Reflecting on 2024
As 2024 ends, the S&P 500 wraps up another stellar year
with a bumper yield of 25%. Markets have demonstrated remarkable resilience,
thriving amid global upheaval and chaos. While Big Tech dominated business
headlines throughout the year, opportunities extended far beyond the tech
giants. The best-performing stock of 2024? Surprisingly, it’s not
Nvidia—despite its prominence, it ranks only 23rd on the list.
Table 1: Tickers with appreciation % in 2024
From a historical perspective, the market has delivered
positive returns in 8 of the past 10 years, with only two instances of negative
performance. This underscores the importance of adopting a strategic,
long-term approach to investing, rather than a tactical, short-term
mindset.
Table 2: S& P 500 % returns by year
Looking forward to 2025
FED interest rates
The monetary easing cycle is expected to extend into 2025, with the Federal Reserve and many other central banks globally continuing to cut interest rates. In 2024, the Fed has already implemented three rate cuts, and it is anticipated to reduce rates by an additional 50 to 75 basis points in 2025, given that the Consumer Price Index (CPI) has now dropped to 2.6%. With US GDP growth remaining robust at around 3% and unemployment at historically low levels, lower interest rates could serve as a buffer against potential economic shocks stemming from fiscal policy changes. However, it's important to note that there is no direct correlation between lower interest rates and rising stock markets, as various other factors—such as geopolitical events, corporate earnings, and investor sentiment—ultimately drive market outcomes.
Table 3: FED Fund Rate decisions by date
Graph 1 - Source: US BLS. Shaded areas represent official recessions.
Graph 2 – GDP of US. Source: US Bureau of Economic Analysis
Impact of fiscal and trade policies
The rhetoric surrounding economic nationalism and tariffs on
foreign goods has intensified. During Trump’s first administration, tariffs
ranging from 10% to 25% were imposed on a wide array of merchandise from China
and Europe. Additionally, NAFTA was replaced by the USMCA. Many of these
policies remained in place during the subsequent Biden administration.
Contrary to dystopian fears, these measures did not lead to
significant inflation, adversely impact GDP growth, or cause a spike in
unemployment. The incoming administration is expected to begin negotiations
with calls for even higher tariffs. However, these effects may be mitigated by
the implementation of tax cuts and deregulations designed to balance the
economic impact.
Large cap companies have a lot of exposure to international
markets while small cap space is immune
to trade policies in general
Recession fears
History shows that a recession often follows when the yield
curve shifts back to positive territory after an extended period of inversion.
Currently, we are witnessing the yield curve turning positive, which heightens
concerns about a potential recession. It is crucial to remain vigilant about
this possibility, particularly as it may materialize in late 2025.
Graph 3 – Yield curve of 10 year treasuries vs 2 year
treasuries
We should aim to maintain six months worth of expenses in liquid
instruments for financial security. Beyond that, I believe all remaining funds
should be actively invested in various assets. I strongly advocate for
recurring investments, as they effectively leverage the power of dollar-cost
averaging to mitigate market volatility and build wealth consistently over time.
Stay committed to long-term growth by avoiding distractions from short-term
developments and global events.
“AI" is the buzzword in recent years.
Early AI models engaging neural networks deployed thousand or
a million parameters but in large language models (LLMs) or vision models - parameters
are now in billions or trillions.
Graph 4 – Number of Parameters vs. Year. Source: Epoch (2024)
The increasing computational
costs to process vast amounts of data are driving greater demand for advanced
hardware solutions to support AI-driven technologies. However, the broader
question remains: Are the developments in Artificial Intelligence leading to
increased profits for the corporate world? The answer is mixed. While AI has
certainly delivered direct and indirect efficiencies and gains in some areas,
the return on investment (ROI) has not yet been fully justified across all
applications. It appears we are still in the "Build" stage of AI,
with many organizations focused on developing foundational systems. The latter
stages of “Adopt” and “Transform” will likely define how AI truly impacts
long-term profitability.
According to McKinsey's "Artificial
Intelligence: The Next Digital Frontier?" report, AI could contribute up
to $13 trillion to global economic output by 2030, indicating significant
potential for growth as technology matures and its applications become more
widespread.
