Quarterly Update

The fourth quarter (Q4) of 2024 ended with a depressing slump but otherwise continued what had been a strong year for US stocks. Foreign stocks perked up occasionally, as did US bonds, but our domestic stock market was the clear standout in terms of generating performance. The expanding AI industry, Fed policy, and inflation once again played important roles during the quarter and year while election outcomes in November reset expectations.

Here’s a roundup of how major market indexes performed during Q4 and for the year, respectively:

• US Large Cap Stocks: up 2.5%, up 24.9%
• US Small Cap Stocks: up 0.3%, up 11.4%
• US Core Bonds: down 3.1%, up 1.3%
• Developed Foreign Markets: down 8.4%, up 3.5%
• Emerging Markets: down 7.3%, up 6.5%

The stock market was consistently strong during most of 2024 after a solid 2023. The AI boom continued to lift “growth” sectors like Technology and Communication Services. There were some bouts of volatility, especially in late Summer but the S&P 500, the typical benchmark for US stocks, stayed above its 200-day moving average the whole year. The S&P hit 57 all-time highs throughout 2024, the most since 1928. Technology stocks, including companies like Nvidia and Apple, accounted for roughly 40% of the S&P’s return while Communication Services stocks, such as Meta and Google, accounted for about 20%, so performance was again tilted heavily to certain sectors. My research partners at Bespoke Investment Group found that the Magificent 7 (popular stocks propelled by the AI boom) now make up 33% of the S&P’s weighting, slightly more than the Tech sector itself at about 32%. And Apple, Nvidia, and Microsoft account for nearly 60% of the Magnificent 7. Growth from these companies boosts returns for the whole market in the short-term but concentrations like this can work the other way as well. It wasn’t all about AI, however. The Consumer Discretionary and Financial Services sectors also posted strong gains, up 29% and 28% for the year, respectively. At the other end of the spectrum Energy, Real Estate, and Healthcare sectors finished the year up slightly while the Materials sector was the lone loser, falling nearly 2% for the year.

November’s election impacted markets in a number of ways but something interesting was Bitcoin hitting $100,000 per “coin” during Q4. Notoriously volatile, the cryptocurrency was rallying going into Election Day and took off when Donald Trump won his second chance at the White House. The reasons why are varied but seem focused on expectations for a friendlier regulatory environment under the new administration. While this seems reasonable, only time will tell if crypto speculators are right.

Expectations for lower interest rates also had an impact on market returns last year and certainly in Q4. For most of the year investors had been expecting the Fed to start aggressively reducing interest rates as inflation continued to fall, but the first change didn’t come until September. The Fed reduced its short-term rate benchmark by half a percentage point during that month’s Open Market Committee meeting, in line with market expectations. The Fed then lowered rates by a quarter point each during its November and December meetings. However, inflation seemed to perk back up so the rhetoric around these decisions, especially in December, led investors to reevaluate expectations for how low rates might go in 2025. Investors had been anticipating short-term rates might fall by a full percentage point or more in the new year but, as of this writing and based on the CME Group’s FedWatch Tool, this has been revised to maybe a quarter to a half point drop. Uncertainty around this caused major stock market indexes to fall from a few to several percent as the year ended in true anticlimactic fashion.

All this again dragged on bond prices during 2024, but mostly during Q4. Prior to that, bond investors had been pricing in the aforementioned rate cut expectations which helped the Bloomberg US Aggregate Bond Index peak at over a 5% return for the year by mid-September. It was downhill from there to the 1.3% annual return and the expectation reset mentioned above. Prices fell as yields rose. The benchmark 10yr Treasury yield ended the year at nearly 4.6%, up from September lows and impacting, among other things, 30yr mortgage rates which hit 7.3% as the year closed. So 2024 was another challenging year for investors who favor the safety and liquidity of investments like US Treasurys and high-quality corporate bonds. Typical money market funds returned close to 5% for the year, more than core bonds and other traditionally safe investment options. Elsewhere within the fixed income realm lower-quality “junk” bonds returned nearly 8% for the year and preferred stocks gained roughly 7%.

So we’ve had a good run for stocks and I still think the economy and markets have a tailwind. That said, there’s bound to be volatility stemming from uncertainty about the new administration in Washington, global instability, and a host of evergreen issues like inflation, Fed policy, and when, not if, we’ll see our next recession, just to name a few. If you’re still saving and don’t need cash from your investments anytime soon, you can leverage volatility by investing more when prices fall, either by rebalancing or investing new money. If you’re spending from your investments, this might be a good opportunity to replenish your cash, pay off some debt, and otherwise batten down the hatches. (I’m not trying to be negative, just practical following a good year with relatively low volatility.) Otherwise, I’ll continue to rebalance your portfolio as needed if I’m responsible for managing it. Let us know how we can help with any of this.

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