Market Commentary | Q4 2024
As we reflect on 2024, one defining theme is the sheer number of elections that were held globally. In fact, last year saw more elections than any other year on record, with upwards of 70 nations covering 4 billion people having gone to the polls. With the results now tallied, one outcome was overwhelmingly clear: virtually every incumbent leader and party was voted out or lost leadership share in their government.[1]
Elections in each country had their own idiosyncratic candidates, scandals, and motivations, but the result was a widespread vote for change from the status quo. The most common concern cited by global voters was the sharply higher prices that consumers are paying after years of rising costs and snarled supply chains. To update the famous quote from veteran Democratic political strategist James Carville: “It’s the post-Covid economy, stupid.” The reasons for election outcomes spanned a multitude of issues, but it is important to acknowledge this backdrop of economic agitation and political transition.
As we enter 2025, it’s natural for uncertainty in the markets and economy to weigh on investors’ minds. However, long-term investing has always required navigating periods of unpredictability, and history shows that staying disciplined through such times is key to achieving financial success. It’s worth noting that while political upheaval seems to be at a historic high point, global stock and bond markets appear to be well within historically normal patterns. There is a smaller group of companies leading the growth charge, there are periodic bouts of volatility, and prices are generally trending higher. Uncertainty is an inescapable part of the investing landscape, and it often brings opportunities for long-term investors.
Reflecting on 2024
Stock market performance in 2024 was a tale of two halves. The first half of the year was marked by uneven performance from different sectors of the market, with large-cap stocks leading the way while small-cap US stocks, bonds, and real estate sectors all lagged considerably amid uncertainty about interest rates and the impending US election. In the second half of the year, those two pillars of uncertainty were partially resolved. In August, the Fed made an announcement about the timeline for lowering interest rates, resulting in a significant rally for small-cap stocks, real estate, and fixed-income allocations. The outcome of the US election in November added clarity about political and policy direction over the next four years, even if significant questions remain about what will actually come to pass.
Large-cap US stocks once again led the way for market returns, supporting meaningful growth in our clients’ diversified portfolios over the past year. The S&P 500 posted a 25% gain in 2024, matching the large-cap stock performance from 2023. These back-to-back annual gains mark the best performance for the index since 1997 and 1998, which saw the index running higher during the lead up to the dot-com bubble. Mid-cap stocks in the US grew by +13.9% and small-cap stocks contributed +8.7% growth.
As the market navigated the normal ebb and flow during 2024, the bulk of the growth remained concentrated amongst a few technology companies riding a wave of fervent optimism about artificial intelligence. This small group of large tech companies has been colloquially named the “Magnificent Seven.” Those seven tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – accounted for over 50% of the S&P 500’s total returns. From November 5th through the end of the year, these seven stocks accounted for over 96% of the S&P 500’s gains.[2] Stock market breadth was poor, with most companies in the S&P 500 seeing price declines from November through the end of the year, but the overall index was buoyed by the Magnificent Seven’s gains.
International stocks from developed economies, including Europe and Japan, lagged behind the US while delivering growth of +3.8% during the year. Stocks from emerging markets, including China, India, and Brazil, delivered growth of +7.5% during the year. European economies have seemingly stabilized, and attractive valuations and corporate reforms in Japan should be supportive of international equities in the longer term. However, new US trade policies, potential tariffs, and the continued trend of de-globalization may generate headwinds for non-US stocks in the near term.
The bond market offered higher income last year, but limited overall return. While the broad US bond market only grew by +1.3%, certain sub-sectors fared better, with short-term bonds returning +5.1% and high-yield bonds returning +8.2%. All three sectors are represented in our client portfolios. As encouraging economic reports came in and the Fed pivoted towards rate cuts, bonds staged a late-year rally. That rally cooled post-election as renewed inflation concerns took hold.
We continue to use bonds for three primary purposes in client portfolios. First, as a stable source of liquidity for our clients’ income needs. Second, to enhance total returns by collecting the interest income in client portfolios. And third, using the more stable bond allocations to rebalance into stocks during market volatility or when pricing opportunities present themselves. While we expect stocks to deliver the majority of long-term growth in portfolios, bonds add key elements of resiliency and income that help smooth out returns over time.
Looking Ahead to 2025
With strong earnings anticipated from a wide array of companies in 2025 and US economic growth expected to remain resilient, the fundamental story for further market increases remains intact. One fly in the ointment may be expectations: many strategists anticipate a resilient economy, so anything less than that could weigh on equities. With that in mind, we have a cautiously optimistic view heading into this new calendar year.
Despite bullish predictions for the market from financial media, there are key risks that could lead to more volatility in 2025. One is the potential for a resurgence in inflation. In early December, the Federal Reserve projected that core inflation would hit 2.5% in 2025 – slightly higher than their previous projection of 2.2% – before cooling to 2.2% in 2026 and 2% in 2027. Predictions for a recession, which were rampant over the past two years, have quieted down and are now nearly nonexistent. Moreover, frothy financial markets aren’t pricing in any hint of a slowdown. Instead, as the incoming Trump administration pushes policies aimed at supporting further growth, the risk is that they may also boost inflation. If sticky inflation spurs the Federal Reserve to stop cutting interest rates sooner than expected, borrowing costs could remain higher for longer and serve as a catalyst for an eventual pullback in the stock market rally.
Additionally, uncertainty around potential policies from the incoming Trump administration will be a key market theme in the new year. We wrote about the potential impact of tariffs in our recent article There’s a New Tariff in Town, and about long-term investing through various political cycles in our article Investing and Elections: What History Tells Us. While US voters may be split in their expectations for the coming four years, proposed policies such as tariffs on imported goods could be a potential catalyst for higher inflation, while other policies – such as maintaining lower corporate tax rates – are likely to support growth in the market.
Uncertainty Isn’t New
One lesson from 2024 is that uncertainty, while unsettling, is neither inherently negative nor particularly new. Periods of volatility have always created mispriced assets and present opportunities for long-term investors, allowing us to add to high-quality investments at more attractive valuations when markets pull back.
At North Berkeley, we have conviction that a well-diversified portfolio is one of the most effective tools for managing uncertainty. Spreading investments across asset classes, industries, and geographies reduces the impact of any single event or market downturn. By staying committed to regular rebalancing, we help ensure our clients remain aligned with their strategic allocations, even as market conditions shift. Our clients are always navigating uncertainty – whether financial, political, or personal – and remaining grounded by a long-term perspective has consistently provided the greatest balance of opportunity and resilience.
Resources
[1] The ‘super year’ of elections has been super bad for incumbents AP News
[2] S&P Dow Jones Indices. CNN
