The S&P 500 (total return) Index rose 25% in 2024. That came on the heels of a 24% gain in 2023. Resulting in the best consecutive two-year increase since 1997/1998 – the heart of what turned out to be the tech bubble.
US Large Cap stocks trounced every other asset class. (Except for maybe Bitcoin (up 125%), if you want to call that an asset class.)
The Russell 2000 (small cap) index rose 11.5%. International Developed Markets gained 4.7%. Emerging Markets were up 7.5%. And Real Estate (REITs) rose 2.77%.
Fixed Income
With longer term interest rates spiking again, the Bloomberg US Aggregate Bond Index fell 3.06% in the quarter. But managed to eke out a 1.25% gain for the year. Somewhat counterintuitively, the yield on the benchmark 10-year US treasury bond is inching back up toward 5% even while the Fed has been lowering short-term rates. It’s good to remember that while the Fed has control over short-term rates, market participants determine the level of longer-term rates via the supply and demand for bonds. And bond investors are concerned that both deficit spending and inflation may increase under policies proposed by the incoming administration, thereby demanding higher compensation to own them.
For a thorough review of the review of the year’s performance data, see the Quarterly Market Review from our friends at Dimensional Fund Advisors.
What’s going to happen?
Much of the future course of the economy and the markets will turn on the polices of the incoming administration. But there is a great deal of uncertainty around which of President Trump’s policy proposal may actually be enacted and to what degree. It is equally uncertain what their effects on the economy might be. Several of the proposals may be contradictory in terms of their consequences.
Taxes. The market is expecting an extension of the original 2017 TCJA tax cuts. And possibly more. But it is not certain exactly what the tax bill will encompass, especially if there are not commensurate spending cuts to offset them to placate the deficit hawks in the Republican party.
Tariffs. Incoming President Trump is promising rounds of tariffs across the board. But it is entirely unclear what the scope of this program will be and how they might be targeted.
Inflation. The Fed has made considerable progress in tacking inflation, resulting in two rate cuts in 2024. But the possible inflationary effects of tariffs, tax cuts and the continuing strong economy leave much doubt around what the Fed will do next.
Deportations. An enormous wild card is what the degree of immigration enforcement will be and what effect that might have on the economy. Reduced immigration would have a negative effect on the construction, hospitality and agriculture industries and could increase costs in those industries.
And these are just a few of the uncertainties.
A Complete Unknown
This time of year, Wall Street prognosticators come out of the woodwork making predictions about what the economy and the market is going to do in the next year. The truth is: they don’t have a clue. As the great economist John Kenneth Galbreath once said, there are two kinds of forecasters: Those who don’t know and those who don’t know they don’t know. So please don’t get euphoric about the returns of the last two years. But don’t get overly despondent about the possible bad news, either.
By the same token, your long-term plan shouldn’t be reliant on short- term predictions anyway. But having some comprehension of what long-term returns might look like can be useful because planning requires making such reasonable assumptions. And you won’t be surprised to see that following two such extraordinary return years we are being cautioned by the experts to tamp down our longer term expectations.
Time to Reflect
The turning of the calendar offers a perfect opportunity to reflect on both our personal lives, goals and aspirations and especially on how our investments are structured and how they interact with those goals. There is a good deal of hype these days in the investing world: AI, private equity, crypto, etc. I strongly encourage you to dig deep to figure out what matters most to you and to align your portfolio to support that. Please don’t be distracted by other peoples’ shiny objects. Take the time and energy to polish your own.
