First half of 2025
We went into 2024 with a cautious view but not bearish. The U.S. equity markets performed very well, led by large cap growth stocks again. International equities and bonds greatly lagged and barely finished in the black. We continue with our relatively cautious view and believe there will be increased volatility during the year and it will be a stock pickers market for equities. Holding some cash reserves could lead to nice buying opportunities.
Asset allocation and diversification will be much more important for investor portfolios in the coming years. Those who think “just invest in the S&P 500” may be disappointed in their results over the next decade, especially when only the largest 10 companies (all tech) control 30% of the movement of the index each day. The other 490 stocks are responsible for the other 70%.
The S&P 500 returned 4.24% annually from 1999 to2014. There were also two 50% drops in the index during that time period. The past 10 years have produced much higher returns annually than the roughly long-term average of 10%. It is difficult to precisely know when this current outperformance will end, and if we could see the future, we would not need asset allocation. We do not know the future, of course, so we recommend diversifying different assets. It’s somewhat similar to the reason we buy insurance on our home or car.
We believe structured notes can be a nice addition to many portfolios as they can offer much higher yields than investment grade fixed income while providing some downside protection that stocks do not provide. Along with structured notes, we also believe preferred stocks, dividend paying stocks, small caps and some international stocks offer diversification and long term potential. Valuations in this group are much more reasonable than large cap growth.
Artificial Intelligence (A.I.) has Wall Street and individual investor’s attention in a major way the past 18 months and numerous “A.I. Stocks” have produced tremendous upside moves. Investment dollars are flooding into a wide range of A.I. stocks ranging from NVIDIA to small private equity start up companies. This is nothing new on the Street of Dreams as we’ve seen similar “once in a lifetime” investment themes like computers in the 80’s/90’s and the internet in the early 2000’s. These truly ended up being life changing technologies over time, but the vast majority of these companies fell by the wayside over time and only a very small fraction of the companies survived and thrived. For example, in 2000, the top 5 most popular sites were Yahoo.com, AOL.com, Geocities.com, MSN.com and Lycos.com. A couple are still around but are certainly not dominant sites today (i.e. Google!). Innovation leads to great progress in so many industries but always leaves destruction behind as well. It’s the very early innings of A.I. and there will only be a handful of winners the next 10 years and plenty of wealth destruction as well. We’re cautious at this time on most A.I. stocks. Crypto currencies are another area we view as very speculative. I’ll leave it at that, as it would take another full Ken’s Korner letter to discuss crypto.
We look forward to sharing our views this year and reviewing the asset allocation with our clientele at our strategy meetings. While somewhat cautious currently, we do look to the future with an optimistic eye.
Best Regards,
Kenneth M. Lampos
Senior Vice President, Investments
Wealth Management Specialist
Any opinions are those of Kenneth M. Lampos and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the forgoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results. Diversification and asset allocation does not ensure a profit or protect against loss. Holding investments for the long term does not ensure a profitable outcome. Dividends are not guaranteed and must be authorized by the company’s board of directors. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight - or 0.2% of the index total at each quarterly rebalance. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.
