Chief Investment Officer, Wealth Manager & Principal
The Importance of Balance As We Welcome 2025
Welcome to 2025! As my wife often says, the days are long, but the years are short. There’s something beautiful about winter’s chill balancing with the warmth and sunshine of spring and summer. While I love summer, I’m a winter person. I’ve been skating as long as I can remember and have been on skis since I was three. Winter also means firing up my Ariens snow blower to tackle the snowbanks left by the plows at the end of the driveway.
The last few winters in the Northeast have been milder, and my Ariens has stayed quiet. Yet, even without snow, I know it’s winter—temperatures drop, and the winds chill to the bone. Snow will come again, and when it does, I’ll be prepared. I’m not getting rid of the shovels, ice scraper, or snow blowers. Yes, I have two snow blowers—don’t judge.
Winter is a balancing act and when we invest, we think about balance, too. A lot. Balancing portfolios means rebalancing for risk management, balancing allocations, balancing cash flows, or balancing gains against losses. It’s a constant effort of managing portfolios in all areas.
Lately, markets may seem unbalanced with large-cap and growth equities dominating, but this doesn’t mean other assets like bonds, international stocks, or small caps should be overlooked. Those who say, “this time it’s different” may be the same ones who say, “it’s probably only flurries.”
We need to balance portfolios because no asset class performs well every year. In the middle of a snowstorm, it may feel endless, but when it doesn’t snow, the shovels catch cobwebs. Investment management means being prepared for both stormy and calm times. Maintaining this balance over the long run—whether it’s cold or warm—better positions investors for financial success.
Enough of snow, let’s talk investing:
A stronger-than-expected economy has supported all asset classes.
Expensive stock market valuations underscore the need for portfolio management.
The Fed is expected to cut rates further.
Political focus has shifted from the election to policy.
Long-term thinking will be key to success in 2025 and beyond.
2024 was another strong year for equities, despite concerns about a “hard landing,” recession, market pullbacks, election turmoil, and more. Most of these fears did not materialize, as economic growth remained strong, employment held steady, and companies reported solid earnings. Innovation and a lower interest rate environment provided positive momentum. Large-cap stocks led the way, while small-cap and international equities performed well early in the year.
Mid-summer saw increased volatility as delayed interest rate cuts sparked uncertainty, but the Fed began easing rates in the fall, triggering broad rallies, particularly in small-cap stocks, bonds, international equities, and real estate.
In the fourth quarter, with the presidential election in focus, we continued emphasizing long-term goals. Instead of attempting to time the market, maintaining a well-balanced portfolio for all environments remains the better strategy.
Note in the table below that over the last 25 years, real estate (as represented by the S&P Developed REIT Index) was the best performing asset class, and the performance of small cap equities (Russell 2000 Index) was about equal to large caps. High yield corporate bonds performed better than the aggregate bond index. So much for one asset class being the answer.
Speaking of interest rates, something unexpected happened after the election. As short-term rates came down, longer-term rates increased. Concerns over fiscal spending, higher inflation and tax rates caused the yield curve to steepen. The bond market seemed to signal a pause in rate cuts. In December, the Fed confirmed that the pace and scale of rate cuts would slow. As a result, mortgage rates and intermediate-term treasuries are now higher than they were at this time last year.
History Applied To The Present.
2025 should remind us that markets can decline. While I am an optimist, I know good times do not last forever. In the last 25 years, 6 have been negative for the S&P500, including -18% in 2022, -4.4% in 2018, and the steep -37% of 2008. In the tech crash of the early 2000s the S&P was negative in 2000, 2001 and 2002.
The table below shows that for a full dozen years, from 2001 through 2012, inclusive, US large cap equities were barely positive, trailing international equities, real estate, small cap equities, even bonds, by a wide margin.
This table should be pinned to the refrigerator door of anyone who thinks that one asset class is enough.
2025 will present challenges including high stock market valuations, the timing of interest rate cuts, and ongoing geopolitical concerns. Consumer spending could slow as excess savings are spent, and debt levels remain high for both households and businesses. Assets that have risen sharply may also experience greater volatility.
Why do valuations matter? With US stock market indices at historically expensive levels, it’s crucial to ensure your portfolio includes more attractive areas of the market. This means balancing US equities with other asset classes such as bonds, real estate, and international investments.
Fortunately, the lessons of the past can help guide our financial decisions moving forward. Rebalancing and regaining balance are as much about managing investor emotions as they are about the economic data.
Predicting which sectors will outperform each year is challenging, so diversifying across the market helps stabilize portfolios. Focusing on fundamentals like quality, profitability, diversification, and valuations will be key.
How Are We Positioning Portfolios?
US Equities
Large cap outperformance vs. small caps is historically wide with US indexes becoming larger, more expensive, and more concentrated. As we rebalance portfolios in 2025, we will be focusing on improving profitability, quality, valuation, and size factors in portfolios.
International Equities
We continue to maintain an overweight to US equities, targeting a 68% US equity to 32% international equity allocation.
