“I am an optimist because I don’t see the point in being anything else.” Abraham Lincoln
What a start to 2025, nearly picking up where 2024 left off. Yes, stocks fell in December and during the historically bullish Santa Claus Rally period, but the S&P 500 just made another new all-time high and is up nearly 3% in January already.
Here are two bits of good news for the bulls as we try to stay warm across much of this great country.
The First Five Days Were Positive
Although you wouldn’t expect there to be much correlation here, the first five days of a new year can sometimes foreshadow how the rest of the year might go.
Since 1950, the first five days were in the green 48 times and the full year was higher 81.3% of the time and up 14.2% on average (both better than the average year gain of 9.5% and up 72.0% of the time). Digging in a little bit more, a negative first five days suggests virtually a flat year on average and higher only 55.6% of the time. This matters, as the first five days in 2025 were up 0.62%, suggesting some potential good news for the bulls.
Post-Election Years Have Been Strong Lately
Did you hear we had an election last year? That of course means this is a post-election year, a year that historically has just been kind of average. As you can see below, since 1950, most of the big gains took place in pre-election years, while midterms years could be trouble. This means election and post-election years have tended to be more along an average type of year.
Here’s where things get interesting though. In more recent times, post-election years have been very strong. Going back 40 years (to 1985) post-election years have gained more than 18% on average and have been higher nine out of ten times!
Here we break it down by all post-election years going all the way back to 1897 and as you can see, only Bush in 2001 saw a negative return during this year in the cycle in more recent times.
To put a bow on this discussion, here are the returns for the four-year presidential cycle since 1950 compared with the past 10 cycles. Post-election years are far and away the best performing year more recently.
What about taking the extra step and breaking it down by whether there was a new president versus a president in their second term? Here we found that stocks once again do much better in post-election years under a second term president, yet another positive for 2025.
Which Is the Best Diversifier of Them All?
One of the things we did in our Outlook 2025: Animal Spirits is take a look at how some different diversifiers of stock risk have worked under different conditions. So which is the best diversifier of them all? The frustrating but true answer is it depends on the environment. One of the deepest scars of 2022 was the failure of bonds to act as a diversifier. The bond market had the worst year in its history and it happened during a bear market for stocks. It doesn’t matter if bond prices will move back to par over time no matter what rates do — bonds didn’t do their job when many investors needed them most.
Looking back at the history of major stock declines, bonds — long-dated Treasuries in particular — have indeed often been one of the best diversifiers during stock selloffs, but not always. Broad commodities often see sharp declines during equity selloffs, but in 2022, commodity exposure was a far more powerful diversifier than fixed income. And gold was also a better diversifier than either during the Great Financial Crisis and in 2018. The point is that bonds, especially long maturity Treasuries, are often an effective diversifier during stock declines, but it does depend on the environment, and bonds aren’t the only diversifier.
More recently we did see bonds start to return to their more typical role of bond diversifier but then were reminded of the conditions when they might not be. Looking at every S&P 500 decline over 5% starting with the pandemic, we can see that bonds were an effective diversifier in 2020, but then failed to outperform Treasury bills during every ensuing decline, five of them altogether covering 2022, 2023, and early 2024. Finally, during the more than 5% decline we saw in July and August of 2024, long Treasuries solidly outperformed Treasury bills and even offset much of the equity market decline. They did it again during the 4.2% stock decline in August and September.
But then in December and January, as economic expectations shifted higher accompanied by some anticipatory concerns about the inflationary impact of tariffs (including by the Fed), another 4.2% decline in the S&P 500 was accompanied by a sharp decline in long Treasuries.
So what can we expect going forward? Bonds struggle most as a diversifier when 1) rates are low, 2) inflation moves higher, and 3) the Fed has to aggressively raise rates. The first condition has substantially improved. Our starting point on the third is already fairly elevated, but as we saw recently, even a shift in Fed expectations to fewer cuts can make a difference. Inflation is the main risk, but even in that case, we have a much better environment than we had during the major bond selloff. With starting rates currently fairly high, we are comfortable with bonds as a core risk diversifier. But with ongoing uncertainty around inflation, which is bonds’ Achilles’ heel, and some potential opportunities among other diversifiers, we continue to recommend diversifying beyond bonds, including asset classes like managed futures, gold, and even lower volatility stocks.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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