
Investment Commentary January 2025
Glen Eagle
January 2025 Investment Commentary
The new year often marks the time when we can exit the holiday season rested (or exhausted) and find time to reflect on the past year and set new goals for ourselves for the coming twelve months. As investors, however, this is also when we find ourselves listening to professionals and pundits alike who have fallen into the less admirable habit of using this “fresh start” to try to predict what the stock market has in store for us in the new year.
Yet, history tells us that the inclination to predict the future is a fool’s game. One only has to remember the renowned and highly intelligent Yale economist Irving Fisher, who in 1929 predicted that “stock prices have reached what looks like a permanently high plateau.” (1) As many an amateur historian knows, hardly had Mr. Fisher finished uttering these words when the stock market experienced Black Thursday and dropped 11% in a single day, kicking off what would later become known as the Great Depression.
This example, and others like it, has always led our Glen Eagle Investment Committee to avoid Predictions in favor of Planning and Probability. General Dwight D. Eisenhower summarized the subtle but important difference between these “P” words when he once stated, “In preparing for battle, I have always found that plans are useless, but planning is indispensable.” (2) Trying to create predictive plans is both futile and arrogant. However, planning for scenarios we believe have a higher probability of occurring and learning from them rather than assuming a false sense of clairvoyance can help us shape our portfolios. The thought process that comes from planning prepares us for when the uncertainty of the future inevitably becomes today’s challenge.
Below are the four specific scenarios that we believe have a higher probability of occurring and what we can learn from each of them:
1) A 10% Stock Market Correction – The S&P 500 had an astounding 57 record highs in 2024, the fifth most for any year since 1953. (3) Needless to say, this was an anomaly rather than the norm, and we believe a stock market correction of around 10% would be expected over the next year. In fact, since 1980, the average inter-year stock market drop was -14.1%. (4) It is important to note, however, that having a correction does not necessarily mean that 2025 will be a negative year for the stock market. Notably, over the same period, 34 of the 45 years ended with positive annual returns.
- Implications: Stay invested, but review your stock allocation. When a correction happens, it often hits the highest-valued stocks the hardest. This would imply that it is a good time to diversify beyond the largest “Magnificent 7” stocks. This is not to say that these larger companies will perform poorly, but rather that their performance is unlikely to meet the expectations that many investors have for them after watching their stocks grow exponentially over the last half-decade.
2) A Frozen Housing Market – The real estate market is different today due largely to the shortfall in housing construction since the financial crisis and higher interest rates. The consequence is that affordability has plummeted. The median age of all homebuyers is now 49 years old, up from 31 in 1981, and a record-high 36% of Americans say they would rent rather than buy if they move. (5) This situation is unlikely to improve soon since inflation, which impacts mortgage rates, is no longer falling, and the political environment is expected to be more restrictive on immigration. Immigration policy is impactful since 25% of the construction industry’s workforce comes from legal and unauthorized immigrants. (6)
- Implications: With high mortgage rates, potential buyers are being forced out of the market, and potential sellers are reticent to leave their homes. In this environment, construction companies will continue to build smaller homes to artificially make them more affordable, and existing homeowners will stay in their aging houses for longer.
3) A Tailwind for Small Companies – As geopolitical tensions rise and political attention focuses on increasing tariffs, companies that derive a larger portion of their revenue internationally are at risk. In general, this works to the benefit of smaller companies, which on average only generate 24% of their sales internationally compared to the largest companies in the US stock market, which have an average of 42% of their sales from international markets. (6)
- Implications: Investors with a higher risk tolerance could look to increase their exposure to small and mid-sized companies that offer more exposure to domestic markets. However, it is important to focus on profit-generating companies. This is because 41% of all small publicly traded companies are unprofitable. These companies will still feel the pain if inflation rebounds, and they need to continue paying high-interest payments on their large debt burdens.
4) A Politically Agnostic Energy Sector – Despite now having a pro-fossil fuel administration in the White House, energy stocks may not move up in direct response. Last year, only 26% of crude oil was produced on public lands, which mitigates the benefit of increased federal leasing and permitting policies. (7) Additionally, it appears unlikely that all the “clean energy” initiatives started by the IRA and CHIPS Acts will be undone with a new administration since 88% of the jobs created from those investments are in Republican and swing states. (8)
- Implications: The US, which already produces more oil and gas than Russia and Saudi Arabia, will continue to increase production, but that may not result in higher stock prices. Investors attracted to the higher dividends of energy stocks may want to look at the utility sector as an alternative. Utilities provide a nice dividend yield while also offering indirect exposure to artificial intelligence (AI), which has led to a massive increase in electricity demand.
All four of the above scenarios are unlikely to come to fruition, and those that do may do so for different reasons than we have written. However, they all can help orient us in an environment full of uncertainty. Specifically, they encourage us to question some of the current narratives by suggesting that politics is not the sole driving force of the market and that inflation may not drop rapidly but could even possibly rise again. Additionally, they encourage us to reassess our portfolios by focusing once again on quality companies that can provide diversification.
Wishing you a wonderful start to the new year!
The Glen Eagle Investment Team
Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, an SEC Registered Investment Advisor; Glen Eagle Wealth, LLC, Member FINRA & SIPC. The information presented is believed to be factual and up to date, but we do not guarantee its accuracy and is subject to change without notice. Commentary is for informational purposes only and is not meant to be investment advice or a recommendation of securities to any individual. It is not prepared with respect to the specific objectives, financial situation, or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed in this commentary.
1. Time “The Worst Stock Tip in History” 2. United States Air Force “Contingency Wartime Planning Course prepares Airmen for duty” 3. MFS “Beyond the News” 01.06.2025 4. JPMorgan “Guide to the Markets” 01.08.25 5. Apollo Chief Economist “The Median US Home is 40 Years Old” 6. Goldman Sachs Research 7. Barrons “Trump’s Win Is (Mostly) Good for the Oil Industry” 8. CNN “Red states are big winners of Biden’s landmark laws”
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