2024 was a banner year for stocks, with the S&P 500 total return surging 25%, marking its second consecutive year of 20%+ gains. The rally was fueled by artificial intelligence growth, crypto enthusiasm, and optimism that declining inflation would lead to less-restrictive monetary policy. The election of Donald Trump and the expectation of lower taxes and less regulation also helped unleash the animal spirits.
Artificial Intelligence continued its ascent with promises to change the world: Nvidia advanced 171%
Cryptocurrencies continued their spectacular run fueled by the Crypto Bros and YOLO fever: Bitcoin advanced 121% and MicroStrategy, a leveraged Bitcoin proxy advanced 405%.
What are the chances of a Three-Peat after two 20%+ year gains? It happened in the 1990s “dot com” era and also the “Roaring 20s”. In fact, according to JP Morgan, two consecutive years of 20%+ performance gains have been followed by a third positive year in 7 instances out of 10 occurrences going back to 1871.
Broad gains in U.S. equities were supported by the economy’s resilience, characterized by strong employment, steady consumer spending, and declining inflation. The Atlanta Fed’s GDPNow model is estimating 4th quarter growth at 3.2%, putting the U.S. economy on track for a solid 2.6% annual GDP gain. The Federal Reserve supported this momentum, starting in September, by cutting its short-term Fed Funds benchmark rate three times for a total 1.0% reduction. These rate cuts encouraged risk-taking and bolstered equity markets.
Bonds posted mixed results. High-yield bonds generated strong performance as the economy remained strong and recession fears faded. Meanwhile, longer-term bonds were hurt by rising interest rates. International developed and emerging markets underperformed relative to the U.S.
Looking ahead to 2025, markets have been buoyed by key policy drivers under Trump’s second term, including reduced taxes, deregulation, and crypto-friendly initiatives. However, uncertainties persist, particularly surrounding proposed changes to tariffs and trade. Economists caution that broad-based tariffs could increase prices for American consumers and raise costs for businesses reliant on imports. Additionally, anticipated deportation measures are expected to constrain the labor supply and drive inflation higher. Investment returns will also be impacted by prospects for AI and Crypto.
ARTIFICIAL INTELLIGENCE-AI:
ChatGPT has been a huge catalyst as Artificial Intelligence remained a dominant theme in 2024, with growth vastly exceeding expectations. AI first captured investor imagination with ChatGPT, unveiled in November 2022, by Microsoft-backed OpenAI. Generative AI quickly showcased its transformative potential, demonstrating the ability to understand and generate human-like language, as well as create images, text, audio, video, and code. This technology is poised to disrupt industries, reducing labor requirements and revolutionizing creative processes across all industries and sectors. Although ChatGPT was first to market, key competitors include Google’s Gemini, Anthropic’s Claude, Meta’s Llama, Microsoft’s Copilot, Perplexity, and Grok from xAI.
Semiconductors and Nvidia: While ChatGPT captured the public’s attention, Nvidia’s semiconductors captured investor interest, solidifying AI’s impact on technology and business. Although Nvidia had the greatest investor mindshare, the whole AI semiconductor chip market has upside. The AI chip market is set to grow 74% in 2025, while the semiconductor market overall is projected to grow just 12% next year, according to consulting firm International Business Strategies. IBS data shows the AI chip market outpacing the sector at large through 2030. Beyond the leader Nvidia, other major semiconductor companies include AMD, Broadcom and TSMC, a contract manufacturing and design company.
Nvidia was up 171% in 2024, and it is up by an annualized rate of 59.4% over the last five years.
Other AI Markets:
The AI landscape encompasses several other major categories with strong growth and investment potential:
HyperScalers and cloud providers offer the massive computing resources needed for AI. The “big dogs” in the field are Amazon Web Services (AWS), Microsoft Azure, Google Cloud Platform (GCP), Meta, IBM cloud, and Oracle.
AI software platforms and tools, including OpenAI, Palantir-PLTR (up 341% in 2024), and C3.ai-AI, enable the development of frameworks, libraries, and applications for AI innovation. Big data tools are critical for storing, processing, and analyzing the vast datasets required for AI applications.
Consumer Technology integrates AI into products such as search engines, virtual assistants, and smart devices, with key players including Apple, Google (Alphabet), Amazon, and Microsoft.
Autonomous Systems and Robots drive automation in vehicles, drones, and robotics, with leaders like Tesla and Waymo (Alphabet). Industry-specific applications deliver tailored AI solutions for sectors like healthcare, finance, and manufacturing and encompass edge devices such as smartphones, Internet of Things (IoT) devices, and embedded systems.
AI research labs like DeepMind (Alphabet) and OpenAI focus on advancing AI research and development.
Power suppliers include nuclear generation from old-school power companies such as Constellation Energy and Vistra-VST. Google, Amazon, Microsoft and Meta are well-known companies exploring or investing in nuclear power projects. The phenomenon has made power generators some of the best-performing stocks in the S&P 500 this year, as Vistra-VST quadrupled in price.
AI Potential-The Upside:
The AI boom is often compared to transformative moments like the railroad development or the 1994 release of the Netscape browser, with many suggesting it is still early in the adoption cycle and has years of growth ahead. While some see AI as a driver of economic growth, medical breakthroughs, and everyday simplifications, others raise concerns about job displacement, fake media proliferation, and societal challenges.
Economic forecasts and outlooks highlight AI’s transformative possibilities:
Goldman Sachs: AI could boost global GDP by 7% (~$7 trillion) and productivity growth by 1.5% over a decade.
PwC: AI might increase global GDP by up to 14% (~$15.7 trillion) by 2030.
McKinsey: Combining generative AI with other technologies could add 0.5 to 3.4 percentage points annually to productivity growth.
OECD: Projects a more modest annual boost of 0.4 to 0.9 percentage points to labor productivity.
Third Way: Optimistic estimates suggest AI could enhance U.S. GDP growth by 0.5 to 1.5 percentage points annually.
These projections range all over the board, and AI’s long-term impact remains uncertain, but its potential to reshape economies and industries looks undeniable. It is often said that we tend to overestimate the effect of technology in the short run and underestimate it in the long run.
