Economic Forecasting Makes Astrology Look Respectable

I’m delighted to report another successful year in our shared pursuit of your most cherished financial goals. As always, our plan and portfolio remain anchored to these goals, not to market timing or predictions. This disciplined approach will guide us in the year ahead and beyond.

Market Reflections

The S&P 500 rose just over 23% in 2024, marking its second consecutive year of 20%+ returns. From the depths of the Great Financial Crisis in 2009 to the end of 2024, the S&P has delivered an impressive compounded annual return of just over 15%.

While these returns have greatly benefited my clients, it’s important to contextualize them. Over longer time frames—30, 50, or 100 years—the average annual return of the S&P 500 is closer to 10% (assuming dividends are reinvested). Additionally, the S&P 500 is currently about 50% more expensive than its long-term average, and valuations among the "Magnificent 7" (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta, and Tesla) are nearly double the norm.

This data is a reminder that markets are unpredictable, and while past performance has been extraordinary, future returns may revert to historical averages. As long-term investors, we must be prepared for both above-average and below-average years. To this end, we have been actively rebalancing portfolios as we transition from 2024 into 2025.

I hate forecasts - and so should you.

Economist John Kenneth Galbraith once quipped, “The only function of economic forecasting is to make astrology look respectable.” Wall Street’s forecasting record supports this sentiment. In 2023, New York Times columnist Jeff Sommer described forecasting accuracy as “horrendous.” Jason Zweig of the Wall Street Journal called annual forecasts the “ritual of wrong,” and Business Insider memorably called forecast accuracy “ugly” and labeled a chart supporting their argument “The Triumph of Hope Over Experience.” Market researcher Joachim Klement analyzed 20 years of forecasts and found that there was no correlation between forecasts and actual outcomes.

Yet, every year, forecasts persist. As we enter 2025, the average Wall Street projection anticipates a 7.4% market gain, with well-regarded Yardeni Research forecasting an 18% rise. Are these actionable insights? No. Do I put credence in these projections? No. My advice remains consistent: stick with your long-term strategy and plan.

Observations on DOGE

The Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy under the Trump administration, is tasked with reducing government spending. While I support fiscal discipline, I am tempering my expectations.

For context, the Federal budget is $6.75T (that is Trillion with a T). Musk said his goal was to cut $2T, or around 30% of the budget. A peek at where the money is spent reveals just how monumental the challenge is:

25%: Social Security
15%: Medicare
10%: Medicaid
10%: Unemployment insurance, food assistance, housing support, and pensions
15%: Defense
10%: Interest payments
15%: Everything else (e.g., NASA, departments of agriculture, education, FAA, etc.)

In December 2024 President Elect Trump indicated he would avoid cuts to Social Security, which one might assume extends to all entitlement programs. If you add up Social Security, Medicare, and other entitlement programs, they represent 60% of the budget. When you add 10% for interest payments, a full 70% of the Federal Budget is out of scope for DOGE. (While you could theoretically default on the debt, it’s my belief that this would be disastrous for the US economy, so I’m hoping that is off the table.)

That leaves only 30% of the budget left for DOGE to address. Even achieving a monumental 30% savings in this segment would yield a 9% (or $600B) reduction overall—far less than what’s needed to offset rising interest costs and entitlement spending (which are expected to double in the next 10 years).

Musk is a polarizing figure, but I’m rooting for his success. However, my read is that any serious discussion about reducing deficits must involve every dollar spent, which includes Social Security, Medicare, and other entitlement programs.

Odd Lots

A few noteworthy items:

Inverted Yield Curve, exit stage left. In Q4 2024 we officially exited the land of “inverted yield curve”. The inverted yield curve is a well known leading indicator of recessions (in this case, it didn’t come to be; at least not yet). It also creates a very strange investing environment where cash can pay more than longer term bond investments.
Does it feel like inflation is still here? Evidence continues to mount that inflation is “sticky” and not going anywhere any time soon. This leads to what I call the “Upside Down”. Not quite as catasclytic as the Upside Down in Stranger Things, but it does lead to good news being bad for the market. Unemployment down? More jobs added to the economy? GDP up? Those are usually good things, but in the Upside Down they are bad and the market can drop on the news.
Do you have a pension? You may be one of 2 million people impacted by something called WEP (Windfall Elimination Provision) or GPO (Government Pension Offset, which affects widows with pensions). At the tail end of 2024 Congress passed, and Biden signed the Social Security Fairness Act which eliminated WEP and GPO. If you’re impacted, you stand to get a lump sum since the bill was backdated to early 2024. Details to follow. (Side note: the CBO estimated this will cost about $20 Billion per year to fund this change).
Do you like coffee? I’m sorry, but that cup of coffee is likely to cost a lot more this year. Drought and adverse growing conditions in places like Brazil and Thailand mean that there isn’t enough supply to meet existing demand. On the flip side, demand is growing as tastes in places like China shift from tea to coffee. The laws of supply and demand tell us that lower supply and higher demand results in much higher prices – wholesale prices are up 30% in the last 3 months, are at 50 year highs, and might go higher.
Do you pay taxes? Most of us do, and the 2025 tax tables were adjusted for inflation. The big news in taxes is that as of December 31, 2025 the TCJA (Tax Cuts and Jobs Act) is set to expire. This would have a bigger impact on Californians than most states. Given this was passed during the first Trump administration, all bets are that this will be extended rather than expire.
Fires. If you’re like me, you’ve been both fascinated and appalled by the devastation caused by the fires in the Los Angeles area. However, perhaps unlike most people, my immediate thoughts go to home insurance coverage. Early indications suggest this may end up being one of the most expensive natural disasters in U.S. history from an insurance standpoint. (Side note: I’m so happy we reviewed client home coverage in late 2024!)

Wrap-Up

Uncertainty will always be a part of investing. While diversification cannot eliminate volatility, it remains one of the most effective strategies for achieving financial goals. Stocks may experience periods of subpar performance, but history rewards patient, disciplined investors.

Thank you for choosing us as your financial advisor. We are honored by your trust and are here to assist with any questions or concerns.

Warm regards,

Chris Duke

January 14, 2025

DISCLOSURES

This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. The views expressed are those of Chris Duke and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates

Investment advisory services are offered through Mutual Advisors, LLC, DBA Context Wealth, an SEC-registered investment adviser.