2024 in Review ~ The Good, The Bad & The Ugly

It was another great year for domestic equity markets in 2024, with the major indices posting double-digit returns for the year. These returns were buoyed by a resilient U.S. economy, driven by strong corporate earnings, a robust consumer, continued enthusiasm around artificial intelligence (AI), and a resolved U.S. Presidential election. Bond market returns were mixed throughout the year reflecting the uncertain path of interest rates and finished somewhat muted compared to the strong equity gains. On the economic front, although it was not a linear ride, inflation did continue its path lower, while the labor market continued to come back into better balance, all on the back of a strong U.S. economy. 

In 2024, the S&P 500, representing the largest U.S. companies, rose a whopping 25.0%. This marks the second consecutive year of 20%+ returns. The technology-focused NASDAQ saw returns of 29.6% and the Russell 2000, an index of small cap companies, rose 11.5%. The Communication Services sector led the way in the S&P 500, gaining over 40%. This was followed by Information Technology (+36.6%), which was driven by the continued AI boom, and Financials (+30.5%), which benefited from a strong economy and the prospect of less regulation. The only sector not participating in the rally was Materials, which was basically flat for the year. Most of the annual gains came during the first three quarters of 2024, with the fourth quarter seeing more modest gains. The S&P 500 rose only 2.4% in the fourth quarter, driven almost exclusively by the Mag 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). The other 493 stocks were slightly negative for the quarter. The NASDAQ and Russell 2000 rose 6.4% and 0.3% respectively.

Conversely, international markets produced more muted returns. The MSCI EAFE, a benchmark for large stocks from developed nations, declined 8.1% during the fourth quarter and rose just 4.4% for the year. Emerging markets stocks, as measured by the MSCI Emerging Markets Index, erased more than half of its three quarters’ worth of gains by falling roughly 8.0% in Q4 2024, but still rose 8% for the full year. The potential for tariffs on Chinese exports weighed heavily in the final quarter of the year.

The bond market lost some traction in the fourth quarter as the Bloomberg U.S. Aggregate Bond Index declined 3.1%, erasing most of the gains experienced during the first three quarters of the year. The U.S. Aggregate Bond Index returned a modest 1.25% for all of 2024. The pullback in Q4 was the result of the steepening of the U.S. Treasury yield curve, which saw rates on 1-month T-Bills decline by 53 basis points to 4.4%, while yields on the 2-yr U.S. Treasury through the 30-year U.S. Treasury rose an average of 73 basis points. The 2-yr U.S. Treasury ended the year at 4.2%, while the 10-yr ended at 4.6%, resulting in positive returns for shorter maturities and losses on longer maturities. Most of this movement came after the Federal Reserve began its easing cycle in September and investors began to anticipate higher inflation in the future from the potential implementation of tariffs. As a point of note, the short end of the yield curve has historically been determined by the policy of the Federal Reserve, while the long end of the curve has typically been dictated by investors’ inflation expectations. For all of 2024, short-term rates on U.S. Treasuries declined an average of 101 basis points, while the remainder of the curve rose an average of 58.4 basis points.

The Federal Reserve remained on pause for most of the year, maintaining the federal funds target rate in the 5.25% to 5.50% range, as the Fed looked for evidence of inflation lowering in a sustainable way. After a bumpy couple of months in the beginning of the year, inflation did indeed begin to move lower giving the Fed the confidence it was looking for to begin the recalibration of interest rates. In September, the Committee began to lower its target rate with a 0.50% cut, and then continued to do so with 0.25% cuts at its November and December meetings. In total, the Committee reduced its target rate by a full 1.0% in the latter half of the year to 4.25% to 4.50%. Further moves by the Federal Reserve to lower interest rates to a neutral rate (a rate that is neither restrictive nor accommodative) is less clear in 2025, with Federal Reserve participants only pricing in 0.50% reduction in its target rate in 2025. Committee members remain data dependent and will be attuned to the effects of policy changes on the economy.

After posting modest increases for much of the year in 2023, inflation, as measured by Consumer Price Index (CPI), began to slide lower from March through June, before trending higher in the fourth quarter. Energy and core goods experienced deflation while food inflation remained mild. The primary drivers of inflation were shelter costs, which represent over one-third of the CPI basket, as well as auto insurance. It is expected that as housing leases and insurance renewals roll over, pricing pressures in these sectors will continue to trend lower in 2025, pushing headline inflation lower as well.

The labor market was a bright spot in 2024, as unemployment fell back to 4.2% in November after rising to 4.3% in July. Overall, the labor market eased during the latter half of the year, and even at 4.2%, remains well below its historical average of 6.2%. Job growth continued at a healthy pace due to increased immigration and participation among prime age workers. This allowed employers to fill positions without putting upward pressure on wages. However, if immigration reform were to detract from the labor force, the market could see an increase in wage pressures, which could in turn lead to higher inflation.

The U.S. economy continued its strong performance in 2024, growing in excess of 3.0% in the second and third quarters of the year, after recording below trend growth in Q1 of 1.6%. This growth continued to be propelled by a strong consumer and continued business investment. U.S. consumers represent approximately 70% of the domestic economy. Rising incomes and increases in their overall wealth led the way as consumer spending increased 3.7% in Q3 2024, the most since early 2023. Investment in manufacturing, driven by the building of houses and factories, rose during the first nine months of the year as companies in the U.S. continued to invest in their businesses.

While no one has a crystal ball to tell us with certainty how 2025 will play out, we recognize we face a dynamic mix of factors: from evolving monetary policies and shifting geopolitical tensions to structural transformations in technology, energy and sustainability. As always, we keep our finger on the pulse of the equity and fixed income markets, the actions of the Federal Reserve, economic policy changes, and the constantly changing domestic and global landscapes.

With an increased focus expected on “Buy America,” you can expect to see some additional tweaks to domestic holdings by sector, as the Trump Administration fosters deregulation and domestic growth. Our changes will reflect deep analysis of companies’ balance sheets, cash flow and strategic, competitive investments. Our investment philosophy remains intact, focusing on long-term, diversified and sustainable growth in your portfolio.

Rebecca Stevenson