AI Investment Risks:
Nvidia Competitors: Nvidia has been the dominant chip supplier, generating outsize investment gains, but there are competitors on the horizon. The move by tech giants to make their own server chips is meant to cut costs and scale back their reliance on Nvidia’s GPUs-graphics processing units. If another chipmaker achieves breakthroughs in GPU technology, it could erode Nvidia’s competitive advantage and negatively impact its stock.
Amazon Web Services (AWS) is advancing its commitment to in-house AI silicon, including its Trainium chips, which are designed as an alternative to Nvidia’s GPUs. In December, AWS announced plans for an Ultracluster AI supercomputer powered by hundreds of thousands of Trainium chips.
Broadcom is reportedly collaborating with Apple to develop an AI server chip. Additionally, OpenAI is said to be working with Broadcom on a similar project. Interestingly, Broadcom joined the $1 trillion market capitalization club in 2024.
Dell Technologies recently supplied thousands of GPUs to xAI, Elon Musk’s generative AI startup.
Other AI Risks:
Valuation Risk: Nvidia and other chip companies are trading at high forward valuation multiples that depend on continued high growth rates. For example, Nvidia is currently trading at 34X their forward 12-month Price/Earnings ratio.
Capital Expenditure Risk: The rapid capital allocation toward AI infrastructure—driven by the success of applications like ChatGPT—may taper off as companies shift focus from building infrastructure to monetizing existing investments. Current trends show prioritization of on-premise and cloud infrastructure, while direct AI technology investments may decline.
Peak Scaling Risk: AI model growth may face diminishing returns as increasing size (more data, parameters, and compute power) stops delivering meaningful performance improvements. Issues such as biased or nonsensical outputs and a shortage of fresh, high-quality data for large language models (LLMs) could hinder progress.
AI poses social challenges like:
-Disinformation: Fake news and political misinformation.
-Harmful Content: Generation of inappropriate, pornographic or other explicit material.
-Job Displacement: Transformational losses in various industries as automation accelerates.
Investment Opportunities:
The AI growth story has helped propel the stock market to record high levels for the S&P 500 index and the Nasdaq Composite, and investors with broad, diversified portfolios already own leading AI companies. For example, five companies in the S&P 500 (Apple, Microsoft, Nvidia, Amazon and Alphabet) with significant AI exposure currently comprise 28% of the index. Moreover, many other S&P 500 companies also have meaningful AI exposure. In a way, you could say that a rising (AI) tide lifts all boats.
For investors seeking a more concentrated, thematic play, there are several AI ETFs available:
BlackRock’s iShares Future AI & Tech ETF-ARTY is one of the older funds, going back to June 2018.
Global X Robotics & Artificial Intelligence ETF-BOTZ is another ETF that goes back to 2017.
Wisdom Tree Artificial Intelligence and Innovation Fund–WTAI.
These funds are too new to have a longer-term track record, and AI has only been a mainstream investment sector for a few years. Nevertheless, they do offer more concentrated AI exposure than funds with broader investment objectives.
Potential AI Stocks: For investors seeking the most concentrated, targeted exposure, individual stocks can be an option. However, buying a single stock is inherently risky due to company-specific risks. It requires a high level of research and expertise. To mitigate risk, it is advisable to invest in a basket of at least five stocks to complement an existing diversified portfolio.
To identify potential AI stocks, the Morningstar Global Next Generation Artificial Intelligence Index could be considered. As of November 2024, the following stocks are among the index’s top constituents. Each has a Morningstar Rating of 4 or 5 stars, indicating they are undervalued. While these companies are not pure AI plays, a significant percentage of their operations are AI-focused:
Microsoft-MSFT, Alphabet-GOOG, Taiwan Semiconductor Manufacturing-TSM, Adobe-ADBE, Snowflake-SNOW, Cognizant Technology Solutions-CTSH, Baidu-BIDU, Dassault Systèmes-DASTY, Okta-OKTA, and UiPath-PATH.
To summarize: The AI theme looks like a long-term play with substantial growth and productivity potential. There are numerous ways to invest in this growth, and there are likely to be a few big winners and many losers along the way.
CRYPTOCURRENCY:
The utility of artificial intelligence is widely recognized, but opinions on the value of cryptocurrencies remain highly divided.
Bitcoin, launched in 2009, is often considered the poster child of the crypto world. It was the first decentralized blockchain network and has become the most recognized cryptocurrency among investors. Bitcoin gained prominence based on extraordinary performance combined with incredible volatility. The data shows that Bitcoin’s long-term returns have greatly outpaced the S&P 500 but with significantly higher risk, as measured by standard deviation.
For example, a single dollar invested in Bitcoin ten years ago would have grown to $291 today. In comparison, the S&P 500, despite its robust performance, would have grown to $3.43. However, Bitcoin’s extreme volatility is evident—a trader in 2021 could have seen one dollar shrink to just $0.30 following the FTX bankruptcy. It is helpful to put Bitcoin’s early growth in perspective, by comparing it to Microsoft. An investor who purchased Microsoft at its 1986 IPO, according to Kiplinger, would have seen each dollar grow to $3,274. Granted, Microsoft has had more years of compounding, but few companies achieve this long-term record of growth. It appears unlikely that Bitcoin, or almost any other early-stage companies, can sustain long-term rapid growth. It should be remembered that there were over a thousand tech/internet IPOs in the late 1990s, but most either failed or were acquired for a pittance. Notable survivors include Amazon, Ebay, BlackRock,Akamai and Agilent Technologies. Attempting to find a “moonshot” is almost always a doomed investment strategy.
Bitcoin and other cryptocurrencies gradually gained acceptance over the past decade due to their strong but volatile performance. A significant recent catalyst has been the “Trump bump” and the prospect of regulatory change and broader acceptance. Few investments captured the post-election market frenzy as effectively as Bitcoin and ETFs tracking its price. From the 2024 election through year-end, Bitcoin surged 61%.
While Bitcoin’s performance has been impressive, it is crucial to understand the overall cryptocurrency ecosystem that spans various sectors and categories, each contributing uniquely to this rapidly evolving space.
Regulatory Realignment: The regulatory factor is a key element supporting cryptocurrency prospects. In the past, President-Elect Trump was critical of cryptocurrencies, once stating their value was “based on thin air.” His stance, influenced by substantial campaign contributions, has shifted, however, and he now supports crypto. Trump is offering leadership roles in key agencies like the Department of Commerce and the Treasury to individuals who are highly supportive of the cryptocurrency industry. Plans are also underway to establish advisory councils specializing in digital assets and appoint a “crypto czar” to oversee and regulate the industry. Former PayPal CEO David Sacks has been named for this role in the White House, signaling a serious commitment to shaping crypto policy. Trump has also called for the creation of a national Bitcoin reserve, further highlighting his support for the sector.