Apart from NVDA, AVGO or PLTR - I
believe private market compared to public markets have huge potential in capturing
future AI winners. Explore access to pre-IPO stakes from Equity Zen , Equity
Bee or Nasdaq private market.
Cryptocurrencies
In the year 2025 – I recommend
exposure to cryptocurrencies. Given that new US administration is friendly to digital
currencies there is a great potential of appreciation in this space. Currently
IBIT is biggest Bitcoin related ETF with assets close to $50 Billion. Many
other cryptocurrencies other than Bitcoin and Ethereum will enter the public
markets. The next generation of millionaires and billionaires will be due to cryptocurrencies.
Coinbase.com has many established currencies. I recommend recurring investments
either daily, weekly or monthly. There are many other upcoming currencies which
are still in nascent stage and not available on coinbase.com. Explore setting
up recurring investments in uphold.com. If we were to start amassing large
portfolios then we will need secure wallets to hold these digital coins.
Art
Investing in art offers an excellent opportunity to
diversify a portfolio and mitigate market volatility, as the value of art does
not typically correlate with traditional financial markets. One of the best
ways to gain exposure to art investment is through platforms like
Masterworks.com, which allows investors to buy shares in high-value artwork.
The graph below illustrates how contemporary art has outpaced stock market
gains, highlighting art's potential as a strong investment asset. When it comes
to art, works by established artists are generally considered a safer bet,
though their rate of appreciation tends to be slower compared to emerging
artists. Emerging artists, though riskier, offer the potential for higher
returns as they gain recognition and fame. Masterworks.com curates a strong
collection of art and provides a solid investment thesis for each painting they
acquire, making it easier for investors to confidently enter the art market.
Graph 5: Source: Artelier
International markets, particularly in Europe and Latin
America, currently appear less appealing for investment. However, India
presents significant opportunities due to its ongoing and large-scale
infrastructure development. In contrast, China’s investment outlook is clouded
by an array of challenges, including an ongoing real estate crisis, high
unemployment rates, rising local debt, an aging population, and upcoming trade
conflicts. While the Chinese government may introduce fiscal stimulus to
reignite economic activity, these concerns persist. Moreover, China's exports
to the US have notably declined from 20% in 2017 to 13% in 2024, reflecting
shifting global trade dynamics.
Across the global landscape, data centers are experiencing
robust growth, not only in the US but worldwide, driven by the increasing
demand for digital infrastructure. Despite the potential in certain sectors, I
prefer to avoid sector-specific investments. When it comes to US markets,
valuations are currently elevated, and I favor the valuation model used by the
Leuthold Group, which considers 4.5 years of past earnings alongside 0.5 years
of estimated earnings. The market is presently overpriced, a situation
reminiscent of only two other instances: 2000 and 2021. With the S&P 500
nearing 6000, a 10% correction would place it at 5400, creating an attractive
buying opportunity. Considering this, I recommend allocating 10% of the
portfolio to cash equivalents, allowing flexibility to capitalize on any market
pullbacks.
Graph 6: Norm P/E vs.
Year. Source: Leuthold Group
Physical gold has surged by 33% in 2024, underscoring its
role as a hedge against inflation and a haven during periods of economic
uncertainty. Precious metals, including gold, have historically provided
stability in turbulent times, offering protection when other assets may be
under pressure. Given these qualities, incorporating precious metals into a long-term
investment strategy can help diversify the portfolio and mitigate risks
associated with market volatility and inflationary pressures.
Engage recurring investments to balance risks. Ideal
portfolio for FY2025:
US Large cap: 25 % (MGK, SPY)
US Dividend: 10 % (SCHD, VIG)
US Mid Cap: 15 % (IJH, VO)
US Small Cap: 10 % (IWM, IJR)
Private Equity: 10 % (Equity Zen, Equity Bee, Nasdaq Private
Markets, etc.)
US/International/Corporate Bonds: 5 % (BIL, IEF, GOVT, JNK,
HYG or direct corporate bonds)
Crypto: 5 %
Art: 5 % (Masterworks.com)
Commodities: 5 % (Gold, Silver, Platinum on Apmex.com or any retail store)
Cash or Cash equivalents: 10 % (MINT, SGOV, PULS, FLOT)
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