Stocks struggled during December, a month traditionally known for strong performance. Below are the 2024 year returns for the popular benchmarks that investors track (Data provided by Y-Charts & Commonwealth Financial Network):

S&P 500 Index: +23.3%
Dow Jones Industrial Average: +12.9%
Nasdaq Composite Index: +28.6%
Russell 2000 Index: +10.1%
S&P Target Risk Moderate: +7.97%
As we step into 2025, it is important to reflect on the current state of the markets and the economy.

The stock market delivered impressive gains in both 2023 and 2024. Given this strong performance, some might predict a sharp pullback for stocks in 2025. While such caution is understandable, historical data tells a more nuanced story.

Below is a graphic illustrating the S&P 500’s performance following two consecutive years of 20%+ gains. Although the sample size is limited, the results are still worth mentioning.

Job growth in the U.S. remains robust and has returned to its pre-COVID trend. For the economy to experience significant deterioration, a marked slowdown in job growth would be necessary. So far, we have yet to see signs of such a decline.

Will there be a recession in 2025? While it’s impossible to predict with certainty, the current data suggests that a recession is unlikely, at least in the first half of the year. Consumer spending, which accounts for approximately two-thirds of GDP, remains strong—a key factor in sustaining economic growth. That said, there are emerging signs of weakness beneath the surface that warrant caution. As investors, staying vigilant and prepared for potential shifts in the economic landscape is essential.

Below is a chart featuring the historical drawdowns of the S&P 500 in the top panel and the yield curve (10-year Treasury yield minus the 3-month Treasury yield) in the bottom panel. Historically, when the 10-year yield rises above the 3-month yield—following a period where the 3-month yield was higher—stocks often face challenges.

We are also entering one of the historically weaker quarters of the four-year presidential cycle. According to data from Ryan Detrick at Carson Group, Q1 of a post-election year has typically been relatively soft, with only Q2 of a midterm year showing weaker performance since 1950.

In December, the Federal Reserve cut interest rates to a target range of 4.25%-4.50% and signaled plans for 2-3 additional rate cuts in 2025—significantly fewer than anticipated earlier in 2024. This adjustment reflects the Fed’s expectation of a potential uptick in inflation next year. To counteract the risk of “reignited” inflation, they aim to keep rates elevated for longer.

Sustaining the cooling inflation trend we’ve seen recently is inherently challenging. However, if inflation remains under control in 2025 and doesn’t accelerate as many expect, it could create an opportunity for the stock market to exceed expectations.

From a seasonal perspective, post-election years have historically delivered relatively average returns for stocks, often followed by some weakness in midterm years. Since 1949, the S&P 500 has averaged approximately +8% during post-election years, according to data from Hirsch Holdings. This seasonal trend provides useful context as we evaluate potential market performance in 2025.

With the Trump administration set to take office on January 20, 2025, and Republicans holding a slim majority across all three branches of government, concerns about the potential for drastic legislation have surfaced. However, the narrow majority may limit the scope of sweeping changes, and we believe President Trump is likely to prioritize his desired legacy of fostering a prosperous economy and strong stock market. This focus could temper the likelihood of disruptive policy shifts in the near term.

Volatility and pullbacks are a natural part of any calendar year in the stock market, and 2025 will be no exception. The coming weeks will offer valuable insights into how the year might unfold. Historically, the performance of the S&P 500 during the “Santa Claus” rally period (the last five trading days of December and the first two trading days of January), as well as the full month of January, has been a reliable indicator of the market’s trajectory for the year.

We’ll analyze these key performance periods in detail in our February market update newsletter.

As always, don’t hesitate to contact our team with any questions.