December 2024 Newsletter

A Strong year, with uncertainty ahead

As we close out 2024, we want to take a moment to reflect on a year marked by significant market activity and prepare for the year ahead. The 2024 U.S. presidential election concluded with a decisive outcome but little clarity for the future policy landscape and the potential impact to investments and the broad economy

While financial markets experienced another strong year of returns across most major asset classes, valuations in US stocks have hit near all-time highs, driven in large part by bubble-esque valuations of AI-related companies. A Wall Street Journal article from December 6th summed up the mood of most analysts heading into 2025, “Is this Wildly Overvalued Stock Market Doomed? Yes, but Maybe Not Yet.”

 20232024
International Stocks (IEFA)+18.0%+3.3%
Gold (GLD)+12.7%+26.6%
US Stocks (SPY)+26.3%+24.9%
IG Bonds (JMSIX)+7.1%+7.7%
Real Estate (VNQ)+11.8%+4.8%
Cash (IJLXX)+5.2%+5.3%

In this quarter’s newsletter, we’ll take a look at the current state of the markets, potential real impacts or planning implications of the new administration, and talk about why in an uncertain market, you should consider stress testing your financial plan, if you’re not already doing so.

We’ll also do our best to help you tune out most of the noise: there’ll be no analysis of the potential impact on your investments of a US invasion of Greenland, seizing the Panama Canal, or Canada becoming the 51st state.

2024 in review

Heading into 2024, inflation -though not prices- had been coming steadily down, setting up an expectation that the Federal Reserve could start bringing interest rates lower as early as January. January quickly turned to Spring as inflation remained stubbornly above the 2% target. Spring turned to Summer, before finally at their September meeting, the Federal Reserve dropped rates by half a point. Subsequent cuts through their next few meetings would lead to a total of a 1% reduction in the Fed Funds rate from where we started the year.

Markets initially reacted positively to the Trump election victory, with the Dow rising 1500 points the morning after, however bond markets have pushed back against the Fed since the election, with intermediate and long-term interest rates pushing higher, even as the Fed brings rates lower. This has largely been driven by concerns that inflation could be returning if some of the proposed tariff policies are put into place by the new administration, along with general concerns on the unsustainability of current government borrowing over the next decade. These borrowing trends look set to continue, regardless of which party controls Congress or the White House.

Irrational exuberance

The S&P 500 finished last year at a cyclically adjusted price-to-earnings ratio of 38.5. The only time in the past 100 years that the stock market has had a higher valuation was at the peak of the dot-com bubble in the early 2000 and driven by what Alan Greenspan referred to in 1996 as Irrational Exuberance. Yale Professor, Robert Shiller, then used this phrase for the title of his book, published in 2000, where he goes on to define the term as:

“Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others’ successes and partly through a gamblers’ excitement.”
– Dr. Robert Shiller, Nobel Laureate and Yale Economics Professor

If you are seeing a lot of similarities between this phenomenon describing the state of equity markets in early 2000 with the current market, you are not alone. Most US banks -including Bank of America, JP Morgan, and Goldman Sachs- in their 2025 outlooks, believe the current valuation levels are not sustainable and will revert to the mean over the next decade. At the same time, most see no catalyst on the near-term horizon to cause such a reversion. Such a catalyst usually comes in the form of a black swan: something unexpected at the tip of an iceberg that gives way to a shift in market sentiment. We won’t get into heavy technical analysis in this newsletter, but if you are interested in a deeper dive on the topic, read the previously mentioned Wall Street Journal article from December 6th. If you’re unable to find it yourself, your advisor will gladly get you a copy.

The good news is that, while the large cap stocks that make up the S&P 500 might be flashing big red warning lights, other parts of the stock market and other asset classes look much healthier and robust. Consequently, welldiversified investors have already taken the biggest step towards protecting their wealth. This is a good time to point out the importance of having a long-term financial plan and regularly stress testing that plan against downside scenarios, whether that is below average market returns, higher than expected inflation, or personal life events, such as long term care needs, premature death, or changes in tax law. We’ll go deeper into the importance of stress testing later in the newsletter.