Crypto regulation under the Biden Administration took a more cautious approach that focused more heavily on consumer protection and fraud. Gary Gensler, Biden’s SEC Chair who is stepping down, had declined to create customized rules for the crypto market, arguing that many digital assets are securities and should comply with existing investor-protection regulations. This stance subjected crypto to stricter securities oversight compared to other assets, such as commodities, which generally have fewer consumer protections.
Crypto supporters, however, contend that traditional investment regulations designed for Wall Street are ill-suited for digital tokens that operate on decentralized, peer-to-peer networks. These advocates argue that most cryptocurrencies are more akin to commodities or collectibles, like baseball cards or even Beanie Babies, and should be regulated by the Commodities Futures Trading Commission (CFTC) instead of the SEC. In line with this perspective, Trump has nominated Paul Atkins—a long-time cryptocurrency bull—to replace Gensler as SEC Chair.
CRYPTO REASONS TO OWN-the Pros:
Decentralized Finance/Medium of Exchange: Bitcoin was created by its pseudonymous founder, Satoshi Nakamoto, as a decentralized financial system operating on a blockchain platform as an alternative to traditional financial systems reliant on intermediaries like banks, brokerages, or exchanges. Bitcoin’s blockchain technology enabled peer-to-peer transactions without oversight or control from financial institutions, governments, or sovereign authorities. This alternative payment infrastructure aimed to provide greater financial autonomy, free from government surveillance and intervention.
Bitcoin as a Store of Value: While Bitcoin was originally envisioned as a decentralized payment system, it is now rarely used for day-to-day transactions. Instead, proponents increasingly regard Bitcoin as “digital gold”—a store of monetary value and a hedge against inflation.
The rationale is based on concerns over the U.S. Federal debt, which has reached $36 trillion and continues to escalate at an unsustainable pace. Coupled with monetary and fiscal policy uncertainty and potential long-term inflationary pressures, Bitcoin’s appeal as a store of value becomes more evident. Bitcoin’s store-of-value thesis hinges on its limited and finite supply. Through the work of Bitcoin miners, there are currently 19.8 million bitcoins outstanding. The total supply is capped at 21 million, a figure that will be reached by approximately 2040. Unlike fiat currencies like the U.S. dollar, which governments can print indefinitely, Bitcoin offers scarcity—a key attribute that supports its potential as a hedge against inflation, excessive government spending, and ballooning national debt.
As government debt continues to rise, concerns about the sustainability of financing this debt are expected to intensify. In such a scenario, U.S. Treasury interest rates could spike, leading to sharply falling bond prices. Under these conditions, Bitcoin’s perceived value as a hedge against economic instability could drive significant increases in its price. By offering a decentralized, finite, and inflation-resistant alternative, Bitcoin and other cryptocurrencies may continue to attract attention as potential safeguards against economic uncertainty.
As a point of reference, the total current value of Bitcoin is approximately $1.9 trillion, and the total crypto universe is currently valued at around $3.3 trillion. Meanwhile, the total global supply of gold is approximately $18 trillion. It is certainly conceivable for bitcoin to play a much larger role in the demand for safe-haven store of value assets.
Greater Adoption and Accessibility: A significant milestone for cryptocurrency adoption came in January 11 2024 when the SEC approved “spot” Bitcoin ETFs offered by major brokerage firms like BlackRock and Fidelity. Spot Bitcoin ETFs allow investors to hold cryptocurrency in traditional brokerage accounts, just like stocks, eliminating the need for a digital wallet. By utilizing spot ETFs, investors effectively entrust Wall Street to hold the underlying Bitcoin on their behalf, enjoying the convenience of managing their crypto investments alongside their stock and bond portfolios—a model that many Bitcoin proponents find appealing.
Prior to January 2024, Bitcoin investors were largely limited to “futures-based” products, trust structures, or direct ownership through crypto exchanges and digital wallets. The introduction of spot ETFs has significantly simplified access, furthering the integration of cryptocurrency into mainstream investment platforms.
Bitcoin as a Financial Asset Class: Over the past few years, Bitcoin has increasingly been recognized as a full-fledged financial asset class by many crypto investors. It is often described as both an inflation hedge and an uncorrelated asset, (though it remains highly correlated with risk assets in the current market environment.) The growing acceptance of cryptocurrency in the U.S. has led to more private banks, hedge funds, and government pension funds incorporating Bitcoin into their portfolios. The entry of major asset managers like BlackRock and Fidelity has further legitimized Bitcoin as a viable portfolio asset.
Institutional investors are increasingly recognizing the value of allocating a small percentage of their multi-asset portfolios to Bitcoin. BlackRock and other firms, for instance, recommend a 1-2% allocation. Some portfolio managers describe this allocation as a speculative trade-off with asymmetric risk. The downside is capped at a maximum loss of 1-2% of portfolio value, while the upside could serve as a hedge against left-tail risks—such as sharp declines in traditional investments caused by inflationary shocks or deep recessions. In such scenarios, Bitcoin’s potential for significant gains could offset broader portfolio losses, making it an intriguing, albeit speculative, component of diversified investment strategies.
Other Coins/Tokens:
Although Bitcoin maintains the lion’s share of investor awareness, there are other coins (tokens):
Ether-ETH, the second most popular digital token after bitcoin, is a crypto currency that runs on the Ethereum decentralized open-source blockchain. It’s primary function is to pay for transactions and maintain smart contracts. The Ethereum platform transitioned in 2022 from a Proof-of-Work to a Proof-of-Stake process, which reduced energy consumption by over 99%.
XRP-XRP is a tradeable token of the Ripple network and maintains partnerships with financial institutions to focus primarily on facilitating cross-border payments. It offers High transaction speed and low cost. XRP has quadrupled in 2024 and has gained more than any other major crypto.
Dogecoin-DOGE was initially a meme coin with simple, fast transactions and low fees. It has significant celebrity support, including Elon Musk.