For context, the world market cap is now approximately 62% US equities to 38% international equities as compared to a near 50/50 in 2008. In the 1990s, international equities made up more than 60% of the global equity market cap.
International equities have underperformed for several reasons including slower economic growth, geopolitical issues, industry weightings, and company specific issues.
However, data show that international markets are less expensive (in terms of price-to-earnings and price-to-book) than the US markets. Including international equities in portfolios continues to offer benefits from reduced correlation and improved risk-adjusted returns.
Fixed Income
Key factors of our strategy include:
Wider diversification (global and asset class) relative to the US aggregate bond index.
Lower duration (duration is a measure of interest rate sensitivity) than the US aggregate bond index.
Investment grade credit quality, on a weighted average basis.
Higher income yield than the US aggregate bond index.
Reasoning
While short-term interest rates may decline, the interaction between rates, inflation and duration do not warrant us making a substantial shift to increase duration.
Increasing duration would require removing many corporate bonds and short-term bonds from the portfolio and replacing them with long-term treasuries. Coupons on many investment grade bonds are higher than treasury yields, so removing them from the portfolio reduces a key aspect of fixed income investments, which is to receive income.
The inverted yield curve currently means that extending duration would reduce the income yield on fixed income.
Maintaining balance across fixed income asset classes remains essential.
Positive Thoughts To Balance Us Out
The interest rate headwinds of 2022 are now turning into tailwinds. The Fed has cut rates by one full percentage point, with markets expecting one or two more cuts by the end of 2025.
This easing of monetary policy may be positive as inflation and economic growth potentially enter a more stable period. Lower rates can help stimulate the economy, potentially boosting both corporate earnings and stock market returns in the long run.
While fiscal policy concerns, like tariffs, trade, and taxes, may continue to worry investors, business cycles are driven by many factors beyond just politics. Markets can perform well despite investors’ worst fears and worst-case predictions often don’t fully materialize.
The bottom line? As we look ahead into 2025, investors should keep that balanced perspective. True growth is created over years and decades, not over months. This mindset helps manage unforeseen events, put short-term events in context, and allows for better, more productive decisions. Our role is to provide and maintain a disciplined, long-term approach ensuring you stay on track and better positioned to achieve financial success.
Thank you for reading, for your consideration, and for the trust, support, and confidence your place in us. Truly-thank you.
Our best wishes for a healthy, happy, and wonderful new year ahead.
George Padula, CFA, CFP®
Chief Investment Officer, Wealth Manager & Principal
This is a photo of my mom and me enjoying the snow in February 1969.
The returns shown in table 1 are annualized returns, except for periods less than one year, for selected asset classes as represented by benchmark indices. Investors cannot invest directly in an index. Unmanaged indices do not reflect management fees or transaction costs associated with some investments. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed herein will come to pass. This document contains forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. Readers are cautioned not to place undue reliance on forward looking statements, which speak only as of the date of this document.
Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
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Investment Commentary: Q4 2024
George Padula
Chief Investment Officer, Wealth Manager & Principal
The Importance of Balance As We Welcome 2025
Welcome to 2025! As my wife often says, the days are long, but the years are short. There’s something beautiful about winter’s chill balancing with the warmth and sunshine of spring and summer. While I love summer, I’m a winter person. I’ve been skating as long as I can remember and have been on skis since I was three. Winter also means firing up my Ariens snow blower to tackle the snowbanks left by the plows at the end of the driveway.
The last few winters in the Northeast have been milder, and my Ariens has stayed quiet. Yet, even without snow, I know it’s winter—temperatures drop, and the winds chill to the bone. Snow will come again, and when it does, I’ll be prepared. I’m not getting rid of the shovels, ice scraper, or snow blowers. Yes, I have two snow blowers—don’t judge.
Winter is a balancing act and when we invest, we think about balance, too. A lot. Balancing portfolios means rebalancing for risk management, balancing allocations, balancing cash flows, or balancing gains against losses. It’s a constant effort of managing portfolios in all areas.
Lately, markets may seem unbalanced with large-cap and growth equities dominating, but this doesn’t mean other assets like bonds, international stocks, or small caps should be overlooked. Those who say, “this time it’s different” may be the same ones who say, “it’s probably only flurries.”
We need to balance portfolios because no asset class performs well every year. In the middle of a snowstorm, it may feel endless, but when it doesn’t snow, the shovels catch cobwebs. Investment management means being prepared for both stormy and calm times. Maintaining this balance over the long run—whether it’s cold or warm—better positions investors for financial success.
Enough of snow, let’s talk investing:
2024 was another strong year for equities, despite concerns about a “hard landing,” recession, market pullbacks, election turmoil, and more. Most of these fears did not materialize, as economic growth remained strong, employment held steady, and companies reported solid earnings. Innovation and a lower interest rate environment provided positive momentum. Large-cap stocks led the way, while small-cap and international equities performed well early in the year.
