, Nvidia, Microsoft, Amazon, Meta, Alphabet and Tesla). Those 7 stocks now represent over 30% of the total S&P index of 500 large capitalization stocks. We are also becoming more bullish on bonds, given that the Federal Reserve is working to keep a lid on inflation, which should help generate positive inflation adjusted returns for bonds. In sum, we would not be surprised if bond returns outperform stock returns in 2025.
Tax Planning Helps Drive Better Financial Returns
Earlier in 2024 there were growing concerns that a Democratic sweep in November would have assured that the Trump tax cuts would expire at the end of 2025 as scheduled. Many clients were concerned about the potential lowering of the estate tax exemption as well as the advisability of doing Roth IRA conversions that would be less favorable if tax rates would rise. While taxes should not be the primary driver of investment decisions, investors should pay attention to the potential tax consequences of their actions. And there certainly not is no “one-size-fits-all” strategy for dealing with tax issues. For example, the advisability of a Roth IRA conversion may be significantly different for investors – the decision should be based on many variables including current tax bracket, age and long-term legacy goals, just to mention a few. At Caplan Capital Management, we are now planning to expand our tax planning services in 2025. We believe we will be able to build more robust financial and investment plans that can better meet the unique needs of our valued clients. Stay tuned. Best wishes for a happy, healthy and prosperous 2025!
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