Q4 2024 Market Commentary
Policy Uncertainty of a New Administration
2024 Market Recap
Global investors grappled with a number of uncertainties during 2024. We experienced a presidential election that was anything but normal, and geopolitical strife with a continued conflict in Ukraine and escalation in the Middle East. On the monetary front, the uneven normalization of inflation and labor markets had pundits eagerly awaiting the much-anticipated start of a Fed easing cycle and lower interest rates.
Nevertheless, risk assets rose, and the S&P 500 index rallied +25.02% for 2024, but concluded the year with an atypical weak December.[1] Global stocks as measured by the MSCI ACWI rose +17.49% for the year but slumped -1.0% for the final quarter of 2024 as the U.S. dollar continued to defy gravity, rising 7% in 2024 in the face of three Fed rate cuts.[2]
Despite a notable broadening market rally and shift away from mega-cap tech stocks during Q3, the Mag 7 technology stocks dominated the year. Accelerated earnings growth from mega-cap tech companies drove their stocks’ performance. As a result, the top 10 stocks account for a record 39% of the S&P 500’s market cap at year end, well above the previous peaks in the Nifty 50 era of 1973, dotcom bubble in 2000, and pandemic concentration in 2021.
Diversification by style, sector, and region outside of this cohort of tech stocks lagged but managed to log solid returns by historical standards. Only 29.4% of S&P 500 stocks outperformed the index, just above the record low of 28.3% in 1998. Small-caps’ relative performance struggles continued as they trailed large-caps for an eighth consecutive year and by the most since 1998.[3]
Bond yields were volatile in 2024. Despite Q3 being one of the best quarters for bonds in years, that theme reversed in December. The 10-year U.S. Treasury yield ended November at 4.18% and rose to 4.58% by year end. The third and final rate cut of 2024 occurred in December and brought the Fed Funds target rate down a full 1.0% since September. The Fed’s latest statement signaled a shift in policy expectations, suggesting fewer rate cuts in 2025 than previously anticipated. This adjustment, coupled with rising inflation concerns and uncertainty surrounding fiscal policy, weighed heavily on bond markets. As a result, the broad-based Bloomberg Barclays U.S. Aggregate Bond Index fell -3.06% for Q4.[4] Overall, it was a rather muted and volatile year for bond returns as the Bloomberg Barclays U.S. Aggregate Bond Index rose just +1.25% for 2024.[5]
Positioning for 2025
We enter the new year with our asset allocation framework continuing to favor risk assets. We anticipate some volatility in the first part of the year as the market digests the policy uncertainty the new administration brings and the expectations for fewer interest rate cuts. Nevertheless, the U.S. economy remains in a strong position for another year of expansion, with GDP growth projected at 2.4%. This outpaces the 1.9% growth forecast for all developed markets, underscoring the relative strength and resilience of the U.S. economic landscape.[6]
With a new administration focused on boosting domestic manufacturing, we anticipate a U.S. economic environment that should continue to outperform due to the following:
Favorable fiscal policies and monetary policy easing
Tax cuts focused on extending and expanding the Tax Cuts & Jobs Act
Potential increased tariffs on U.S. imports
Deregulation spurring business growth, investment, and merger activity
Stable unemployment and moderate wage growth should contribute to lower inflation, and barring any major policy changes, it should continue to trend towards the Fed’s 2% target. Credit conditions remain favorable, and earnings growth is forecasted to accelerate for the S&P 500 to 14.8% in 2025 with broader market participation.[7] While valuations for the S&P 500 have risen over the last year, the difference in valuations between the most expensive and least expensive stocks is wider than it has been 90% of the time over the last 28 years.[8] This should create opportunities for active stocks pickers and diversified portfolios.
Entering the year, we made a strategic shift in your portfolio by modestly increasing your U.S. large-cap equity exposure and reducing developed international equities. While the contrarian would say that U.S. stocks have enjoyed an extended run of superior performance, many international markets are facing cyclical challenges, the prospect of increased U.S. tariffs, and a dollar that is likely to remain strong in the near term.
We remain overweight U.S. stocks and believe small & mid-cap stocks offer compelling value. Small & mid-cap stocks should benefit from the new administration’s domestic policy trends, Fed rate cuts, and broadening economic growth. Further, the chart below highlights the historical outperformance of small-caps (Russell 2000) versus large-caps (Russell 1000) after the last 10 presidential elections.
Average Total Returns for the Russell 2000 and Russell 1000 After the Last 10 Presidential Elections
Despite the gyrations and frustration experienced in the bond market over the past three years, at current levels, bonds play a renewed diversifying and defensive role in portfolios looking forward. We remain bullish as we see some of the strongest bond yields in years. We believe interest rates will trend lower over the medium term with subsequent Fed rate cuts and lower trending inflation, offering attractive total return potential. Until the weight of the evidence suggests that the environment is changing, we believe broadening earnings growth, a solid labor market, cooling inflation, and the Fed continuing to gradually cut interest rates to normalize policy should provide a supportive environment for diversified portfolios in the year ahead.
With the start of the new year, we thank you for your continued partnership and for entrusting us as the steward of your family’s wealth. We look forward to health, happiness, and endless possibilities in the coming year!
DISCLOSURES
IMPORTANT DISCLOSURE INFORMATION
This material is provided for information purposes only and should not be construed as a recommendation or investment advice, as the material does not consider the investment objectives, risk tolerance, restrictions, liquidity needs or other characteristics of any one particular investor. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
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