StableCoins: StableCoins are digital currencies designed to maintain a stable price of $1, thus avoiding the volatility of current tokens such as Bitcoin. Stablecoins are known for 1:1 backing with either the dollar, gold, other commodities, or algorithmic structures. They are essentially a digital dollar, though unlike government-issued currencies that flow through regulated banks, its transactions are decentralized on a blockchain and are largely hidden from governments. Tether, known for its 1:1 backing with the dollar, is the largest and most widely used stablecoin issuer. Circle is another prominent stablecoin issuer.
Beyond Coins/Tokens:
There are many other crypto sectors and categories beyond bitcoin and other “alt” coins.
Cryptocurrency Exchanges are platforms for buying, selling, and trading cryptocurrencies. Coinbase-COIN is popular in the U.S. for its user-friendly interface. Binance is the largest global exchange by trading volume, but it is not publicly traded. Kraken (also not publicly traded) is known for security and support for diverse crypto assets. Finally, FTX, headed by convicted felon Sam Bankman-Fried, was a large exchange before it collapsed due to fraud and money laundering.
Miners and Staking use high-powered computers to earn newly created bitcoin and to process bitcoin transactions by solving complex mathematical problems. They then receive bitcoin as payment. Mining is based on a Proof of Work process that is energy intensive. Riot Platforms-RIOT is another major Bitcoin mining operator. Staking utilizes a Proof of Stake process to put the underlying crypto on a network to validate transactions, and it uses considerably less energy. Bitcoin is the primary Proof of Work network and Ethereum is the prominent Proof of Stake network. Miners were early beneficiaries of crypto creation, but have been challenged by high energy costs and numerous competitors.
Blockchain is Intriguing: Blockchain is the underlying technology supporting cryptocurrencies, but it is important to note that blockchain also has much broader applications. Since blockchain technology is essentially a secure database, or ledger spread (distributed) across multiple computers, it offers a secure system for a multitude of applications. Everyone has the same record of all transactions and tampering is difficult compared to hacking a centralized system. In addition to handling/managing crypto transactions, blockchain allows the use of “smart” contracts. These contracts include terms of agreement that automatically execute when the terms are met, eliminating the need for intermediaries such as attorneys, banks and other administrative functions. As an example, Walmart has partnered with IBM and Unilever to leverage the Hyperledger Fabric blockchain for tracking product supply chains. As central bank digital currencies develop, they are also expected to use blockchain ledgers. Blockchain technology and applications are rapidly evolving and there is substantial potential for increased efficiencies, cost savings and transaction speed.
CRYPTOCURRENCY RISKS-The Cons:
There is no denying large returns for a number of crypto players, but crypto is evolving and future returns are not assured.
There is no Intrinsic Value. The Intrinsic Value of a business or security is based on inherent value based on future cash flow, risk, and growth potential. Intrinsic value reflects worth based on an objective calculation and it may be different from the current market price of an asset. Since Bitcoin and some other crypto players have no cash flow the value is derived for what others perceive the value to be based on supply/scarcity and demand. Skeptics ask what problem does it solve for our economy?
It is also different in that it is an intangible asset, unlike tangible assets such as gold. Bitcoin exists as a computer entry in a digital ledger, and thus it’s value is determined by what others are willing to pay. This is sometimes referred to as the Greater Fool Theory. Some call it a Ponzi scheme, while others liken its intangibility to the wind. As Bob Dylan famously sang, “The answer, my friend, is blowin’ in the wind.”
High Energy Costs: Bitcoin mining and transactions are highly energy-intensive. It is estimated that Bitcoin mining in 2024 will consume as much electricity as the entire country of Sweden. In contrast, some other tokens and platforms are far less energy-intensive.
Sellers vs Buyers: Fidelity, JP Morgan, BlackRock, Citadel and Bridgewater Associates are all major brokerage intermediaries that “Sell” to investors. Notably, these same firms previously sold various sub-prime mortgage securities to investors, leading the Great Financial Crisis. Meanwhile, Warren Buffet is an acclaimed investor who has not chosen to be a “Buyer”.
Consumer Protection: Crypto is not currently afforded SEC consumer protections, and. the rules governing this space have yet to been written. In addition, President-Elect Trump has floated the idea of a U.S. Bitcoin Reserve, but Lawrence Summers, Harvard professor and former Treasury Secretary, described Trump’s BTC Reserve as “crazy.”
Newer Technology: Could other coins displace Bitcoin? The cryptocurrency industry is dynamic and continuously evolving. At its core, Bitcoin is a technology product reliant on blockchain technology for its security. However, newer entrants in the space are emerging with protocols that process transactions faster, more efficiently, and at lower costs. These advancements could challenge Bitcoin’s dominance.
Government Role: The U.S. government may create its own form of digital currency, potentially reshaping the landscape of cryptocurrency. With so much technological innovation and regulatory uncertainty, the long-term prospects for Bitcoin and other cryptocurrencies remain difficult to predict.
Illicit Activity: Cryptocurrency transactions have been associated with criminal activities, including ransomware attacks, money laundering, human sex trafficking, and black-market dealings.
Speculative Element: Current market movements in cryptocurrency are heavily driven by sentiment and momentum. Bitcoin and a few other crypto assets have delivered extraordinary performance, but this has come with equally extraordinary volatility. A notable example is MicroStrategy-MSTR, a software company focused on business intelligence, mobile software, and cloud-based services. Despite negative revenue growth and negative profitability in recent years, MicroStrategy has become known as a leveraged Bitcoin proxy.
The company has adopted a unique strategy, purchasing a massive amount of Bitcoin as its primary treasury reserve asset, making it the largest corporate investor in cryptocurrency. To fund these purchases, MicroStrategy has repeatedly issued billions of dollars in zero-interest convertible securities. As of December 2024, Executive Chairman Michael Saylor has amassed approximately 440,000 Bitcoins for the company. Remarkably, MicroStrategy now has a market capitalization of nearly $90 billion—more than double the value of the Bitcoin it holds. This illustrates the irrational exuberance often seen in speculative markets.
Adding to the frenzy, MicroStrategy, a high-beta play on Bitcoin’s price, has been included in the Nasdaq 100 index—a move that further boosts demand for the controversial stock, which has surged this year alongside Bitcoin’s price. Saylor has even expressed aspirations for eventual inclusion in the S&P 500. However, challenges stemming from the profitability of its core software business may complicate such ambitions.
