The year of 2024 was remarkable for the U.S. economy and the equity markets. High interest rates and stubborn inflation, raging wars in the Middle East and Europe, and election uncertainties and surprises around the globe were just some the factors that should have caused an economic contraction and a downturn in the stock market. However, we all witnessed just the opposite.
Aside from some notable declines through the year, each of the equity indices extended the bull market that began in late 2022. The S&P 500 Index posted a gain of 25% for the second year in a row, a record not seen since 1998-1999. The NASDAQ Composite Index was up 29.6%. The stellar performance of the major large-cap indexes was significantly driven by the so-called “Magnificent Seven” tech giants. Excluding these names, the equal-weighted S&P 500 posted a more modest, but still solid increase of 11%. The Russell 2000, which tracks small-cap stocks, rose 10% and S&P 400 Mid-Cap Index advanced by 14% for the year. Growth stocks significantly outperformed their value counterparts through all capitalization categories.
All but one of the sectors of our domestic economy were positive for the year with only materials ending 2024 with marginal -.0.4% decline. Communication services, technology, financials, and consumer discretionary led the charge with the more defensive utilities, energy and health care underperforming relative to the broader market.
The foreign markets lagged the U.S. but still finished the year with modestly positive returns.
The fixed income markets, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, weakened in the last quarter of 2024, reducing the year-to-date return to 1.25%. Shorter duration bonds outperformed long term ones due to the start of the Fed rate cutting cycle, while U.S. fiscal concerns and resilient inflation posed a negative influence on the longer end of the yield curve. Interest rates on the 10-Year Treasury ticked higher to the end of the year, finishing at 4.5%.
Our domestic economy grew in 2024, proving that it was able to withstand the interest rate hikes from the previous year. Gross domestic product expanded during each of the first three quarters of the year, culminating in a 3.1% advance in the last reported third quarter.
The employment sector, expected by some to slow with rising interest rates, remained strong through the year. While the number of new jobs trended lower during the second half of the year, job growth still averaged a decent 185,000 per month.
After holding the Federal Fund rates steady at 5.5% for over a year, the Fed started cutting the rate in September 2024 and continued to cut through December, reducing it by a full 1% by the year end. While official data showed that price pressure slowed in 2024 with inflation hovering around 2.5%, consumers faced the stark reality of the overall high cost of living. According to the Consumer Price Index, food and shelter prices rose for the 12 months ending in November by 3-5%. Prices at the wholesale level rose 3%, the largest increase since February 2023. At their December meeting, the FOMC members mostly agreed that inflation was likely to continue moving down to the central bank’s 2% target, but the process could take longer than previously anticipated. Therefore, the Fed decided to slow the pace of their interest rate cuts, signaling only two rate cuts in 2025, depending on inflation and economic data.
As we start the new year, the same drivers of the last year’s returns – inflation, interest rates and corporate profits – remain. While most market analysts are optimistic about the continued strength of the market, lofty valuations leave little room for error in meeting investors’ expectations. Santa brought some volatility to the market during the last few days of 2024, but we would like to remind our clients that this volatility brings risks. It also has the potential to create rewards, and rebalancing to align with strategic allocation targets and diversification across asset classes remain critical steps for navigating the everchanging market environment. As we move into 2025, we maintain a long-term view, investing in profitable, high-quality companies and continuing to look for opportunities.
Dumont & Blake Investment Advisors, LLC
December 31, 2024