The Year of the Wood Snake
The Chinese Lunar Calendar features a 12-year cycle of animals. Each year also incorporates one of five elements: wood, fire, Earth, metal, or water, creating a 60-year cycle. So, while the animal repeats every 12 years, the animal and the element together repeat only every 60 years. For example, the last “Year of the Wood Snake” was in 1965. The Year of the Snake is supposed to represent wisdom, intuition, and transformation, qualities we hope our political leaders will embrace after this election year has concluded.
This past year, equity markets certainly lived up to an energetic Dragon Year. Regardless of a pullback in December, U.S. equity markets experienced another strong gain in 2024, characterized by 57 all-time closing highs. Overall, the S&P 500 finished up 25%, closing out the best two-year run since 1998. This was driven again by strong performances from mega-cap technology names, continued economic growth, and AI-related optimism. Most large-cap sectors posted gains in 2024, with Communication Services, Information Technology, and Financials leading the charge. Growth stocks outperformed value stocks as well. Laggards this year included the Healthcare, Energy, and Real Estate sectors. Although midcap and small cap stocks benefited from the broadening of the rally, aided by the election and a focus on domestically sensitive stocks, inflation jitters and fewer than expected Fed rate cuts led to their recent underperformance. Mid cap and small cap stocks were up 14% and 9% for the year, respectively, lagging their large-cap peers.
Steady Worldwide Economic Growth
This past year’s economic data largely confirmed a soft-/no-landing economic scenario. Economic growth, consumer spending, job creation, and disinflation continued to make progress through 2025, though that progress was sometimes uneven. GDP printed at a 1.6% in Q1, the lowest since 2022, but Q2 came in at 3.0% and Q3 at 3.1%. Meanwhile, Q4 GDP growth is pegged to come in at close to 3%, ending the year with solid economic progress. Looking back at 2024, U.S. nonfarm employment grew by nearly 2 million jobs for the 11 months through November, though the unemployment rate moved up to 4.2% from 3.7% in December 2023. According to Mastercard#, online spending during the holiday shopping period from Nov. 1 to Dec. 24 grew by 6.7% over last year, compared to a 2.9% increase for in-store sales. This contributed to a total spending increase of 3.8% over 2023. The consumer price index printed at a 2.7% rise in November, in contrast to the 3.3% from December 2023; core CPI was up 3.3% versus last December’s 3.9%. There has been some concern about shelter prices, which have remained sticky, though these too have been easing as well.
Looking ahead to 2025, corporate earnings are expected to grow by about 12%. The latest round of quarterly earnings reports showed 5.8% growth for Q3, the fifth-straight quarter of earnings growth. The outlook for Q4 earnings suggests an estimated EPS growth rate of 8%. Forecasts call for 2.1% U.S. GDP growth in 2025 and 2% in 2026, while overall world GDP growth is expected to be in the range of 3% next year, a decent backdrop for further corporate earnings gains.
China’s economy, the world’s second largest, faces a convergence of critical challenges that could culminate in an economic slowdown in 2025. Chinese consumer confidence is weak, domestic consumption remains muted, and unemployment among China’s youth has surged. Unsold housing inventory in China exceeds about two years’ worth of demand, and property values could fall further without sustained government intervention. China’s GDP growth is already falling short of the government’s 5% target and potential tariffs loom ahead, although perpetual stimulus efforts by the Chinese government are being implemented.
Sidewinding or Concertina Market Ahead?
The term premium is one of the best gauges of the direction of the macroeconomy: the difference between the yield on long- and short-term bonds. Unlike shorter-term rates, which are highly influenced by monetary policy, longer-term rates reflect the economic and inflationary outlook. What happens to the term premium in 2025 will be a good sign of whether markets are buying the new administration’s growth agenda, or see it being thwarted by the threat of tariffs, debt, and high inflation. If the term premium increases, this may hinder interest rate sensitive parts of the economy along with valuations, so this bears watching.
Unlike the bold and outgoing Year of the Dragon, the Year of the Snake is supposed to represent calmness and introspection, though markets rarely are so steady. Like the snake, we may have more of a sidewinding or concertina type of year in equity markets as we digest large gains from the past two years. Productivity increases due to AI implementation, along with corporate tax cuts and deregulation could keep the economic pot brewing in 2025. This may not be the year of the bond, but the reason for owning bonds, to generate income, is back in vogue.
Actor Dax Shepard turns 50, Cuba Gooding Jr. turns 57, and Christy Turlington turns 56.
Christopher Crooks, CFA®, CFP® 610-260-2219