Shedding the Last Five Pounds: Inflation, Market Trends and Timeless Investment Strategies

By Dr. Robert Votruba

If you’ve ever tried to lose weight, you know the phrase: “The last five pounds are the hardest.” The first few pounds often melt away with relative ease, but shedding those final stubborn few requires effort, discipline, and time.  And, sometimes, there are setbacks.

Jerome Powell and the Federal Reserve's battle with inflation has reached those stubborn “last five pounds.”  While there is still some work to do to hit their 2% target, after peaking over 9% in June 2022, inflation now hovers below 3%, thanks to the easing of supply chains and the Fed’s efforts.  Inflation can wreak havoc on an economy and financial markets, so keeping it under control is vital – which is why it is part of the Fed’s dual mandate, alongside promoting full employment.  

Many market experts feared the Fed would ignite a recession as it lifted interest rates to combat rising prices. Paradoxically, despite those fears, the stock market (S&P 500) has delivered its best two-year performance since the 1990s. At the end of 2024, few disagreed with Chairman Powell when he stated, “I think it’s pretty clear we have avoided a recession.”

Yes, markets have been cooperative.  Progress, but not victory, on inflation, has helped.  So too has the continued advancement of artificial intelligence, propelling the “Magnificent 7” stocks to new highs in 2024.  The Magnificent 7 are Apple, Amazon, Facebook, Google, Microsoft, Nvidia, and Tesla.  These companies have been driving market returns in an outsized way for the past few years, as illustrated below.

Source: FactSet, Standard&Poor’s, J.P.Morgan Asset Management

Looking ahead to 2025, Wall Street’s largest banks predict an approximate 10% rise for the S&P 500[1].  At first glance, it seems like a safe bet since the S&P has returned 10.3% on average since 1926.  However, history reveals that the index rarely lands near its average in any given year.  Consider: over the past 98 years, the S&P 500 only achieved a rate of return between 8%-12% in any given calendar year 6 times[2].  Yes, the index is up far more often than it is down (it was positive 73% of the time, dating back to 1928), but the ride has been and always will be bumpy.  The good years tend to be exceptionally strong, but predicting when the downturns will occur can be costly – just ask those who tried over the past two years.

Since the 2024 election, expectations of more business-friendly policy from Washington have helped buoy equity markets.  Proposals around deregulation and lower taxes are particularly favorable to markets. Many of the tax cuts from the first Trump administration are set to expire at the end of 2025. With Republicans in control, many assume the reductions will be extended or made permanent, with additional cuts also under discussion.

Of course, taxes remain the government's primary revenue source, and without offsetting economic growth, concerns about growing debt, which is already at a postwar high, are justified.  It’s astonishing to recall that in 2000, analysts predicted the U.S. debt would be nearly eliminated by 2010[3].  Instead, thanks mainly to the Financial Crisis of 2008 and later COVID-19, the U.S. – like much of the developed world – is deeply indebted.  

However, this financial burden has not stifled growth.   In fact, compared to other nations, we have only become stronger.  China, once predicted to surpass the U.S. economically, has fallen behind; in 2021, China’s GDP was 75% of the U.S., but by 2024 it dropped to 66%[4].  Since the start of 2020, real economic growth in the US has been 10%, three times the G7 average[5].  We are the only large economy with both output and employment above pre-pandemic levels.  With deep capital markets, a large and skilled labor force, leading universities, a dominant currency, and the world’s largest oil and gas production, it's no wonder Warren Buffet advised, “Never bet against America.”

Back to those pesky last 5 pounds.  Progress notwithstanding, because the economy has performed better than expected, inflation remains above the Fed’s target.  However, according to their estimates, inflation should fall to 2.5% by the end of 2025 and reach their goal of 2% by 2027.   Those hoping for aggressive rate cuts in 2025 may be disappointed.  While the Fed lowered short-term rates by 1% in 2024, long-term rates actually rose by over half a point, reflecting market expectations that those final inflationary pounds will be hard to shed.  Policy decisions on tariffs, mass deportations, and deglobalization could also create inflationary pressures.  

The era of low rates that persisted from 2008 through early 2022 appears to be over, absent another financial crisis.  While we will see movement in 2025, the current level of interest rates represents more of a return to historical norms – the “new normal” is, in essence, the “old normal.”

Just like maintaining a healthy weight, achieving long-term financial success isn’t about quick fixes or chasing the latest trends—it’s about consistency, discipline, and a commitment to proven principles, such as:

DIVERSIFICATION—While stocks like the Magnificent 7 have produced impressive returns over the past few years, over-concentrations in any single stock or sector can jeopardize a financial plan.  For example, Citibank's share price remains nearly 90% lower than it was 25 years ago.  To return to the levels it traded at in July 2000, the stock would have to rise over 700%.

TIME is an investor's best friend; TIMING is the investor’s worst enemy.  A $10,000 investment in the S&P 500 at the end of 1980 would have grown to approximately $1.5 million through early last year.  This assumes that the investor stayed invested the entire time: through the Iran Hostage Crisis, the stock market crash of 1987, the Great Recession of 2008, and COVID-19.  Had the investor missed the 10 best days of that 40-year span, he/she would have ended with $800,000 less than the investor who rode it out.  Had the best 30 days been missed, the investor would have left over $1.2 million in profits behind.

RISK MANAGEMENT MATTERS.  You can only ride out the bumps if your portfolio volatility matches what you can withstand emotionally and financially.  Strategies like rebalancing help to keep you on track.   Rebalancing involves realigning your asset allocation so your portfolio does not deviate too far from the intended strategy.  For instance, a mix of 60%[6] stock funds and 40%[7] bond funds would have changed to 73% stocks and 27% bonds over the past 5 years if left untouched.  Rebalancing forces investors to “buy low and sell high” and, if nothing else, allows one to reexamine their risk tolerance every year.

AND THEN THERE’S THE OBVIOUS.   Unless you’re retired, don’t spend more than your income.   Or, if it sounds too good, it probably is.  As Samuel Johnson said, “Men more frequently need to be reminded rather than informed.”

The market will have its ups and downs, just as progress on those “last five pounds” can sometimes stall. But with a diversified strategy, a focus on time in the market rather than timing it, and a risk profile aligned with your goals, you can weather the volatility and stay on track. At National Financial Network, we’re here to help you protect your wealth, invest wisely, and achieve your financial goals—one disciplined step at a time.

Registered Principal and Financial Advisor of Park Avenue Securities LC (PAS).  Securities products and advisory services offered through PAS, member FINRA< SIPC. PAS is a wholly owned subsidiary of Guardian.  National Financial Network is not an affiliate or subsidiary of PAS or Guardian.  CA Insurance License Number – OD23495, AR Insurance License Number – 2854395.

This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Data and rates used were indicative of market conditions as of the date shown. Opinions, estimates, forecasts and statements of financial market trends are based on current market conditions and are subject to change without notice. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. All investments contain risk and may lose value. Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. Diversification does not guarantee profit or protect against market loss. 

National Financial Network is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 900 Stewart Avenue, Ste 500, Garden City, NY 11530, 516.745.5600. PAS is a wholly owned subsidiary of Guardian. National Financial Network is not an affiliate or subsidiary of PAS or Guardian 7498680.1 Exp 0127

[1]FactSet

[2]Vanguard

[3]National Archives.gov

[4] The Economist

[5] The Economist

[6] Bloomberg, FactSet, MSCI, Russell, Standard & Poor’s, J.P.Morgan Asset Management

[7] Bloomberg, FactSet, MSCI, Russell, Standard & Poor’s, J.P.Morgan Asset Management