Investment Commentary | December 2024

It was a December to remember for all the wrong reasons, with no Santa Claus rally to spread year-end cheer. For the month, the S&P 500 finished down 2.38%, but still ended the year up a surprising 25.02%. This was the second year of 20%+ performance, which has been the best two years of index performance since 1998.

Strength Across Sectors and the Economy

The market and economy were significantly stronger than expected. Market strength showed in more sectors in 2024 than compared to 2023, with four S&P sectors finishing above 30% for the year – Communications (40.23%), Information Technology (36.61%), Financials (30.56%), and Consumer Discretionary (30.14%). The US economy led the world in GDP growth for much of the year. As of the 3^rd quarter reading, only Argentina was ahead of the US with 3.9% and 3.1% GDP growth respectively. Additionally, earnings from S&P companies were strong throughout the year, showing consumer resilience.

Navigating Challenges with Optimism

Elections, wars, interest rates, and high valuations; you name it, and the market looked past it. Most of the push higher came from the promise of lower rates, productivity gains from artificial intelligence, and potentially lower taxes and deregulation stemming from the Republican election victory. The ever-present question for the stock market is whether the good times will continue. Note that the last two years of performance this strong was before the dot-com collapse. While history may not repeat, it is always worth paying attention to.

Robust earnings, low unemployment, deregulation, and advancements in productivity are poised to sustain upward momentum in the stock market throughout 2025. In light of the persistent challenges facing other nations, the United States remains the leading global market and economy, continuing to attract significant capital inflows.

Small Caps Struggle in December

The Russell 2000 Mid and Small Cap index finished the month even worse than the S&P 500, down 8.26% for the month, and ending the year up 11.54%. Deregulation arguably stands to benefit smaller companies more than their larger peers, but this hope was offset by the reality of longer-term interest rates creeping higher. As we have written throughout the year, higher interest rates affect these companies more than their larger peers.

International Markets Show Modest Gains

Foreign stock markets fared better for the month than their US counterparts, with the developed markets ending the month down 2.27% and emerging markets ending down 0.14% based on the MSCI EAFE and MSCI EM indexes. For the full year, the developed markets index finished up 3.82% and the emerging markets index finished up 7.50%.

The issues that have plagued both developed and emerging markets look set to continue into 2025. For Europe the economic malaise starts with stifling regulation which reduces growth, innovation, and productivity. Japan’s issue is inflation leading to rising interest rates. 2024 was the first time The Bank of Japan increased interest rates in 17 years. Germany and Japan, both powerhouses in automotive manufacturing are also suffering from stiff competition with Chinese and South Korean automakers. China continues to suffer from demographic problems, lack of consumer spending, and debt fueled infrastructure and real estate spending. Currently, Chinese bonds are in or close to bubble territory, with 10-year rates below 2%.

Bonds Struggle Amid Rate Fluctuations

Bonds and fixed income did not escape December unfazed, ending the month down 1.64%, and ending the year up a paltry 1.25% based on the Bloomberg US Aggregate Bond Index. Inflation and interest rates continue to be the story in this market. During the year, as inflation trended downward, the market anticipated short-term rate cuts. However, as the Federal Reserve (Fed) embarked on the much-anticipated cutting cycle, long term interest rates went up rather than down. From September 18^th through December 31^st, the 10-year Treasury rate went from 3.70% to 4.58%, while the short-term overnight rate set by the Fed declined from 5.25% to 4.25%. The increase in longer term rates moved the price of bonds downward, culminating in the low overall return for the year.

The discussion of inflation and the interest rate response to inflation from the Fed will continue in earnest until there is a clear picture regarding policies from the new administration. The potential tariff and immigration policies both have the possibility of being inflationary. Deregulation and lower taxes could also be inflationary. The devil is in the details, how policies are rolled out and implemented will affect the Fed’s response with monetary policy.

Precious Metals Shine

Precious metals were not immune from the December pullback, down 1.07% for the month, but ended the year as the best performing asset class with a 26.10% return for the year based on the S&P GSCI Precious Metals index. Geopolitical issues across the globe and governments looking for non-dollar assets to protect their economy and currency could continue to provide a tailwind for metals going forward.

Wrapping Up 2024, Looking Ahead to 2025

While unwrapping presents, we wrapped up 2024. Although investors ended up with coal in their stockings for the month rather than a rally, it was a good year overall. Looking ahead to 2025, there are a lot of hurdles from valuations to policy changes that could disrupt markets. But it also could be another year that markets just look past the challenges to continue the climb up.