Key Takeaways
- S&P 500 On Track For Rare Back-To-Back 20% Gains
- Rising Bond Yields And Fed Stance Cloud 2025 Equity Outlook
- Choppy Year-End Trading As Debt Ceiling And Volatility Concerns Loom
As we head into the last couple trading days of the year, I wanted to take a quick look back at the year and what we might expect in 2025. Through last Friday, the S&P 500 is up 25% while the Nasdaq Composite is up 31%. The Russell 2000 is up 11% and the Dow Jones Industrial Average is on pace to gain 14%.
If the market closes near these levels, it will mark the first time since 1997 – 1998 that stocks put together back-to-back years of 20% gains. According to Yahoo Finance, that is something we’ve only seen happen eight times since 1950. Six out of those eight times the market posted positive gains in the third year. However, one thing I think that’s worth noting is the fundamental valuation of the market in 1997 – 1998 and today.
At the beginning of 1997, the price-to-earnings ratio of the S&P 500 was less than 20. By the end of 1998, it had risen to more than 32.5. The current ratio is slightly below 30, but well above its five-year average of less than 21. None of that is to say the market cannot continue to rally into 2025. In 1999, the market added another 19.5%. Having said that, I would just encourage readers to question what is driving the market and what the rest of the economy is telling us.
I have mentioned multiple times now, if there is a dark cloud on the horizon for equities, it’s what has been taking place in the bond market. At the beginning of the year, yields on the 30-year bond were hovering just above 4%. Heading into this week, that rate has increased to nearly 4.8%. Perhaps most interesting is that the higher rates have come despite no Federal Reserve increases this year, but rather three consecutive rate cuts by the Fed. In addition, at the most recent Federal Reserve Open Market Committee (FOMC) meeting, Jerome Powell announced what was effectively a pretty big pivot from expectations of further rate cuts in 2025 to a much more cautious stance. While a cautious stance isn’t necessarily a negative, I have a harder time making a bullish case for equities if we continue seeing rates rise next year. Therefore, heading into a new year, I believe this is the arguably one of the more important narratives taking place.
Turning back to what’s currently taking place in the market, stocks are trading lower in the premarket. After falling 1% on Friday, the S&P 500 futures are trading lower by almost 1% in early morning activity. Part of that pullback may be attributable to Janet Yellen’s warning that extraordinary measures could be needed if Congress fails to raise the debt ceiling in the coming days. Also, shares of Boeing are indicated lower by more than 3% following a plane crash in South Korea.
For today and tomorrow, I’m closely watching how stocks close the year. It has been a remarkable two-year run for this market but the selling pressure we’re seeing isn’t the way I hoped the year would end. Although we typically see lighter volumes during the holidays, we may see an uptick in activity as traders clean up their books for the year. With the VIX higher by nearly 13% at just under 18, we could be in for some choppy trading.
Finally, I want to note the passing of President Carter. While his time in office is often remembered as a difficult time economically, I remember a fundamentally decent man. He was someone who truly cared for people as evidenced by his work with Habitat for Humanity and his pursuit for human rights around the globe. There will be a National Day of Mourning on January 9th and markets will be closed in remembrance of President Carter.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.