Weekly Market Update for February 21, 2025
In lieu of our regular weekly market update, this week’s post features the Quarterly Client Letter:
Reflecting upon another prosperous year for the markets and our strategies, we’d be remiss not to say our office is still grieving. Jim was a shining light to those who knew him – always a glass half full. He will continue to be deeply missed. In case you missed it, please see our website for our Tribute to Jim, as well as the Minnesota Star Tribune’s feature on Jim’s life.
The economy remains in good shape. Fourth-quarter real U.S. GDP (preliminary) suggested economic activity grew for an eleventh-consecutive quarter, at a 2.3% annualized pace. Full-year 2024 appears to have grown by 2.8%, compared to 2.9% in 2023. This latest reading is in line with expectations for growth to decelerate to 2.1% in 2025. Meanwhile, the labor market is healthy, including steady job and wage growth with low unemployment near 4%. The Federal Reserve will remain data-dependent with regard to how quickly it may further reduce benchmark rates, but they do plan to continue lowering rates, a benefit for major markets.
For the equity side of portfolios, the fourth quarter saw the S&P 500 rise 2.1% and the Nasdaq climb 6.2%, even as the 10-year Treasury yield jumped 77 bps to 4.58%. A healthy economy and labor market are leading economists to pencil in earnings growth of 10-15% for the S&P 500 over this coming year. Consumer, business, and investor confidence remains high. Throw in the potential for lower taxes, less regulation, and a growth-friendly business environment, and one can paint a favorable picture for what the next year could bring to equities. But risks are always present.
One risk is that the AI leaders have been very large contributors to overall market performance. The AI impact on the real economy is still in the early stages, with potential for significant productivity gains across a wide swath of industries. Yet January brought more than one hiccup to this space. If additional challenges present themselves, it’s possible CEOs may rein in data center spending. A second risk is valuations – the price investors are willing to pay for an earnings stream – which are historically high. A third concern is inflation, particularly the unknown effect of future policy actions. Tariffs and fiscal deficits have the potential to be inflationary – a concern the Federal Reserve noted in their most recent meeting minutes.
When the dust finally settled in 2024, our Intelligent Fixed Income (IFI) strategy was near the top of nearly all U.S. Fixed Income choices. Buoyed by an improving economic backdrop and recovering security prices, the strategy posted solid double-digit total return gains for clients. This compares to paltry returns in the Bloomberg Aggregate Bond index (+1.25% in 2024).
Intelligent Fixed Income is off to a strong start here in 2025. We have seen a flurry of new issues in the preferred market, including several big bank preferreds. For example, JP Morgan (6.50% Fixed-to-Float), Goldman Sachs (6.85% Fixed-to-Float) and Citigroup (6.95% Fixed-to-Float) all issued preferreds. One major benefit of a boutique like Ulland Investment Advisors is our ability to quickly add a new issue to a portfolio in a meaningful way. Our goal is to make sure our clients achieve the desired allocation without compromising price or liquidity.
With the current IFI strategy income rate around 6.50%, and potential price appreciation if interest rates fall, we expect another solid year on the fixed income side. We still anticipate further rate cuts by the Federal Reserve in 2025 and 2026. Over the next 24 months we expect the Fed to land close to their neutral rate, which we estimate to be around 3.50%. We expect the 10-year Treasury to move closer to 4.25% by the end of 2025. As always, we will have both hands on the wheel if things materially change with regard to this outlook.
Intelligent Fixed Income GOV remains an attractive choice for clients with idle cash. This strategy uses primarily 3–12-month U.S. Treasuries to generate a meaningful return with minimal volatility. We are targeting a 4% return in this strategy and, as a reminder, the income is exempt from state income tax. We have seen strong interest from investors looking for higher returns than low-yielding bank choices and better state income tax treatment than CDs.
Despite the economic and political uncertainties we remain optimistic about both equities and fixed income. The economy remains strong, company earnings estimates have been rising, sentiment remains favorable, and policymakers seem intent on being supportive. We will continue monitoring risks and have been shifting portfolio weights in the new year, incorporating some hedged products that participate on the upside but reduce the downside magnitude. While markets may prove choppy, we see reasons to cautiously position for further growth.
As always, please reach out with any questions you may have.
Nat Beebe, CFA
Jared Plotz, CFA
The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Investors should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All investors are strongly urged to consult with their tax advisors regarding any potential investment.
Performance quoted is past performance. Past performance is not indicative of future performance. There is always a possibility of loss. Current performance may be lower or higher than performance shown. Differences in performance versus the indices/funds may be attributable, in part, to differences in the asset make-up of the strategy vs. the indices/funds. Performance calculations are based on the reinvestment of dividends and gains unless these amounts were paid out to the client. Performance is subject to revision. See www.ullandinvestment.com for important strategy disclosures.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investing involves risk; principal loss is possible. Investors should consider the investment objectives, risk, charges, and expenses of the strategy carefully before investing. This and other important information can be obtained by contacting Ulland Investment Advisors at 612.312.1400 or visiting www.ullandinvestment.com.