2025: The good, the bad, and the uncertain

As we’ve discussed, valuations are near all-time highs that most analysts think are unsustainable, yet at the same time, very few of those same analysts are expecting an immediate drop in the market. So where does this leave us? Most banks are predicting returns in the US stock market between 8-13% for 2025, less than last year, but still a solid year. At the same time, those same banks are decidedly pessimistic over the intermediate term: Goldman Sachs thinks the market will only average 3% for the next 10 years, while Bank of America is even more bearish at 0-1%, despite predicting a 10% return for 2025.

We think 2025 could be the Make-It-or-Break-It year for Artificial Intelligence, which has driven much of the past year’s market speculation. JP Morgan estimates that total corporate spending on AI for 2025 will be around $1 trillion. Microsoft alone plans to spend $80 billion on AI investments during 2025, and while it may be nice that Microsoft Word can now offer to translate our newsletter into Ancient Greek, the jury is still out on AI’s true value. As in the early days of the internet, anything remotely related to AI receives a high valuation in the markets, but only time will tell which applications are the next Google or Amazon, and which are the next MySpace and AOL (apologies to our younger readers who have never heard of these companies).

Nobody can consistently and accurately predict when a bubble will burst. For example, some analysts rightly pointed out as early as 1997 how unsustainable tech bubble valuations were, but the market still went up another 100% over the subsequent 3 years, before losing 50% between 2000 and 2003. When valuations were at a similar level in early 1999, the market continued to climb for another 15 months, gaining 20%, before starting to correct. In fact, if you look at most market cycles, the years of best returns come immediately before the correction, which is why nobody should try and time the markets.

The good thing about a diversified portfolio is that you are constantly auto-correcting for overvalued or undervalued investments. If your allocation calls for a 60% allocation to large cap US stocks and this asset class performs well while other parts lag, then through regular rebalancing, you will be reducing exposure to the overvalued asset class, while increasing exposure to undervalued asset classes.

Looking at different equity markets, growth stocks are currently approximately 30-50% above their long-term historical valuation, while value stocks are at 0-20% premiums. The least expensive segments of the US stock market are small- and mid-sized value companies: mature businesses with stable cash flows, but limited upside growth potential.

As has been the case for the past few years, international valuations are at a significant discount to US valuations, with the S&P 500 currently at 21.5x (20-year average: 15.9x), compared to the rest of the world at 13.3x (20-year average: 13.1x). While these multiples look attractive, the big question mark for international stocks in 2025 is what the new administration’s trade policy will look like.

While there is extreme uncertainty as to how much of the proposed policy positions are campaign rhetoric, there are a few areas that we want to focus on during the first year of the new administration that are most likely to potentially impact finances.

Taxes

Since the Tax Cuts and Job Creation Act of 2017 (“TJCA”), the US has had a temporary window of reduced tax rates and an increased threshold for estate taxes. The TJCA tax cuts will currently expire at the end of 2025, and this will be a major negotiation and discussion you’ll see in the news throughout the year as Republicans have already said they plan to pass a new tax bill to preserve or revise tax provisions. If a bill is not passed by Congress, most tax brackets will increase (for instance, the rate on those earning between $23k and $96k of income will increase from 12% to 15%), and the level at which individuals are subject to estate taxes will drop in half, from approximately $13.6 million to $7 million. The standard deduction amount will also be cut in half, potentially impacting charitable giving strategies. Balancing this out, however, several items that were disallowed for deductions will become eligible again. One of the topics up for discussion that has some support from both sides is increasing the $10,000 limit on State and Local Taxes (“SALT”) that was put in place in the TJCA.