Another High-Octane Speculative Bet: One of the most aggressive leveraged bets on cryptocurrency-related assets is the T-Rex 2X Long MSTR Daily Target ETF-MSTU. This fund aims to deliver 200% of the daily return of MicroStrategy. In theory, if MicroStrategy performs well, MSTU will double the gains. Conversely, if MicroStrategy falters, MSTU will double the losses. Leveraged funds like MSTU are not designed for long-term investments and are particularly volatile, making them high-risk instruments.
As an example of the volatility, the Federal Reserve jolted the market on December 18 with an announcement of its updated “dot plot” interest rate projections. This statement showed only two rate cuts in 2025 instead of the previously expected four. Additionally, year-end inflation was forecasted at 2.5%, higher than the earlier projection of 2.1%. This unexpected shift caused a sharp market downturn, impacting speculative assets.
Note: T-Rex Long initiated trading Sept 18, 2024.
The table shows performance and volatility for year-to-date, since the election, and also the one-day move when the Fed disappointed the market. As the table shows, T-Rex Long fell -20.0% on December 18.
Despite such risks, the crypto evangelists remain active participants in these markets.
The appeal of a simple investment product promising double or triple the returns of a popular stock, index, or cryptocurrency is undeniable. However, for many, the results have been disastrous, with billions of dollars lost. Yet, Wall Street continues to find no shortage of eager buyers willing to take on the gamble.
Crypto ETFs: The crypto investment space presents both potentially massive upside and significant downside risks. Some crypto investors use the term “to the moon” to characterize their pursuit of outsized returns. Other investors view crypto as a hedge against rampant inflation and a broad-based market collapse. Regardless of the investment objective, one of the most accessible ways to invest in cryptocurrency is through spot ETFs, as discussed earlier. Below are examples of ETFs managed by major providers:
BlackRock iShares Bitcoin Trust-IBIT: Notably, BlackRock CEO Larry Fink, who once identified as a staunch Bitcoin skeptic, has shifted his stance. With the allure of substantial fees, Fink and BlackRock have embraced Bitcoin-related products, sparking criticism from some investors who compare him to a modern P.T. Barnum.
Fidelity Crypto Industry and Digital Payments ETF-FDIG: A product focusing on companies within the crypto and digital payments ecosystem.
Schwab Crypto Thematic ETF-STCE: This fund offers exposure to a diversified basket of crypto-related themes.
While the involvement of industry giants like BlackRock, Fidelity, and Schwab may offer some investors a sense of legitimacy, its essential to remember that new funds often emerge in response to strong past performance—an indicator that doesn’t necessarily predict future success.
Behind Bars-Lessons from Cryptocurrency’s Growing Pains: The cryptocurrency industry evolved at breakneck speed, attracting immense excitement and vast sums of money. However, its rapid growth has also been marred by significant growing pains, including fraud, scams, and schemes by some unsavory characters looking to get rich quickly. Notable cases of fraud and misconduct are as follows:
Sam Bankman-Fried (FTX): Once the CEO of FTX, a crypto exchange valued at $32 billion, Bankman-Fried oversaw the commingling of customer funds to prop up its troubled sister firm, Alameda Research. Amid liquidity issues, FTX collapsed in November 2022 as it failed to meet customer withdrawal demands. By November 2023, Bankman-Fried was convicted of seven counts of wire fraud and conspiracy to launder money. He is currently serving a 25-year prison sentence.
Changpeng Zhao (Binance): The former Binance CEO faced charges for violating U.S. Commodity Futures Trading Commission (CFTC) regulations and money laundering laws. Zhao and Binance settled with U.S. authorities, paying $4.3 billion in fines. Zhao also pleaded guilty to one felony charge of money laundering and served four months in prison.
Ross Ulbricht (Silk Road): Under the pseudonym “Dread Pirate Roberts,” Ulbricht operated the darknet marketplace Silk Road, which facilitated transactions involving drugs, weapons, and stolen credit cards. Ulbricht was sentenced to life in prison, though there are rumors that President-Elect Trump is considering commuting his sentence.
Alexander Vinnik: A cryptocurrency pioneer, Vinnik has faced accusations of fraud, hacking, identity theft, drug trafficking, and money laundering. He has served time in prisons in France and Greece and has pleaded guilty to conspiracy to commit money laundering in the U.S.
John McAfee: The developer of McAfee antivirus software became entangled in cryptocurrency schemes and faced charges of using crypto exchanges to evade taxes. McAfee died by suicide in 2021 in a Spanish prison after a court approved his extradition to the U.S. for tax evasion.
Alexey Pertsev: An early cryptocurrency developer, Pertsev was convicted of money laundering charges related to his activities in the crypto space.
These cases illustrate the fraud, conflicts, and crimes that have plagued the cryptocurrency industry, harming countless investors along the way. While the involvement of established brokers like BlackRock and Fidelity signals greater legal compliance and a maturing market, the industry remains fraught with risks. Cryptocurrency’s volatility and history of misconduct mean that, for now, the risks often outweigh the potential gains. Although fortunes have been made and lost, investors should approach this evolving industry with caution.
To Summarize: The cryptocurrency industry is complex and speculative, it is clearly in the early innings, and it looks like the Wild West. A case can be made for a store of value and as a hedge against market turbulence. For those seeking a hedge, a 1-2% allocation is typically recommended.
MARKETS: LONG-TERM PERFORMANCE:
The table above shows investment performance and risk going back 30 years. The data shows that the U.S., and especially large-cap assets, have been the strongest performers. Despite the stellar large cap performance, it is noteworthy that large-cap growth and technology stocks were some of the hardest-hit categories in 2022, falling -40%. As the tech sector went from worst to first from 2022 to 2023 and then further in 2024, their valuation levels have become quite expensive. Meanwhile, small cap US stocks and international stocks performance lagged but they are relatively cheaper.
The bond market produced another disappointing year. The broad-based Bloomberg Aggregate bond index eked out a small gain. High-Yield corporate bonds performed best, benefitting from a resilient economy. Long maturity performance produced the worst returns due to rising interest rates and corresponding price declines. As an example rates for the 10-year U.S. Treasury bond rose from 3.87% at year-end 2023 to 4.57% at year-end 2024.
