The market is getting a little frothy.
The S&P 500 is up 5.5% in the five weeks since election day, though that’s a historically normal bump following an election. The bull/bear ratio topped 3.9 last week – just shy of the 4.0 “danger zone” that often precedes pullbacks, though it’s not the first time it’s been this high in recent months. And Bitcoin, an asset that thrives in bull markets and typically tops right before a major pullback, just crossed the $100,000 threshold for the first time and has more than doubled in the last three months.
So, there are plenty of signs that we could be hurtling toward a pullback – perhaps a significant one – in the new year. But that doesn’t mean the bull market will end. Pullbacks, even market corrections (i.e., a dropoff of at least 10%), are healthy. Like the just-completed Black Friday shopping holiday, consumers and investors are more likely to buy when there’s a steep discount involved. Thus, a 5-10% pullback from current prices could be a good thing. I think such a pullback is quite possible, if not likely, in the next couple months.
But I still think 2025 will be a good year for stocks. Here are three reasons why.
[text_ad]
3 Reasons 2025 Will Be Another Good Year for Stocks
1. The Bull Market Is Still Young. The current bull market has lasted nearly 26 months, having technically begun after the October 2022 market bottom. If that sounds like a long time, it isn’t. The average bull market lasts longer than twice that at roughly 61 months – more than five years. The average gain during a bull market is 180%. The gain in the current bull market is about 68%. So, historically speaking, we could be still in the first half of this bull market. No bull market dies of old age anyway. And this one isn’t even “old.”
2. Fed Rate Cuts Are Just Getting Started. After the fastest rate-hiking program in history, in which the federal funds rate ballooned from near zero to a range of 5.25-5.5%, the Fed has started slashing rates in earnest, trimming by 75 basis points to a 4.5-4.75% range, with another 25-basis point cut likely coming next week. It won’t end there – not even with inflation still above the Fed’s preferred 2% threshold (the November print, out yesterday, came in at 2.7%, in line with economist estimates). According to the CME Group’s trusty FedWatch Tool, the majority (58.2%) of economists expect the Fed to cut rates by another 75 to 100 basis points over the next 12 months. There’s a 25% chance they’ll cut by even more than that. As interest rates decline, so will mortgage rates, which were well above 7% for a 30-year loan this time a year ago, and are now in the mid-6% range. Chances are, as the Fed continues to cut, mortgage rates will dip below 6% for the first time in more than two years, and a long-dormant housing market – which accounts for 15-18% of U.S. GDP – will be revived, at least to some degree.
3. A Record Amount of Cash is Still Sitting on the Sidelines. As of the end of the second quarter, a record $6.55 trillion was sitting in money market funds, up from $5.92 trillion a year ago and $5.22 trillion at the end of 2022. Anytime there’s that kind of spike in cash, it eventually gets deployed into stocks. The last big runup in money market fund reserves peaked in the second quarter of 2020. Over the ensuing two quarters, more than $300 billion of it was poured into the stock market, as the short-lived but powerful post-Covid bull market of 2020 and 2021 took off. Expect a similar inflow this time, now that the bull market has spread beyond the Magnificent Seven and a handful of other artificial intelligence-related stocks. In fact, it’s already happening: net inflows into ETFs globally hit a record $205 billion in November, with U.S. equity ETFs accounting for $149 billion of the total – blowing away the previous monthly record of $98.5 billion, set in December 2023. Now that the election is over, interest rates are coming down, and the U.S. economy remains healthy, investors are finally starting to come off the sidelines, and are feeling confident enough to turn their cash into stock investments.
As always, there are plenty of potential hurdles that could derail the bull market in 2025. Geopolitical turmoil continues to spread to places like Syria and South Korea. The new administration’s plans to issue high tariffs on China, Canada and Mexico could send consumer prices in the wrong direction again. And there’s always the unknown, which is what the market fears most.
But barring some sort of catastrophic, black swan event like a global pandemic or a sudden recession, I think the bull market will continue in 2025. While I don’t expect a third consecutive year of 20% gains in the S&P 500 to materialize, I think a more muted return of 10% or more, with perhaps even better performance from the many sectors and asset classes that have lagged behind mega-cap tech and AI stocks these last two years. I expect that to include value stocks, which are only up 40% since the bull market began 26 months ago, but which have been more in lockstep with the market of late, up 10% since the August market bottom.
We’ve seen this outperformance in our Cabot Value Investor portfolio, which has had more big winners (including several stocks that we’ve “retired” after they reached our target price) than at any point in the last three years. We hope to keep identifying undervalued gems in the year ahead, which I believe will be another good year for stocks – even if there are some growing pains along the way.
To subscribe to Cabot Value Investor, click here.
[author_ad]
