The U.S. jobs market ended 2024 with a bang, as last Friday’s jobs report showed 256,000 jobs were added in the month of December, easily surpassing the 155,000 economists were expecting. The unemployment rate ticked down 0.1% to 4.1%, and average hourly earnings (a measure of wage inflation) came in slightly below expectations. So why did the market (referring to the S&P 500) sell off on this robust report? It’s a good time to remind readers that the economy and the market are not the same. While one does influence the other, they don’t move in lockstep. Occasionally, there are periods of time where good news for the economy (the December jobs report), is bad news for the market. We are in one of those periods. Why is that? While there are numerous factors at play, two central reasons are:
- December’s jobs report is another economic data piece that has come in stronger than forecast, causing market participants to recalibrate expectations for Fed rate cuts in 2025. Many now see the Fed cutting rates only once this year, well below the predictions of three to four 25 basis point cuts predicted just a couple of months ago. While the inflation data released Wednesday eased, at least momentarily, concerns of minimal or no rate cuts for 2025, “higher for longer” is the phrase being thrown around, and to argue against that would not be wise at this point. Yields on intermediate and longer-dated Treasuries continue to be attractive as the 10, 20 and 30-year are yielding anywhere from 4.65%-5%+.
- The S&P 500 is one component of the Conference Board’s Leading Economic Index (LEI), an index made up of 10 economic indicators used to gauge where the economy might be headed. While the flaws of the Conference Board’s LEI have been garnering more attention over the last couple of years, the reason I mention the LEI is the fact that the S&P 500 is a component of the index. As a leading economic indicator, the S&P 500 is forward-looking. Price movement is based on expectations of companies’ future earnings, not just present earnings. The market may be soaring, or tanking, with Gross Domestic Product (GDP) – the most referenced measure of economic health - doing the opposite (GDP is a lagging indicator). Additionally, with the concentration of the S&P 500, with 7 mega-cap tech stocks making up about 1/3 of the index - does not accurately reflect the broader health of the US economy. Let’s look at an example – and while extreme – makes the point:
In the second quarter of 2020, as COVID-19 became more widespread (with the severity of the pandemic still unknown), GDP plummeted 31.4% after the first quarter’s 5% decrease. In April 2020, the unemployment rate hit 14.7% as businesses across the country closed their doors. What did the market do during the second quarter of 2020? The S&P 500 posted a total return north of 20%. By June of 2020, the S&P 500 had risen 36% from its lows on March 23rd. GDP did not turn positive until 2021. The economy and “the market” are not one in the same.
Financial Planning/Investment Management Corner
Does Your Employer-Sponsored Retirement Plan Have a True-Up Provision? As we start a new year, your benefit elections (deferral %s into your retirement plan, insurance coverage elections, etc.) have been sent to your HR department. There is a nuance that could result in retirement plan participants missing out on part of their employer match depending on how the employer makes matching contributions. If you are a high-earner and plan on maxing out your retirement plan ($23,500 for those under the age of 50, $31,000 for those 50 and older) during say the first 9 months of the year, and your employer makes matching contributions on a pay period-by-pay period basis vs. annual salary, what happens to the employer match the last 3 months of the year (after you have reached the IRS maximum)? This is where a true-up provision comes into play. A true-up provision allows plan sponsors who match employer deferrals on a pay period-by-pay period basis to “true-up” contributions at the end of the plan year to make sure participants receive the full match they are entitled to. However, not all plans have a true-up provision. One solution from the participants’ perspective is to spread out contributions evenly throughout the year, rather than front-loading or making irregular contributions. Reach out to your HR department to confirm how your plan operates, or have your Financial Advisor review your plan details. Is Your Plan in Need of a True-Up? - Fiducient; Big savers could miss part of their 401(k) match without this plan feature
Bitcoin as Part of your Strategic Asset Allocation? The frequent discussions about Bitcoin in financial media and inquiries from clients raise an important question: “Should Bitcoin be part of my portfolio?” From a professional money management perspective, caution is warranted.
Bitcoin is a speculative asset characterized by extreme price volatility and significant uncertainty about its long-term role in the financial markets. While it has gained increased attention and accessibility through vehicles like BlackRock’s Bitcoin ETF (IBIT), with its low expense ratio of 0.12%, this does not necessarily translate to suitability for most investors.
As fiduciaries, our priority is to manage risk and help clients achieve their long-term objectives. Given Bitcoin's speculative nature and unpredictable behavior, we do not recommend including it as a core part of a portfolio. For those still interested, any allocation should be minimal and carefully considered—1%-2% of the portfolio at most, and only for those with a high tolerance for risk and a strong understanding of the potential downsides (over the last decade, Bitcoin has had multiple corrections of over 50% with some corrections over 80%). Even at these levels, such exposure should be approached with the recognition that Bitcoin’s value can fluctuate dramatically, and there are no guarantees of its future performance.
One last thought, from an investment nerd perspective, Bitcoin is intriguing. There is much still left to figure out about its ultimate use in our world, and time will tell. However, people (whether called investors or traders) have enjoyed large returns if they were lucky enough to pick the right timeframe (or had the stomach to stay invested through the crazy ride it's been on over the last decade. Kudos to you!)
Quick Hits:
- California fires – The devastation the fires have caused around the Los Angeles area over the last week and a half is heartbreaking. The number of homes destroyed, people lost and lives forever changed is almost unimaginable. A few ways to help: Home : Los Angeles Fire Department Foundation; World Central Kitchen; Wildfire Relief Information | American Red Cross
- Martin Luther King Jr. Day– Monday, January 20th is Martin Luther King Jr. Day. With many offices closed, it is a great time to reflect on the impact Dr. King had on our country. Martin Luther King Jr. Biography, Quotes & Legacy | HISTORY
- Whether you enjoy the snow and everything winter offers, or want to escape to warmer weather, here is a list for all: 23 Best Winter Vacations | U.S. News Travel
- RSWA webinar series, “Economic & Financial Outlook 2025" with Fritz Meyer - If you could not attend and are still interested, you can access the replay on our website with the following link and password below; RSWA Webinar Replay
- Password: RobinsonSmithWealth (password is case sensitive!)
Quote
“Our prime purpose in this life is to help others. And if you can’t help them, at least don’t hurt them.” – Dalai Lama
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