Finally, the 60/40 diversified equity/bond portfolio recovered strongly in 2023 and 2024 after being much maligned in 2022.
CURRENT MARKET PROS AND CONS:
Uncertainty is a term often used to describe market prospects, and it certainly applies to 2025. The election of Donald Trump is generally seen by the market as positive, but also as a wild card. Trump provides prospects for market-friendly tax cuts and deregulation, but tariffs and deportation are seen as looming risks.
Market Tailwinds-The Pros:
The economy is resilient with strong consumer spending and most economists see limited recession risk. Corporate earnings growth has exceeded expectations.
President-Elect Trump’s tax-related proposals are expected to increase economic growth, enhance consumer spending and increase corporate investment.
Deregulation is somewhat of an intangible, but should benefit corporate profits.
Artificial Intelligence is expected to provide productivity gains through greater output and lower costs. Productivity has advanced at a solid 2% level over the last five quarters and offers the prospect of greater economic growth and lower inflation.
Market Headwinds-The Cons::
It is difficult to know whether or not the substantial tail winds will offset risks and generate another positive year in the markets. In any event, the risks are listed below in greater detail.
Inflation: Inflation has been surprisingly impactful over the past three years, particularly in housing and food prices. While inflation was largely contained following the Great Financial Crisis of 2008, it surged after the pandemic due to supply-chain disruptions and expansive fiscal stimulus. It peaked at a 40-year high of 9.1% in June 2022. Inflation disproportionately affects middle and lower-income households and proved to be a critical factor in the 2024 presidential election.
When inflation first spiked in 2021, the Federal Reserve and many economists believed it was primarily driven by pandemic-related supply disruptions and would subside on its own. However, by late 2021, officials recognized that fiscal stimulus and strong consumer demand were fueling persistent price pressures. The Fed pivoted aggressively, raising interest rates at the fastest pace in four decades to combat inflation.
This rapid tightening of monetary policy initially raised fears of a “hard landing” recession. However, the economy has shown resilience, and markets have priced in a “soft landing,” characterized by slower growth and declining inflation. Ironically, some experts now warn of a potential “no landing” scenario, where the economy does not slow down enough, leading to renewed inflationary pressures and ultimately the risk of 1970s-style stagflation.
The Core Consumer Price Index (CPI), excluding volatile items like food and fuel, has declined to 3.3% on an annualized basis but remains stubbornly high compared to the Fed’s 2.0% inflation target. As a result, many households continue to feel the pinch. Compounding this is the cumulative impact of inflation: Between 2019 (pre-pandemic) and 2024, prices have increased by 23% according to the Bureau of Labor Statistics. In practical terms, it now costs $1.23 to buy what cost $1.00 in 2019. Another way of thinking about this is that a dollar today only buys 81% of what it could buy back then. Progress toward the Federal Reserve’s 2% inflation target has stalled in recent months, underscoring the challenge of fully reining in inflation and its lasting impact on American consumers.
High US Federal Debt: The U.S. federal debt has surged in recent years, with deficit spending escalating at an unsustainable pace. Federal debt stood at $9 trillion in 2007 but ballooned following the 2008–2009 Great Financial Crisis and the 2020–2021 COVID-19 pandemic. These events necessitated significant fiscal support and safety nets, but deficit spending has continued unabated and the U.S. now faces structural deficits even during periods of strong economic growth.
Total federal debt now stands at $36 trillion, equating to $106,000 per capita. The federal deficit reached $1.8 trillion, or 6.4% of GDP, in the last fiscal year—an unprecedented figure outside of war, recession, or emergency. Interest on the debt reached $882 billion last year, exceeding defense spending. The total federal debt is now 123% of nominal GDP. Compounding the debt problem are entitlement program challenges: The Social Security Trust Fund is projected to be depleted by 2033. The Medicare Trust Fund is expected to run out between 2031 and 2036, depending on estimates. There are clear implications. Rising debt service costs have increased to the point that debt service is now the fastest-growing line item in the federal budget, with increasing interest payments placing further strain on fiscal resources. Funding future deficits may require elevated interest rates, leading to broader economic repercussions. Treasury buyers are already demanding higher rates for longer maturities, and larger deficits exacerbate the rate pressures.
Rising debt burdens could have serious implications for the U.S. economy, including downward pressure on market valuation levels and upward pressure on the U.S. dollar. In a worst-case scenario, a “debt crisis vortex” could emerge, leading to defaults, financial instability, and potential bailouts—especially in emerging markets struggling with mounting economic pressures. These trends underscore the urgency of addressing unsustainable fiscal policies to avoid jeopardizing economic stability and global financial health.
Tariffs and Deportation: President-Elect Trump has publicly endorsed tariffs of up to 60% on imports from China and tariff increases with most other countries. While these statements may serve as negotiation tactics, it appears that tariffs are likely to increase. Economists generally view tariffs negatively, as the associated costs are passed on to U.S. consumers, driving up the price of goods. Additionally, retaliatory tariffs could quickly escalate into trade wars, exacerbating inflationary pressures.
A policy of mass deportation would reduce the labor force, diminishing overall productivity and potentially fueling wage inflation as employers compete for a smaller pool of workers.
Overvalued Market: Technology and mega-cap parts of the equity market are clearly overvalued by historic standards. Valuation is not a short-term market timing factor, and markets can get even more overvalued in the short to intermediate term. However, high valuation levels point to below-average future long-term returns. Conversely, low valuation levels are highly correlated with higher long-term returns.
Zero-Day To Expiry Options. Zero-day to expiry options involves trading in contracts that expire the same day. These trades are the riskiest, and have recently soared to make up more than half of all trades in the market for S&P 500 index options this year, according to figures from SpotGamma. The huge trading volumes point to extreme speculation and momentum.
WALL STREET/GOVERNMENT FORECASTS & OUTLOOKS
Wall Street strategists, along with government and consulting entities, provide various outlooks for markets and the economy in the year ahead. While often criticized for their accuracy, these forecasts offer valuable insights:
Collective Insight: They reflect the collective perspectives of seasoned investors, which are already priced into the markets.
Consensus Value: Individual strategists’ forecasts can vary, but the consensus average is helpful in understanding overall market expectations.
Directional Guidance: Annual forecasts provide useful direction for anticipating earnings trends and price movements.
Assessing Uncertainty: These outlooks also offer a framework for evaluating potential unexpected events throughout the year.
