2024: A Rising Tide Lifts All Assets
“We appreciate the past. We are grateful for the present and we’re looking forward to the future with great anticipation.” – Jimmy Carter
Investors enjoyed another year of strong returns across a broad range of asset classes. Global stocks started the year strong as the economy continued to expand at a healthy pace alongside falling inflation and a healthy labor market. It was the perfect storm that would ultimately allow the Fed to achieve the improbable soft landing. Fast-forward to the second half of the year and recessionary fears began to creep in as a string of softer-than-expected jobs reports in mid-summer shook the markets. However, the brief sell-off and subsequent spike in volatility was short-lived and stocks continued to march higher. With the uncertainty of the fast-approaching U.S. elections on the table for November, it seemed as though this abnormally low volatility would soon come to an end. However, the elections came and went with very little volatility in stocks, and the S&P 500 once again was reaching new all-time highs throughout the final quarter of this year. Meanwhile, we saw assets such as gold and bitcoin reach all-time highs as well. For bonds, it was a year of ups and downs as interest rate volatility remained high, but ultimately both taxable and municipal fixed income investors experienced positive returns as well. All told, a globally diversified 60% equity (MSCI ACWI Index) / 40% bond (Bloomberg Global Aggregate) portfolio delivered more than 10% in total return for the year.
Stocks – Impressive Rally Continues
The past 12 months brought another impressive year of returns for equity investors, who saw the S&P 500 surge more than 25% in total return for the second consecutive year. Over the course of 2024, the S&P 500 notched 57 record highs, placing the past year in the top five historically for new record highs. Elsewhere, returns were strong but failed to keep pace with U.S. large caps. The Russell 2000 finished the year higher by more than 11.5%, as higher interest rates constrained the floating rate debt heavy small cap index. Meanwhile, international developed stocks were higher by about 4.5%, while emerging market stocks were higher by more than 8%. A more sluggish economic backdrop paired with a stronger dollar remained key headwinds for U.S. investors in foreign markets over the past year.
From a sector standpoint, each of the 11 S&P 500 sectors delivered positive returns on the year. However, the following chart highlights the significant dispersion between the top- and bottom-performing sectors on the year. Communication services, financials, and consumer discretionary, and utilities were among the top performers. Rounding out the bottom were real estate, health care, and materials. Interestingly, the worst-performing sectors over the past year also carry three of the four smallest weights in the S&P 500 index.
Earnings in Focus
As we set our sights on the year ahead for stocks, earnings remain at the top of the list. Analysts expect S&P 500 earnings to grow at an impressive clip of nearly 15% in the year ahead, well above the 10-year average of about 8%. Notably, analysts believe earnings growth for companies outside of the Magnificent 7 will improve considerably over the coming months. This is important because the Magnificent 7 stocks have been responsible for the bulk of earnings growth over the past couple of years and subsequently have seen the strongest returns. With market concentration and valuations sitting well above averages heading into 2025, strong earnings will be a key catalyst to see the next leg higher in this currently two-year-old bull market.
Bonds – Resilient Against Higher Yields
Interest rates moved notably higher over the course of the year, creating a challenging backdrop for fixed income investors. After starting the year around 3.9%, the yield on the 10-year Treasury note finished the year around 4.57%, a significant move higher. Despite the higher interest rate headwinds, both taxable and municipal bonds managed to sneak out positive returns of about 1.25% and 1%, respectively, on the year.
Looking forward, higher rates present both challenges and opportunities for bond investors. Higher interest rates lead to higher expected returns for bonds, as starting yields are the primary driver of returns for investment grade bond holders. However, rapid changes in interest rates like we've experienced recently can trigger temporary turbulence in bond prices. We expect this volatility to continue in the year ahead, as the markets navigate a more cautious Federal Reserve alongside tariffs, deregulation, and a growing federal deficit. With that said, the yield on the aggregate taxable bond market is currently around 5%, while municipal bonds are yielding closer to 4%. For investors looking for stable income with the potential for price appreciation in the event of an economic downturn leading to lower rates, we believe the bond market continues to offer a compelling entry point.
Outlook – Risks on the Horizon
While the outlook for both the markets and economy remains strong, there are potential risks that will command our attention as we look to the year ahead. With the incoming administration set to take office Jan. 20, we are almost certain to see tariffs put into effect. We can expect to see more tariffs on China and other key exporters, which could lead to an uptick in goods inflation, an area where inflation has been quite low recently. This could create a dilemma for the Federal Reserve, which recently dialed back their expectations for interest rate cuts due to higher inflation forecasts as well as stronger economic growth. If the Fed is forced to keep monetary policy restrictive to stave off inflationary pressures, it could be enough to push the economy into a mild recession, particularly against the current backdrop of a softening labor market
Bringing it all together, we continue to see plenty of positive news priced into the stock market, reflected in elevated valuations, particularly in the U.S. This is not unexpected, given the incredibly strong earnings backdrop and generally upbeat economic outlook. With lofty expectations and valuations in certain pockets of the market, we continue to stress the importance of diversification in portfolios. The concentration of the S&P 500 is something we continue to watch, with the top 10 stocks in the S&P 500 representing nearly 40% of the index. While it can be easy to get caught up in what has been working recently, we continue to lean on the merits of diversification and constructing portfolios that are equipped to endure a wide range of market environments.
Please let me know if you would like to set up a meeting to discuss any questions about your portfolio.
This letter was created by a third party and was not written or created by the Advisor named above.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses.
Investments in individual sectors may be more volatile than investments that diversify across many industry sectors and companies. Certain sectors of the market may expose an investor to more risk than others.
An investment cannot be made directly into an index.
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Sources: Blackrock, JP Morgan, Bloomberg, Goldman Sachs, Morningstar, and YCharts. This material is being provided for informational purpose only and was obtained from sources deemed to be reliable. It is not represented as being complete, and its accuracy is not guaranteed. The information and opinions given are subject to change at any time based on market and other conditions and are not recommendations of or solicitations to buy or sell any security. Opinions and forecasts expressed herein might not actually occur.