Solid Returns on the Back of a Resilient US Economy
The markets closed out 2024 on a mixed note. The momentum in large capitalization high growth equity names stalled as investors used the last month of the year to take profits and rebalance portfolios. The S&P 500 index fell -2.5% during December, in contrast to its 20+% annual rise.
Bonds struggled, particularly after the election as the market increased its probability of an inflationary resurgence, centered around the incoming administrations threat of international trade tariffs. Higher bond yields also contributed to the pause in the equity rally during the final weeks of the year.
Stock market returns over the past year were solid driven by a resilient US economy, moderating inflation, and impressive corporate earnings. For the year the S&P 500 was up +24.8%, US Small Cap was up +11.4%, International Developed was up +3.5%, and Emerging Markets were up +10.8%.
Despite large annual returns on an absolute basis, it was difficult for diversified investors to keep up with the performance of the headline S&P 500. To illustrate, the ten largest stocks in the S&P 500 currently account for approximately 40% of the index’s weighting, which is the largest level in modern history. To provide a sense of the impact the high flying names are having on the index, we can look to the equal-weighted S&P 500, which underperformed the widely followed market capitalization index by 11.6%!
Investing in fixed income continued to be challenging. Despite the Federal Reserve cutting the policy rate by 100 basis points, intermediate and long term interest rates actually increased, with the yield on the 10 year US Treasury note moving from 3.88% to 4.57%. On the other hand, 2 year note yields ended up practically unchanged. For the year, short term Treasuries bonds were up +3.9%, while intermediate and long term Treasuries were down -0.8% and -8.1% respectively.
Looking ahead, much has been written about the overvalued U.S. equity market, however adding to the uncertainty are policy changes coming from the new administration. From a political perspective there are generally two narratives regarding the path the economy could take. One view sees tax cuts and deregulation unleashing animal spirts. The other foresees policy uncertainty hitting growth, with trade and immigration restrictions increasing inflation.
In reality, there are offsetting cross currents at play with regard to economic policy. For example, trade tariffs are generally seen as unfriendly to interest rates, while deportations and debt reduction seen as unfriendly to growth. Something will have to give, but it is too early to know how things shake out. Therefore, my suggestion is to observe and be reactive to information and momentum as it develops.
As we close out a profitable year for investors, a new year begins with questions and concerns. Obviously, the new legislative agenda will be a big focus early in the year as will trends in both inflation and interest rates. Add in a historically overvalued US equity market and there is plenty for investors to worry about if we choose to do so.
My crystal ball is as cloudy as anyone’s, but I do believe the economic fundamentals could be decent for 2025, leading to a higher stock market at year end. With that said, the market will likely move around more than it did in 2024 as emotions swing between greed and fear. Therefore, investors should expect a 10-15% stock market drawdown at some point during the year which could be used to our advantage. Managing and diversifying risk through a balanced portfolio will be key.
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Enclosed are your investment reports for the last quarter. Please feel free to contact me if you would like to discuss our investment strategy for the upcoming quarter. Thank you for your continued trust and confidence.
Sincerely,
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
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Sources:
The Wall Street Journal: https://www.wsj.com/market-data?mod=nav_top_subsection
J.P. Morgan Asset Management: https://www.jpmorgan.com/insights/markets/top-market-takeaways/tmt-fourth-quarter-forecast-three-things-that-could-affect-markets
International índices: https://www.msci.com/real-time-index-data-search
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
__________________________________________________________________________________Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.
Indices mentioned are unmanaged and cannot be invested into directly. The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. The Russell 2000 Index is a stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index. The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries. The MSCI Emerging Markets Index is a market capitalization weighted index comprised of over 800 companies’ representative of the market structure of the emerging countries in Europe, Latin America, Africa, Middle East, and Asia. Prior to January 1, 2002, the returns of the MSCI Emerging Markets Index were presented before application of withholding taxes.
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