The outlook for 2025 generally anticipates a soft landing, where inflation continues to decline without triggering a recession. Equity markets are expected to trend upward in line with historical growth patterns. Meanwhile, the fixed income market is likely to shift toward a “return to normal,” where the Federal Reserve is less involved in driving down interest rates and distorting market pricing.
LONG-TERM EXPECTED RETURNS:
While short-term projections for 2025 are useful for understanding current consensus pricing, long-term projections are more relevant for strategic planning, such as retirement planning. Market outlooks often focus on near-term factors affecting the upcoming year, but it is crucial to consider longer-term growth drivers and risks. On the positive side, long-term trends, driven by human ingenuity and creativity, are likely to continue improving productivity and leading to new products. Additionally, people are living longer, healthier, and more productive lives, and innovations like artificial intelligence are expected to further boost productivity.
Valuation doesn’t typically explain short-term performance, but it correlates more strongly with long-term returns. While current markets—especially large-cap stocks like the S&P 500—are relatively expensive, they can remain expensive for extended periods. However, longer time horizons (e.g., 10 years) suggest that higher starting valuations often lead to lower long-term performance, while lower valuation levels tend to produce higher long-term returns.
Noteworthy Long-Term Performance Forecasts are listed below:
Goldman Sachs strategist David Kostin recently predicted that the S&P 500’s return over the next decade will average just 3% per year, less than a third of the postwar average.
Vanguard forecasted an annual return range of 3% to 5% for large U.S. stocks and 0.1% to 2.1% for growth stocks over the next decade. Vanguard’s projections for the next 10 years include 7% to 9% for non-U.S. developed market stocks and 5% to 7% for U.S. small-cap stocks.
Professor Robert Shiller’s Cyclically Adjusted Erice-to-Earnings ratio-CAPE suggests an average return of about 0.5% annually, after inflation.
JPMorgan Private Bank projects 2.9% annual returns for cash, 5.1% for bonds, 7% for U.S. large-cap stocks, and 7.8% for global equities. Historically, every major asset class has outperformed cash over 10- to 15-year horizons. The bank also recommends alternatives like real estate, infrastructure, private equity, and hedge funds as hedges against inflation.
LARGE CAP and S&P 500:
The graph above shows the performance for the large cap S&P 500 index starting at year-end 2019 before the pandemic. The S&P 500 large cap index has dominated performance for all major asset classes in recent years, and has been helped in large part by the strong performance by the mega-cap Magnificent 7 stocks. The Magnificent Seven currently comprise 28% of the value of the S&P 500 and revenues are nearly $2 trillion. Although these stocks have strong profitability and balance sheets, they are subject to the law of large numbers, and historic growth rates will be increasingly difficult to sustain far into the future. The strong performance of the Mag 7 stocks in recent years has also caused the mega-cap holdings to be significantly overweight compared to historic average levels and shows the need for rebalancing.
While performance has been strong of late, the index suffered through the “Lost Decade” in the 2000s, when small caps and other asset classes had far stronger performance. The market history also shows that performance over the past decade provides no assurance of similar performance in the next decade.
Valuation: The graph below shows the S&P 500 index is relatively expensive compared to average levels, but not quite as expensive as the dot com era. An analysis by Morningstar shows much cheaper valuation levels for mid and small cap sectors, for the value investment style and for international assets.
The relatively high valuation level of the S&P 500 index, provides another reason for rebalancing to improve diversification.
SMALL CAPS & RUSSELL 2000:
Small cap stocks have underperformed in the recent past. Historically, small cap stocks have generated higher performance than large caps going back through history, but they tend to either over or under perform for long periods. Part of the reason for this disparity is that small caps are more sensitive to economic cycles. They can be highly profitable when the economy is strong, but they are more negatively impacted than large caps when the economy weakens. They also tend to have a higher proportion of debt, and the debt is oftentimes floating-rate. Finally, they have less access to capital. In contrast, bigger companies were more able to refinance debt by locking in low fixed rates in 2020 and 2021. Small cap stocks should benefit from the current monetary easing and the prospect for a soft landing. Small cap valuation levels also remain very cheap. Morningstar has analyzed data over the last 100 years, and the average period of either large beating small, or small beating large is about 10 years on average. The longest period of large beating small was the 14-year period leading into the internet bubble. After the internet bubble burst, small caps outperformed for the following 10 years.
FOREIGN DEVELOPED:
Foreign stocks have been another laggard compared to large cap U.S. stocks in recent years. One of the reasons is that the U.S. has been a global innovator and has a much larger tech sector with a stronger growth rate. Meanwhile, the European Union’s export-led model is more challenged than ever by Chinese overcapacity and the threat of U.S. tariffs. Ongoing political crises in Germany and France make it even harder for the bloc to establish a coherent industrial policy. Another part of the reason for this underperformance relates to the appreciation of the U.S. dollar since 2009. According to Morningstar, the US dollar has appreciated over 2% on an annualized basis over that time period.
Diversification provides benefits over time, however. Non-U.S. stocks have led U.S stocks for extended periods, such as the mid-1980s, and from the late 1990 into the mid-2000s. Most recently, when the S&P 500 declined -18.1% in 2022, the MSCI EAFE index fell -14.5%.
EMERGING MARKETS:
Emerging market stocks are another laggard compared to the S&P 500 index over the past decade.
Despite weak relative performance, market fundamentals remain favorable. International Monetary Fund data shows emerging markets comprise 58% of global GDP and 86% of the global population. Demographics are favorable with younger populations moving into the middle class and higher spending patterns. Based on this higher growth rate, the October 2024 IMF World Economic Outlook shows 2025 emerging market growth at 4.2%, compared to 1.8% for advanced economies. Emerging markets also offer attractive valuations and diversification benefits.
One reason for emerging market underperformance relates to the fact that China comprises nearly 30% of the emerging market indexes. Chinese markets were positive in 2024 based on government policy initiatives, but have performed poorly going back over the last 10 years. Given the weak fundamentals and prospects, it is worth considering emerging markets ex China. The iShares MSCI Emerging Markets ex China Index-EMXC ETF was launched in 2017 and offers an alternative.
One surprising development was in Argentina where the Global X MSCI Argentina-ARGT gained 61% in 2024. President Javier Milei is being given credit for overhauling the long-suffering economy.
