Fourth Quarter 2024 Review

By White Pine Wealth Management

Executive Summary

• The U.S. economy in 2024 was marked by declining inflation and robust consumer spending which helped to push Markets higher. After a 2+ year bull run for US stocks, however, possible signs of over-extension have begun to show.

• The S&P 500 Index rose +25% in 2024, after rising +26.3% in 2023. This was the first time in 20 years that the index posted back-to-back years of 20%+ returns. The Tech-Heavy Nasdaq Composite fared even better, with a 29.57% advance in 2024. During the 4^th quarter, the S&P 500 and Nasdaq Composite rose 2.4% and 6.4%, respectively¹.

• The performance of overseas equities continued to underperform U.S. markets in 2024. The MSCI ACWI Ex-U.S. TR Index fell -7.5% in the 4^th quarter, which brought it’s 2024 total to a modest 6.1%. Non-U.S. bright spots in 2024 were the MSCI Taiwan TR Index, which rose 35.1% and MSCI China TR index, which rallied 19.7% after a difficult 2023¹.

• In Fixed Income markets, the Federal Reserve began cutting the Federal Funds Rate in 2024, but 10-year treasury yields rose as the bond market appeared to take issue with the Fed cutting rates in a growing economy. 10-Year US Treasuries declined -1.73% in 2024 and the Bloomberg U.S. Aggregate Bond Index rose 1.25%². While the potential for a sustained rise in treasury yields could impair capital appreciation for bond portfolios moving forward, bond buyers can enjoy starting nominal yields that are higher than they have been for over a decade. Moreover, as inflation has waned, yields in real terms have risen back into positive territory².

First Quarter 2025 Outlook

What we are watching in the first quarter of 2025:

• Market Concentration: A small group of very large companies have driven much of the stock market’s returns in 2023 and 2024. Much of the rise in concentration has stemmed from investor enthusiasm around Artificial Intelligence and its potential to increase productivity. As of this writing, the weight of the 10 largest stocks in the S&P 500 index by market capitalization was hovering around 36%, a level not seen since the Nifty Fifty era in the early 1970’s².  While it is impossible to know when the current level of market concentration will recede, investors should remain vigilant. Past instances of declining market concentration have featured increases in volatility and herd-like behavior from investors.

• Valuation: By numerous measures, stocks are not cheap heading into 2025. With a valuation of 22-times earnings, the S&P 500 Index is well above its 30-year average of 17 times earnings². However, high market concentration is obscuring the picture somewhat. If we were to exclude the 10 largest stocks in the index, the remaining 493 stocks are trading at a more palatable 18.9 times earnings. In such a top-heavy environment, investors may want to rebalance their stock portfolios to maintain exposure to more reasonably-priced sectors.

• Investor Sentiment: As 2024 drew to a close, investors were more optimistic about future stock market performance than at any other time going back to 1988, according to survey data³. Somewhat counter-intuitively, past instances of widespread optimism for stocks have often led to muted performance and/or volatility moving forward. This is because optimistic investors tend to be heavily invested already so the amount of additional buying they can do is limited. Further, if most investors are already in the market, they can easily become a herd of sellers if some future event spooks the market.

• Public Policy: It remains to be seen how and to what extent the Trump administration’s policies will impact the markets and the economy. While a more business-friendly regulatory environment may be good for stocks, increased tariffs and an evolving immigration policy may prove inflationary.

• Interest Rates and Monetary Policy: Encouraged by declines in inflation, the Federal Reserve started to modestly reduce interest rates, beginning in September 2024. Running counter to the Fed’s rate cuts, longer-term bonds sold-off sharply since the election, causing the 10-year U.S. treasury yield to rise to 4.79% by 01/14/2025. If yields on long-term bonds remain elevated, borrowing could become more expensive for consumers and businesses, slowing economic growth.

Performance data provided by ¹Y-Charts, ²J.P. Morgan Asset Management, ³The Wall St. Journal, as of 12/31/2024.