Winter 2025 Market Commentary
By Marc Usem and the Affiance Financial Investment Committee
Fourth Quarter Caps a Strong Year for Stocks
The fourth quarter of 2024 included one of the most highly anticipated events of the year: the Presidential election. The election swung in Trump’s favor, as the electorate demonstrated a desire for change from the current administration. Markets generally dislike uncertainty and tend to rally post-election regardless of the outcome. This held true as the S&P 500 gained 2.5% on November 6 alone.
The November Federal Reserve meeting was cancelled to prevent any perceived political influence. Investors hoped the December meeting would confirm a continuation of the Fed’s process of reducing interest rates. Lower rates provide economic stimulus reducing borrowing costs and generally supporting bond and stock values. The Fed’s third cut of the year reduced rates by 0.25% to 4.5%, leaving rates 1% lower than the 5.5% high. However, Fed projections of only two rate cuts in 2025 disappointed investors as prior estimates had been four rate cuts. Stocks reacted by trading lower after the announcement.
The fourth quarter of 2024 was the fifth consecutive quarter of positive stock market returns and saw the S&P 500 gain 2.4%. Once again, large-cap U.S. stocks led international markets. Developed markets dropped by -8% and emerging markets dropped nearly -10% during the quarter. Full year returns maintained the sharp U.S. versus rest-of-world comparison - the S&P 500 closed the year up 25%, developed markets up 3.4%, and emerging markets gained 6.9%.
In addition to global diversification, size and style diversification were also punished during the quarter. Fourth quarter returns for small-cap stocks were -1.5%, with mid-caps close behind at 0%. Full year returns for small- and mid-caps were a fraction of large-cap gains. Small-caps were up 12% with mid-caps up 15%. Growth stocks outperformed value again in 2024 with fourth quarter gains of 7% while value fell -2%. For the full year, large growth jumped 33% and value up 14%.
Bonds were plagued by a volatile interest rate environment during the year, with 10-year rates swinging up and down by more than 1% twice during the year. January’s starting rate of 3.9% rose to 4.7% by late April, then fell to 3.7% by mid-September, before rising again to reach 4.6% by the end of December. Interest rate volatility left the Aggregate Bond index down -3% in the fourth quarter, and up only 1.3% for the year. Long-term treasuries fell by nearly -10% during the fourth quarter and ended the year down -8%. Cash was king with a 5.1% return for the year. We would note that we shortened our bond portfolio maturities during the year and include bond fund alternatives in our portfolios to mitigate interest rate risk inherent in the indexes.
The year’s market returns highlight the saying: “diversification means always having to say you’re sorry.” The inventor of modern portfolio theory, Harry Markowitz, is credited with a famous corollary quote, “Diversification is the only free lunch in investing.” When diversifying investments, you have to accept that some investments will underperform in order to reduce the risk of being concentrated in any single investment or asset class – “sorry”. Over time, diversified portfolios are designed to provide increased portfolio stability and reduced risk while still sacrificing little, if any, long-term growth – “free lunch”. Our globally diversified portfolios are designed with these goals in mind.
We would highlight that the past two years have posted significant returns with stocks up 26% in 2023 and 25% in 2024 for a 58% two-year gain. Stock market valuations are stretched compared to history. However, as we enter 2025, we are optimistic that markets will be buoyed by strong employment and consumer spending, modest inflation, advances in AI, and further Fed rate cuts.
We know we can’t control the ups and downs of markets, but we can rely on our disciplined investment processes to provide well-designed, tax-efficient, globally diversified portfolios that suit your investment planning needs.
Thank you for your continued confidence in our work.
Sources: YCharts, SectorSPDRs, Morningstar, Federal Reserve, China Briefing, Reuters, Forbes
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.