BONDS:
Weak Bond Performance: Bond market performance was relatively weak again in 2024, with the Bloomberg Aggregate index posting a meager total return of 1.25%, and -0.33% annualized over the last 5 years. The Bloomberg High-Yield Corporate bond index produced the highest return at 8.19%, as the economy maintained strength. The Bloomberg US Treasury 20 year + long maturity index posted a -7.99% return in 2024 as rates rose and corresponding bond prices plummeted. This index is now down -5.97% over the last 5 years and down -1.02% annualized over the last 10 years. It is significant to note that the Fed reduced the short Fed Funds rate by 1.00% starting in September 2024, but longer maturity bonds saw yields rise. Longer maturity bond yields are moving up based on inflationary fears and unsustainable federal government budget deficits.
Despite poor long-maturity bond performance, the bond market is now described as more normal, than at any time in the last 16 years. Short-term interest rates were kept near zero for much of the time since the Great Financial Crisis in 2008, and the COVID crisis in 2020/2021. Inflation resulted after COVID, and the Fed Raised short interest rates starting March 2022 by a total of 11 times, taking the Fed Funds rate to a range of 5.25% to 5.50%. The Fed began reducing short rates in September 2024, but is now waiting for more data and evidence that inflation is trending towards their 2.0% target. Given higher interest rates, yields should be high enough to offset modest bond price declines.
The long bond bull market has come to an end. Rates peaked at 15.8% in 1981 and bottomed at
0.50% on March 9, 2020.
Although the Fed has cut the short-term Fed Funds rate by 1.0% since September 2024, longer-maturity 10-year U.S. Treasuries have increased to 4.57% by year-end 2024.
Money Market Anomaly: The Federal Reserve’s policy to push up short interest rates produced an interesting anomaly where money market funds were relatively strong performers starting in 2022. Money market funds are typically performance laggards, but inflation and recession fears caused sharply negative performance for intermediate and long-maturity bonds. The Fed’s actions to force short-term rates up, caused money market yields to move up as well. According to CraneData, the year-end 2023 7-day money market yield was 5.19%. By 8/31/24, before the Fed began dropping short rates, it was still at 5.10%. With the Fed pushing rates down, the money market yield moved down to 4.28% as of 12/31/24. Based on current Fed projections, money market yields are expected to trend towards 3.7% in 2025. As a result, the recent money market yield advantage is being dissipated, and longer-maturity bonds are expected to produce stronger future returns.
PRIVATE MARKETS:
A developing trend is for major brokerage firms to bring private markets to more individual investors.
Private assets, include private-equity funds, private credit, nontraded real estate, various alternative assets, hedge funds and (even) venture capital. Private market assets don’t trade publicly, the way public securities like Microsoft does on the New York Stock Exchange. As a result, private market asset prices are much less transparent, and they are usually illiquid except for a few times a year. These private assets are promoted based on an expectation of higher performance and a lower correlation compared to publicly traded securities.
Major brokerage firms have seen erosion in fees and revenue due to low/0% commissions and lower asset under management fees. The various private entities offer higher fees, often 2%/year and commissions can range from 2-5%. Internal fund expenses are much higher than for traditional publicly traded securities. Wall Street is seen opening the floodgates in 2025 for various “private” offerings. Current Wall Street firms include Fidelity, Goldman Sachs, Cliffwater and numerous others. Most recently, BlackRock, the passive index behemoth, is buying HPS Investment Partners to offer private credit.
CHARITABLE GIVING:
The marketplace has experienced extraordinary gains—not only in 2024 but throughout history—fostering significant wealth creation for many individuals. These gains present unique opportunities for sharing wealth through charitable giving, and especially through donating appreciated securities.
Donor Benefits include:
Tax-Efficient Rebalancing by using large gains to trim overweight positions, improving portfolio balance.
Numerous studies show the positive personal satisfaction from supporting specific charities
Charity Benefits include:
Increased impact to benefit the common good. Faith-based religious organizations receive the largest amount of charitable giving, but education, health and various humanitarian causes are also significant.
WRAP UP:
AI and cryptocurrency emerged as major drivers of the 2024 market and were supported by a resilient U.S. economy and strong corporate earnings. While optimists foresee continued growth, skeptics caution against speculative bubbles. As always, history reminds us that past performance does not guarantee future results.
Long-Term Themes:
Economic growth is cyclical, but markets have benefited from the positive long-term economic growth.
The fundamental case for AI remains strong and a market-weight or overweight allocation may be warranted. Despite short-term volatility, a significant underweight/zero weight could risk missing a significant opportunity.
Cryptocurrency: The outlook is more speculative. A 1–2% allocation could serve as a hedge in case of market disruptions or as a potential bet on the displacement of legacy financial systems.
It is important to remember the lessons from past market excesses:
The dot-com bubble of 1999–2000
Subprime mortgages in the Great Financial Crisis
More recent trends like meme stocks, SPACs, nonfungible tokens-NFTs, and cannabis stocks.
In 2024, speculative extremes continued, with examples like a banana secured by duct tape selling for $6.2 million in the art market.
Key Investment Principles:
Diversification: As always, diversification remains critical. It’s not rocket science—avoiding over-concentration reduces risk.
Rebalancing: Strong performance in specific sectors, like AI, has caused many portfolios to become highlyt concentrated. Regular rebalancing ensures alignment with your target asset allocation and investment objectives.
Long-Term Focus: Time in the market consistently proves more impactful than trying to time the market. Sentiment and speculation are short-term factors that usually hinder performance.
Jeff Johnson, CFA
January 4, 2025
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Disclaimer:
The information provided in this web post is for informational and educational purposes and it does not constitute personal investment recommendations or investment advice. The investment information presented is generalized and it does not take into consideration the individualized needs, objectives, constraints or unique circumstances of individual investors. Historic market trends, risks, patterns and relationships may not continue into the future and assumptions and predictions may not prove valid. Past performance does not guarantee future performance. Markets are dynamic and subject to change and all investment/market commentary is subject to change or revision without notice. Cornerstone uses multiple data sources wherever possible to help provide data and information that is comparable across various asset classes and is consistent over the course of time. All data and content is derived from what are considered reliable and credible sources, but Cornerstone does not accept responsibility for any errors. The user accepts all responsibility for actions taken based on any information from this post.
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