Bearish. Bullish. But Also Indifferent.
December 31, 2024
Man is not worried by real problems so much as by his imagined anxieties about real problems.
—Epictetus
As humans, we’re wired to crave certainty.
It’s comforting to think we can predict what’s coming next — in life, in markets, and in the broader world.
This desire for certainty isn’t just a quirk; it’s rooted in cognitive biases that shape how we interpret the world. Recency bias tempts us to overemphasize recent events, assuming today’s trends will continue indefinitely. Overconfidence convinces us we know more than we do, emboldening us to make predictions we can’t possibly guarantee. And confirmation bias leads us to seek out information that aligns with what we already believe, reinforcing flawed assumptions.
These biases don’t just influence individuals. They shape market sentiment, often leading to predictions that seem logical in the moment but unravel with time.
At Blueprint Investment Partners, we aim to sidestep these traps by trading the allure of certainty for the discipline of a systematic approach. Instead of speculating about what SHOULD happen, we focus on following what IS happening, using trends to guide us through uncertainty.
As we reflect on 2024 — a year that defied many expectations — and prepare for 2025, we’re reminded that resilience comes from acknowledging uncertainty rather than resisting it. In this month’s Co-Founders’ Note, we explore how the past year unfolded, the lessons we’ve drawn, and the opportunities we see ahead.
But first, here’s a summary of our take on what transpired in the markets in December.
Asset-Level Overview: Market Talking Points for Financial Advisors
Equities & Real Estate
Volatility arrived in U.S. equity markets a month or so later than expected. It came after the Federal Reserve followed through on its intentions to reduce interest rates again while simultaneously providing guidance indicating fewer cuts in 2025 than previously anticipated. After another new all-time-high to start the month, the S&P 500 Index found itself flirting with negative territory for the month. Despite the end-of-year jitters, all trends among U.S. equities remain positive. As a result, domestic equities remain the largest allocation across most our portfolios.
The fourth quarter swoon for international equities continued in December. Among other things, one likely culprit is the expected impact of tariffs being communicated by the new U.S. presidential administration. At the asset level, all trends in the foreign-developed segment are now negative. Only the long-term trend in emerging markets remains positive. The continued weakness will mean another reduction in exposure, with that allocation being handed off to stronger U.S. equities.
A direct casualty of the adjusted guidance for the 2025 path of interest rates was the intermediate-term trend in real estate securities. In fact, this asset was the worst-performer in December among the major classes we track. The long-term trend continues to be positive, but the poor monthly performance will lead to a move to underweight across our portfolios. Like foreign developed exposure, this allocation will be handed to stronger U.S. large-cap equities.
Fixed Income & Alts
As is to be expected, the Fed’s confirmation of “higher for longer” did little to reverse the direction of recent declines in fixed income instruments of meaningful duration. Trends over all timeframes are now negative, which will cause our portfolios to move from being underweight — where they have generally been for more than three years now — to their minimum allocation. This exposure will be handed down to instruments with less than a 1-year duration, Treasury bill equivalents that continue to yield relatively well with very little volatility.
In the alternatives allocation of our portfolios, the largest exposure remains tilted toward the fixed income sector. The portfolio favors positions in corporate and short-term government bonds while maintaining short positions in long-duration Treasuries. The equity sector is predominantly hedged but retains a net long position, with most of its long exposure focused on the U.S. Additionally, commodities exposure continues to hold a net long position.
Sourcing for this section: Barchart.com, S&P 500 Index ($SPX), 1/1/2000 to 12/26/2024 and Barchart.com, Real Estate Vanguard ETF (VNQ), 12/1/2024 to 12/26/2024
3 Potential Catalysts for Trend Changes: Giving Clients the Context
ETF Push: Investors added more than $1 trillion into U.S.-based ETFs in 2024. This broke the previous record set three years ago and raised Wall Street hopes for an even bigger year in 2025. Total assets in U.S.-based ETFs reached a record $10.6 trillion at the end of November, which was an increase of more than 30% from the start of 2024.
Housing Restart: Pending homes sales in the U.S. grew for the fourth straight month in November. This reflects a return to the highest level since February 2023. The Chief Economist for the National Association of Realtors Lawrence Yun has indicated that prospective home buyers are adjusting to the idea that mortgage rates won’t soon bring relief, and they are dipping back into the housing market. Average 30-year mortgages have risen to about 6.7%, up from around 6.1% since the Fed started lowering rates in September.
A Confusion of Confidence: The University of Michigan’s index of consumer sentiment for the end of December moved to 74.0 from 71.8 in November. Sentiment is currently about midway between the all-time low reached (June 2022) and pre-pandemic readings. In a different poll, confidence among U.S. consumers dropped unexpectedly, with expectations growing bleaker for the economic situation in 2025: The Conference Board’s sentiment index dropped 8.1 points to 104.7. The group’s expectations index – which measures consumers’ near-term confidence in income, business, and the jobs market – also fell (dropping 12.6 points to 81.1, which is close to the level that often signals recession).
