The fourth quarter of 2024 was marked by significant economic and political events, including two interest rate cuts by the Federal Reserve and surprising election results that will influence government policies for the next four years. Meanwhile, markets continued to rise despite marginal gains in business from artificial intelligence and growing concerns about the current state of the economy.
Republicans across the country outperformed many political experts' expectations in November, winning the Presidential election and narrow majorities in both the House of Representatives and the Senate. The new Republican government is expected to focus on policies related to lowering corporate taxes, increasing border control, and introducing tariffs on foreign goods. These policies aim to positively impact the domestic economy and markets; however, they will face challenges passing through Congress with a narrow Republican majority.
After an initial 0.50% interest rate cut in September, the Federal Reserve further reduced interest rates with two additional 0.25% cuts in November and December, bringing the Federal Funds rate to a range of 4.25% to 4.5%. With inflation now down to 2.5% according to the Personal Consumption Expenditure (PCE) Index, the Federal Reserve deemed their policy interest rate overly restrictive. The PCE Index measures the average increase in prices for goods and services purchased by consumers in the United States. The Federal Reserve considers it the preferred key indicator when setting monetary policy because it reflects changes in consumer behavior and captures inflation across a wide range of expenses. In their December press conference, the Fed also lowered their expectations of future interest rate cuts as the path of inflation became more uncertain. Fed Chairman, Jerome Powell, used the analogy of walking into a dark room full of furniture to describe the Fed’s current outlook on policies. This policy uncertainty did not sit well with the market, which led to volatility in stocks and bonds at the end of the year.
Turning to markets, U.S. equity indexes showed solid performance during the fourth quarter. Led by the largest 10 stocks of the S&P 500, the index closed at its most concentrated level in history (see chart below). While there are reasons to be optimistic about companies like Nvidia, Microsoft, and Meta, this overall optimism may pose risks for investors. With a lot of good news and high expectations currently priced into these stocks, their share prices are vulnerable to any bad news that doesn't meet investors' euphoric outlook.
Source: JP Morgan’s Guide to the Markets
JFG Outlook
At the start of the year, 19 Wall Street analysts forecasted the median S&P 500 return would be +1.7% for 2024. (2) These analysts were well off the mark as the S&P 500 closed 2024 up 23.3%, notching back-to-back +20% years for the first time since 1998. (1) But after those two consecutive years in 1998, what happened next was a historical breakdown. The dot-com internet bubble burst in 2000, and the S&P 500 index (and particularly the technology stocks) gave back all their gains, falling over -40% by the end of 2002. While we do not believe today’s market resembles the same level of excess from the dot-com bubble, valuations remain elevated. Companies who promised growth from artificial intelligence over the past two years must now prove this technology will help them grow sales to justify their lofty stock prices.
As we began 2024, with many experts forecasting moderate equity returns, we believed that high-quality bonds would once again provide the diversification and safety that portfolios lacked during the rate rises of 2022. Bonds gained just 1.5% in 2024, but a well-diversified portfolio of stocks and bonds still performed well overall. Looking ahead, when markets inevitably go sideways again, we believe investors will seek the stability of bonds and the attractive 4.5% yields that U.S. Treasuries now offer. This shift towards bonds could provide a buffer against market volatility and help maintain portfolio stability in uncertain times.
At Juno, we focus on finding a balance between our client’s goals and risk tolerance to achieve long-term success. Investors over the past five years benefited from staying the course through short-term market shocks, as the stock market reached new all-time highs.
Sources
- FactSet
- First Trust Portfolios