Nervous Start to 2025

The financial markets have experienced some turbulence in early 2025, with the S&P 500 declining 4.3% from its December 6 peak as the 10-year Treasury yield increased to 4.76%. This volatility stems from shifting expectations around interest rates and economic conditions, particularly following a stronger-than-anticipated December jobs report that suggests less urgency for Federal Reserve rate cuts.

Markets often experience temporary setbacks after periods of strength

While market pullbacks can be concerning, they represent normal behavior after two years of relative calm. The S&P 500's largest decline in the previous year was just 8%, which is modest by historical standards. These temporary setbacks often create opportunities for portfolio rebalancing.

History demonstrates that markets typically experience several pullbacks annually, but tend to recover over time. Investors who remained invested through recent challenges including the pandemic, inflation, and geopolitical tensions have generally been rewarded.

Mag 7 Propelled Markets to New Heights

The Magnificent 7 technology stocks have been central to market performance, surging 250% since early 2023. However, we should remember that these same stocks faced significant pressure in 2022 when interest rates rose. Their concentration in market indices may create unintended portfolio risks.

Rather than making concentrated bets, successful investing typically involves building diversified portfolios aligned with long-term objectives.

Market Valuations are Historically High

Current stock market valuations are elevated, with the S&P 500's price-to-earnings ratio at 21.5x. A high price-to-earnings ratio means that investors are paying more for every dollar

of earnings than in the past. This means that future returns may be lower, or equivalently, that markets have gotten ahead of future returns. The key question is whether the underlying economic and market fundamentals are healthy, or if the market rally is

built on a house of cards as it was in 2000 or 2008. Today, the economy is still growing steadily, the job market is strong, and the companies with the most enthusiasm have robust earnings. When valuations are high, the solution is not to avoid stocks altogether. Instead, it's to stay balanced across different parts of the market. The key is to hold a portfolio that is appropriate for your specific financial goals.

Please reach me with any questions- chris@harriswealthmgmt.com

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Examples are for illustrative purposes only. All investing involves risk of loss including the possible loss of all amounts invested.