Mid-summer saw increased volatility as delayed interest rate cuts sparked uncertainty, but the Fed began easing rates in the fall, triggering broad rallies, particularly in small-cap stocks, bonds, international equities, and real estate.
In the fourth quarter, with the presidential election in focus, we continued emphasizing long-term goals. Instead of attempting to time the market, maintaining a well-balanced portfolio for all environments remains the better strategy.
Note in the table below that over the last 25 years, real estate (as represented by the S&P Developed REIT Index) was the best performing asset class, and the performance of small cap equities (Russell 2000 Index) was about equal to large caps. High yield corporate bonds performed better than the aggregate bond index. So much for one asset class being the answer.
Speaking of interest rates, something unexpected happened after the election. As short-term rates came down, longer-term rates increased. Concerns over fiscal spending, higher inflation and tax rates caused the yield curve to steepen. The bond market seemed to signal a pause in rate cuts. In December, the Fed confirmed that the pace and scale of rate cuts would slow. As a result, mortgage rates and intermediate-term treasuries are now higher than they were at this time last year.
History Applied To The Present.
2025 should remind us that markets can decline. While I am an optimist, I know good times do not last forever. In the last 25 years, 6 have been negative for the S&P500, including -18% in 2022, -4.4% in 2018, and the steep -37% of 2008. In the tech crash of the early 2000s the S&P was negative in 2000, 2001 and 2002.
The table below shows that for a full dozen years, from 2001 through 2012, inclusive, US large cap equities were barely positive, trailing international equities, real estate, small cap equities, even bonds, by a wide margin.
This table should be pinned to the refrigerator door of anyone who thinks that one asset class is enough.
2025 will present challenges including high stock market valuations, the timing of interest rate cuts, and ongoing geopolitical concerns. Consumer spending could slow as excess savings are spent, and debt levels remain high for both households and businesses. Assets that have risen sharply may also experience greater volatility.
Why do valuations matter? With US stock market indices at historically expensive levels, it’s crucial to ensure your portfolio includes more attractive areas of the market. This means balancing US equities with other asset classes such as bonds, real estate, and international investments.
Fortunately, the lessons of the past can help guide our financial decisions moving forward. Rebalancing and regaining balance are as much about managing investor emotions as they are about the economic data.
Predicting which sectors will outperform each year is challenging, so diversifying across the market helps stabilize portfolios. Focusing on fundamentals like quality, profitability, diversification, and valuations will be key.
How Are We Positioning Portfolios?
US Equities
Large cap outperformance vs. small caps is historically wide with US indexes becoming larger, more expensive, and more concentrated. As we rebalance portfolios in 2025, we will be focusing on improving profitability, quality, valuation, and size factors in portfolios.
International Equities
We continue to maintain an overweight to US equities, targeting a 68% US equity to 32% international equity allocation.
For context, the world market cap is now approximately 62% US equities to 38% international equities as compared to a near 50/50 in 2008. In the 1990s, international equities made up more than 60% of the global equity market cap.
International equities have underperformed for several reasons including slower economic growth, geopolitical issues, industry weightings, and company specific issues.
However, data show that international markets are less expensive (in terms of price-to-earnings and price-to-book) than the US markets. Including international equities in portfolios continues to offer benefits from reduced correlation and improved risk-adjusted returns.
Fixed Income
Key factors of our strategy include:
Reasoning
Maintaining balance across fixed income asset classes remains essential.
Positive Thoughts To Balance Us Out
The interest rate headwinds of 2022 are now turning into tailwinds. The Fed has cut rates by one full percentage point, with markets expecting one or two more cuts by the end of 2025.
This easing of monetary policy may be positive as inflation and economic growth potentially enter a more stable period. Lower rates can help stimulate the economy, potentially boosting both corporate earnings and stock market returns in the long run.
While fiscal policy concerns, like tariffs, trade, and taxes, may continue to worry investors, business cycles are driven by many factors beyond just politics. Markets can perform well despite investors’ worst fears and worst-case predictions often don’t fully materialize.
The bottom line? As we look ahead into 2025, investors should keep that balanced perspective. True growth is created over years and decades, not over months. This mindset helps manage unforeseen events, put short-term events in context, and allows for better, more productive decisions. Our role is to provide and maintain a disciplined, long-term approach ensuring you stay on track and better positioned to achieve financial success.
Thank you for reading, for your consideration, and for the trust, support, and confidence your place in us. Truly-thank you.
Our best wishes for a healthy, happy, and wonderful new year ahead.
George Padula, CFA, CFP®
Chief Investment Officer, Wealth Manager & Principal
This is a photo of my mom and me enjoying the snow in February 1969.
The returns shown in table 1 are annualized returns, except for periods less than one year, for selected asset classes as represented by benchmark indices. Investors cannot invest directly in an index. Unmanaged indices do not reflect management fees or transaction costs associated with some investments. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed herein will come to pass. This document contains forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. Readers are cautioned not to place undue reliance on forward looking statements, which speak only as of the date of this document.
Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
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