2024 Year in Review

By all accounts, 2024 was a good year for investors. U.S. stocks led the way higher, surprising many by delivering a second consecutive year of 20%+ gains. The Russell 3000 Index, a popular proxy for the U.S. market, closed at a new record on 59 occasions, nearly a quarter of the year’s trading days. The index ended the year up 23.8%. Within the U.S. market, large-growth stocks were in the driver’s seat as the excitement around artificial intelligence continued to lift the share prices of many technology stocks.

Other major asset classes delivered positive returns as well. International stocks gained 5.5%, while bonds and cash were up 1.3% and 5.3%, respectively. The positive return of bonds came as a high starting yield offset the negative impact from a modest increase in long-term interest rates (bond prices move inversely with rate movements). 

The year was characterized by relatively positive economic developments in the face of the most restrictive monetary policy in decades. Growth remained solid, slack emerged within a tight labor market, unemployment remained low by historical standards, and inflation continued to grind down toward the Federal Reserve’s 2% target. The year was far from perfect, but if this outcome had been offered to market participants last January, most would have happily accepted it.

The Federal Reserve ultimately liked how the economic data progressed. In September, the rate-setting body voted to lower its benchmark interest rate by 0.50%. It then went on to make 0.25% cuts at both the November and December meetings. With the benchmark federal funds rate now set at a range between 4.25-4.50%, the Fed has signaled it intends to slow or perhaps even pause additional cuts as it evaluates the impact of the easing done thus far. 

Looking Ahead to 2025

Can the good times from 2024 continue into the new year? As always, there are plenty of reasons for optimism and just as many for caution. The list below illustrates some of the major known factors that may impact the markets in the coming year. As we have seen in the past, with the pandemic or the launch of Chat GPT, the most impactful events might not even be on the radar yet.

Sizing Up the New Year

At a high level, market and economic fundamentals appear on strong footing as we enter the new year. The economy is humming along, and the labor market has been resilient. Moderating inflation has allowed the Federal Reserve to cut rates following the sharpest cycle of increases in decades. Growth in business earnings is expected to remain strong, buoyed by the billions being invested in the infrastructure needed to deploy artificial intelligence at scale. AI further promises to increase the productivity of workers throughout the economy. Finally, the incoming Trump administration is touting some market-friendly policies, including an extension of the 2017 tax cuts, with the potential for additional cuts and deregulation. 

These factors reflect legitimate reasons for excitement. There is just one problem, however, and it’s a big one. All this good news may already be reflected in market prices. By some measures, market valuation (the price you pay relative to the fundamental value you receive) for large-cap stocks in the U.S. is approaching the highest levels since the late 1990s. At that time, excitement about the mainstream adoption of the internet sparked market euphoria and the investment of billions in the infrastructure needed to take the masses online. When the bubble eventually burst, it became clear that the excitement was overdone.

Some popular measures of sentiment, such as a survey produced by the Conference Board, show that investors are as excited about the prospects for the stock market as they have been in decades.

It is said that the market will move in the direction that causes the most pain. This means when investors are overwhelmingly positioned on one side of a trade, the buying/selling pressure that could continue to move prices in a specific direction has been exhausted. This can leave prices with only one direction to go… in reverse. For this reason, sentiment indicators are considered a contrarian indicator. Extremely optimistic (frothy) sentiment has historically been a bad sign for the market, while extremely pessimistic sentiment has been a positive. 

While investors appear extremely optimistic, and market valuations reflect that optimism, there is a real risk that the things people are excited about won’t play out as expected.

• Not all policy initiatives touted by the incoming administration are definite positives. There is substantial uncertainty about the impact of tariffs and a potential immigration clampdown.
• An extension of the 2017 tax cuts, other tax cuts, or meaningful deregulation may not come to fruition.
• Progress on inflation has largely stalled in recent months. It could remain stuck or even reverse. If this were to occur, interest rates would likely remain higher for longer.
• While reduced government spending would improve the current budget deficit, government spending acts as a sugar high for economic activity. Activity would likely slow temporarily as the economy is weaned off higher spending.

Ultimately, there are compelling reasons to be both excited and anxious about the market’s prospects in the new year. It is impossible to know with certainty how things will play out. Anyone who claims to know is either lying to you, to themselves, or both. As the famous economist John Kenneth Galbraith once said, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

So, what does all this uncertainty mean for investors? People often assume that intelligent investing involves anticipating future market conditions and then adopting an aggressive or conservative posture in response. The financial media’s coverage certainly reinforces this type of behavior, but in a world that is too complex to predict, you don’t have to play that game.

Intelligent investing means building a diversified portfolio that strikes a balance between risk and reward, tailored to an individual’s unique circumstances. This allows for participation in the upside when times are good and provides the confidence and wherewithal to ride out the occasional storm.

Source: MarketWatch

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