The Data:
- 7 - Mortgage Rates Increase
- 36 - Top 10 S&P Holdings
- 256,000 - December Jobs
Commentary:
As we step into 2025, three major themes are shaping financial markets: persistently high mortgage rates pressuring housing activity, a historically narrow equity market led by a handful of mega-cap stocks, and economic uncertainty tied to Fed policy and government spending.
Housing Market Faces a “Quadruple-Whammy”
Home affordability has reached historic lows, with prices up 53% in the past five years, while mortgage rates have climbed from under 3% to over 7%. The result? 2024 saw the fewest existing home sales since 1995, as both demand and supply dried up. Adding to the strain, 32% of the average mortgage payment now goes toward property taxes and insurance, a record high. The Fed’s restrictive rate stance continues to create a headwind for the real estate market, and without rate cuts, affordability challenges will persist.
A Market Led by the Few, Not the Many
At the start of 2025, only 19% of S&P 500 stocks were trading above their 50-day moving average, the lowest level since the market bottomed in October 2023. Meanwhile, the top 10 companies in the S&P 500 now make up over 36% of the total index (they touched over 40% just a few weeks ago), highlighting the extreme concentration of market leadership. While these mega-cap stocks command lofty valuations, equal-weighted and small/mid-cap stocks present lower-risk entry points. Investors looking for opportunities may find better value outside the dominant tech giants.
The Fed, Inflation, and Government Debt - A Balancing Act
The labor market remains resilient, with 256,000 jobs added in December, far exceeding expectations. While this suggests economic strength, it complicates the Fed’s decision-making. Perhaps the Trump administration federal worker buyout may reduce numbers ahead. Recession odds have dropped to 22%, but interest rates remain a wild card. The U.S. budget deficit ended 2024 above $2 trillion, and interest payments on national debt hit a record $1.15 trillion, surpassing defense spending (Yikes!). If inflation remains sticky, rate cuts could be delayed, further weighing on interest-sensitive sectors like housing.
Where does this leave investors? While economic momentum is still intact, market breadth remains weak, and high rates continue to create headwinds. The key to 2025 will be staying adaptable - watching how the Fed, inflation, and fiscal policy evolve to shape the investment landscape.