The short-term impact to equity investments is likely to be positive from an extension of the TJCA, and of the various Trump policy positions, this seems to be the one with the most support in Congress to be acted upon. To the extent that a decrease in taxes is not offset with a decrease in expenses though, we should expect to see continued upward pressure on bond yields that started after the election and continued through the end of the year. From a planning standpoint, high net worth families who have not yet had discussions around taking advantage of current lifetime gift exclusions for estate tax purposes are strongly encouraged to bring the topic up with their advisor, CPA, and estate attorney, as 2025 is likely to be a very busy year for trust attorneys depending on the provisions of the new tax law and waiting to the final months of the year may be too late for some strategies.

Tariffs

The increased bond yields in December reflect the potential impact of tariffs being placed on our major trade partners. By design, these would increase the price of imported goods, to the benefit of domestic manufacturers and detriment to companies reliant on imported goods as well as the consumers who purchase them. From an asset class perspective, large global companies would be hurt more, while smaller companies could potentially benefit from reduced international competition.

Depending on retaliatory tariffs, it is likely some sectors would also be impacted. This would depend on which sectors our trade partners decide to target. During the first Trump administration, China retaliated by placing tariffs on US soybean exports, which led to a 75% decrease in their export value from 2018 to 2019. In that case, the big winner was Brazil, which replaced the market share lost by the US. Any increase in inflation will also delay or reverse the expected continued decrease in interest rates, affecting bond yields, mortgages, and financing cost, to name a few.

Immigration

Immigration has been a hot topic throughout the election and since. While there is some doubt on the practicalities of implementing the sort of mass deportation program of which President Trump speaks, there is little doubt on the impact that it would have on inflation and the wider economy. Companies able to push increased costs to customers will increase wages to fill the vacant positions, likely raising the cost to their customers. Companies unable to do so will reduce or exit businesses they are no longer able to profitably operate in. The most impacted industries would be Construction and Agriculture. For Construction, increased build costs and reduced supply of builders seems the most likely result. For Agriculture, a mass deportation program would likely see a decrease in US agricultural output, offset by increased imports. In both cases, higher inflation would keep bond yields high and drag real returns on equity markets.

What all of these policies have in common is a trend towards higher-for-longer on interest rates. This means savers should continue to benefit from higher rates on bonds and interest-bearing accounts, while borrowers can continue to expect higher rates on things like car loans and mortgages. For investments, this means current 5-7% yields on bonds should be maintained. This could potentially also be strong for the US dollar, as international investors crowd into US treasuries for a higher yield. A more expensive dollar would hurt exporters, but mitigate a bit of the damage from tariffs due to more favorable exchange rates.

Plott and French Updates

At Plott and French Financial Advisors, we believe that giving back to our community is not just a responsibility—it’s a privilege. Over the past year, we’ve been proud to support various causes and organizations that align with our values of service and community spirit. We’ve highlighted some of these efforts in our past newsletters, including donating 140 pounds of pet food to the NRV Agency on Aging to support seniors struggling to care for their beloved animal companions, and our participation in the Radford Field of Honor, honoring service members and first responders. With wintry weather in the forecast for January, we’ve just donated 20 blankets to City of Refuge in Pulaski to help people stay warm during the cold winter months. And as always, we welcome suggestions from our clients on additional local causes that may benefit from our support.

Moving ahead into 2025, we continue to believe that the best path to long term financial prosperity is to not get lost in the noise of the latest headline. Instead, focus on long-term planning and a disciplined approach to your investments.

The coming year will undoubtedly bring its share of challenges and opportunities. Your Plott and French team is dedicated to providing clear guidance, thoughtful strategies, and unwavering support tailored to your unique financial journey.

Remember, financial success is not about reacting to every headline but about making informed, deliberate choices aligned with your goals.

If questions or concerns arise—no matter how small—know that we’re here to help. Don’t hesitate to reach out between scheduled meetings; your peace of mind and confidence in your financial plan are our top priorities.

Radford

104 Wadsworth Street Radford,
VA 24141

Blacksburg

2401 South Main Street, Suite C Blacksburg,
VA 24060

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