Quarterly Newsletter 2025 Q1
The past year was remarkable for several reasons. For only the second time in U.S. history, a past president was re-elected, and the economy defied expectations by delivering higher-than-anticipated returns. Two years ago, we projected that differences in returns between aggressive and conservative portfolios would compress, with safer investments outperforming their historical averages—a prediction that proved accurate. This trend could persist for another year but is unlikely to last indefinitely, leading to normalized returns across risk categories. The current economic debate is whether a recession looms or if the economy has transitioned into a new economic cycle. At Navigate Private Wealth, we rely on risk allocation models that respond to market shifts, allowing us to stay flexible and capitalize on opportunities without overreacting to short-term events.
2024 4th Quarter Review
The fourth quarter of 2024 concluded with steady gains across most asset classes, driven by strong consumer spending and stable interest rates. U.S. equities experienced year-end rallies, recovering from earlier volatility, with December delivering stronger-than-expected performance. Fixed-income markets remained stable, benefiting from a pause in Federal Reserve rate hikes. Internationally, markets saw mixed results. Despite some geopolitical concerns, optimism heading into 2025 remained intact, with portfolios overall performing in line with expectations.
2025 1st Quarter Preview
As we move into the first quarter of 2025, we expect a measured economic environment. The Federal Reserve is likely to maintain its current stance on interest rates, supporting stability in both equity and fixed-income markets. However, early-year volatility could arise from shifting investor sentiment, particularly in light of geopolitical uncertainties and debates over the economy’s trajectory. International markets offer opportunities for diversification, though caution remains warranted due to global economic and political risks. The year’s start presents an ideal time to revisit portfolio allocations and align them with long-term goals.
Bonds
The bond market appears poised for stability as the Federal Reserve pauses its rate hikes. After significant volatility in 2024, bond yields remain elevated, offering attractive income opportunities for conservative investors. Short-term bonds are particularly appealing, given their strong yields and lower duration risk. While the market anticipates no major rate changes in Q1, low consumer demand could force consumer lending rates lower having a positive impact on bond valuations. Investors should maintain a balanced fixed-income allocation and monitor market signals for opportunities to rebalance portfolios.
Bond values declined in the December due to rising market rates in spite of an additional drop in the Federal Funds lending rate. At some point, bank lending rates could drop leading to higher bond prices. The graph below illustrates the disconnect between the Federal Lending Rate and 30 Year Mortgage Rates.
US Stocks
U.S. equities enter 2025 with optimism, bolstered by resilient consumer spending and robust performance in the technology sector. Early-year volatility may emerge as markets digest ongoing debates about the economy’s trajectory, but historical data suggests January often brings strong performance due to the “January Effect.” We anticipate growth across sectors linked to innovation and government initiatives. While risks such as geopolitical tensions and inflationary pressures persist, careful sector selection and diversification will remain key to navigating the market.
International
International equities present a mixed outlook as emerging markets continue to struggle to keep pace with developed economies. Countries with strong domestic demand and fiscal stimulus are likely to attract investor interest. However, geopolitical uncertainties, including trade tensions and regional conflicts, may dampen returns in certain markets. While diversification into international stocks can offer growth potential, careful selection and risk management will be critical for optimizing performance in this space during the first quarter. Navigate Private Wealth will remain underweight international stocks.
Did You Know?
DeepSeek, a Chinese AI startup, has recently emerged as a significant competitor to OpenAI, particularly with its latest AI model, DeepSeek-R1.This had caused NVIDIA stock to trade down nearly 15% so far on January 27th. The following is a summary of a great post on X written by Morgan Brown about how DeepSeek is doing this. DeepSeek’s recent advancements showcase innovative strategies that are reshaping the AI development landscape. Traditional AI models often require substantial financial investments, sometimes exceeding $100 million, but DeepSeek has managed to develop a competitive model with a budget of approximately $5 million. By reducing computational precision from 32 decimal places to 8, they maintain sufficient accuracy while significantly cutting costs. Additionally, their ability to process entire phrases simultaneously doubles processing speed, achieving approximately 90% of the accuracy of traditional methods and enabling efficient handling of vast datasets. These innovations could challenge companies like NVIDIA, whose business models rely heavily on the sale of high-margin GPUs. If AI development becomes feasible with more affordable hardware, it has the potential to disrupt existing market dynamics and democratize AI development, making it more accessible and cost-effective.