Sourcing for this section: The Wall Street Journal, “A Record-Shattering $1 Trillion Poured Into ETFs This Year,” 12/30/2024; The Wall Street Journal, “U.S. Pending Home Sales Rose in November,” 12/30/2024; The Wall Street Journal, “Consumer Confidence Climbs Driven by Republican Sentiment,” 12/20/2024; and The Wall Street Journal, “U.S. Consumers Feel Less Confident as Economy Concerns Mount,” 12/23/2024
Setting the Stage For the Year Ahead
No man ever steps in the same river twice, for it’s not the same river.
—Heraclitus
In what has become a holiday tradition at Blueprint Investment Partners, we will soon release our annual predictions blog to discuss current and upcoming year market forecasts.
Memories fade quickly, so we find it helpful to take a look back at the (typically) errant guesses. We think it is a good reminder for financial advisors to be wary about market prognostications. In our opinion, predictions are the most consequential mistakes an advisor can make. Thus, what better way to start off the new year than by sharing what we hope will be valuable lessons to help advisors avoid both the allure and pitfalls.
As a prelude to our blog, we wanted to use this section of our Co-Founders’ Note to recap 2024 and set the stage for items to watch as we enter 2025.
In Preparation for Landing
It seems so long ago, but recall from the latter half of 2023 all the talk about what type of “landing” the U.S. economy would have as it came out of the highest inflation levels in more than four decades. The Federal Reserve had embarked on a series of interest rate increases with the goal of bringing inflation back to its long-term target. The fear was that this would sink the economy into recession (i.e., hard landing). However, the hope was for a Goldilocks scenario where price increases would decelerate while the economy continued to grow (i.e., soft landing).
If one was handicapping sentiment, they would conclude it clearly favored the hard-landing scenario. Original forecasts called for several rate decreases in 2024 to help offset a declining economy and minimize the severity of recession. Predictions about the S&P 500 reflected this pessimistic view as well, and the average close to the year was forecasted between 4800-4900.
A Cautious Entry Into 2024 Now Looks Laughable
We believe it is fair to say investors were cautious entering 2024, thanks to the “landing” uncertainty, multiple wars (i.e., Ukraine-Russia and Israel on multiple fronts), and a contentious U.S. election on the horizon.
Now with 2025 upon us and the S&P currently hovering near 6,000 after achieving more than 50 new all time highs in 2024, this pessimistic view looks silly in hindsight. Almost all domestic equity segments have enjoyed above-average performance, with growth stocks once again leading the year. Volatile assets, such as crypto currencies, have largely experienced banner years.
Reacting to Rates
With that said, it has not all been rosy.
Interest-rate-sensitive assets, such as real estate and fixed income, have underperformed at times, as fewer rate cuts occurred than expected and the view of future cuts has become murky. Even among equities, international stocks severely lagged their U.S. counterparts.
Trend Followers Ride the Wave
For us as systematic trend followers, 2024 has looked like every year preceding it in the sense that we have simply followed our rules day by day, month by month. This has allowed us to take advantage of strong trends in U.S. growth stocks while minimizing exposure to foreign stocks and interest-rate-dependent instruments.
Until these trends shift, we will continue to ride the wave.
Bearish, Bullish & Indifferent
While we disregard predictions, we often say that the best indication of what something will do is what it is currently doing based on its trend.
If that is true, then the number one theme for 2025 could end up being what the Fed does with rates. After three straight increases, but with inflation remaining persistently above the long-term goal, will the Fed be forced to hold here? Or worse, will it be pushed to actually increase rates in 2025?
Additionally, what effect will the much-discussed tariffs have on prices and the economy at large? What if NVIDIA ever disappoints the markets with results or forward-looking results?
On the positive side, what if inflation resumes its decline, allowing the Fed to continue cutting? How might this impact interest-rate-linked assets, such as bonds and real estate? What if a potentially more favorable regulatory environment creates a boom for mid- and small-cap stocks in 2025?
As one can see, it doesn’t take much effort to create both bearish and bullish scenarios for a wide range of assets for the upcoming year.
As a systematic trend follower, we are thrilled at the results our investing process generated for our partnering advisors both before and during 2024. Perhaps just as important, we are excited about what it means for them — and us — in 2025.
In a time of year when we celebrate the idea of peace on earth and goodwill toward men, we are grateful to have an investment approach that promotes peace for advisors and their clients alike by always having a plan for what’s ahead. It’s not always easy, but it is simple. And we believe simplicity is key to navigating the sometimes-choppy waters of financial markets.
We encourage everyone to take a moment and reflect on the good things that have happened in 2024 and if you haven’t already, make a plan for a great 2025. Happy New Year!
Sourcing for this section: Yahoo! Finance, “Wall Street's 2024 Predictions Fall Short as S&P Hits 6,017,” 11/27/2024; Benzinga, “S&P 500 Hits 57 All-Time Highs In Record-Breaking 2024: Magnificent 7 Drive 30% Of Nasdaq's Surge,” 12/25/2024; and Barchart.com, Growth ETF Vanguard (VUG), 1/1/2023 to 12/26/2024
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