For the second year in a row, a small number of U.S.-based technology stocks earned exceptional returns.
The S&P 500 Index returned 25% last year, slightly under 2023’s return of 26.3%. Back-to-back equity returns over 20% have been extremely rare. Notably, just seven large companies drove more than half of these gains, and their stock prices now reflect very optimistic expectations about their future growth. Smaller company stocks earned an annual return of 11.5%1, in line with historical averages.
Stock markets outside the U.S. had mixed results.
In most years, the 2024 return of 11.8%2 for developed international stock markets would be viewed as a good annual return, but when translated into U.S. dollars, the return dropped to 4.3% due to the strong dollar. Emerging equity markets such as China, Taiwan, and India, had stronger results. The MSCI Emerging Markets index appreciated 13.7% in local currency terms and 8.1% for U.S. dollar-based investors.
U.S. companies now make up 67% of the global stock market – the highest level in over 40 years. This means U.S. stocks are relatively expensive compared to those in other countries.
The U.S. economy remains strong, growing 3.1%3 after inflation.
Despite election campaign rhetoric, inflation has cooled to 2.8%4, with housing and services costs now being the main drivers of price increases. The Federal Reserve continued to lower the Fed funds interest rate during the fourth quarter. It is currently at 4.38%, a full percent lower than at the start of the year. With a new administration taking office, there’s uncertainty about future policies and their effects on the economy. Some proposed policies, like increased tariffs and reduced immigration, could push prices higher, while others, like tax changes and fewer regulations, might boost economic growth.
Bond yields moved up in the fourth quarter after declining earlier in the year.
Since the election, bond yields increased to 5%5, while yields of short-term money market funds fluctuated in the 4.2% to 5% range. The increase in bond yields caused bond prices to fall, resulting in the overall bond market declining 3.1%5 in the fourth quarter. For the full year, bonds appreciated 1.3%5.
Given ever-present risks, we are maintaining investment portfolios close to their established targets.
There was much emotion leading up to and after the November election. Excitement for the incoming administration should not lead to taking greater investment risks than before, nor should despair lead to excessive conservatism. We remain focused on building investment portfolios based on proven principles and thorough research, always keeping your personal goals, cash flow needs, and comfort with risk at the forefront of our decisions.
1 Russell 2000 Index; 2 MSCI EAFE Index in local currency; 3 Bureau of Economic Analysis, third quarter 2024; 4 Core PCE deflator; 5 Bloomberg U.S. Aggregate Bond Index