Quarterly Newsletters
Quarterly Newsletter for the 4th Quarter 2024
Last year tested all of us with inflation, interest rates, pre-election rhetoric and post-election results, leaving all of us with a sense of concern and uncertainty. Yet, despite the perils of last year, the stock market exhibited notable performance, concluding in a year characterized by strong overall growth.
On a price return basis, the Dow Jones Industrial Average (DJIA) was up only 0.51% for the fourth quarter and 12.88% for the year. The Standard and Poor’s 500 (S&P 500) was up 23.31% for the year and 2.07% for the quarter and the NASDAQ was up 28.64% for the year and 6.17% for the fourth quarter of 2024. The MSCI All Country World ex-US Index erased all of its third quarter gains with a return of -7.85% for the fourth quarter- finishing the year up only 2.92%. In the fixed income environment, the Merrill Lynch 3-month Treasury Bill Index yielded 1.17% for the quarter and 5.25% for the year, while the Bloomberg Aggregate Bond Index returned only 1.25% for the year as it lost 3.06% during the fourth quarter.
The markets, at present, seem to be broadcasting mixed signals. The bond market is somewhat tenuous in its enthusiasm, while the stock market seems more optimistic.
Fixed Income Market (Bonds): The Federal Reserve remains the center of market dynamics. As a means of explanation, the FOMC’s (Federal Open Market Committee or the Fed) is tasked with moving interest rates up and down in such a way as to prevent the economy from overheating when growth is strong or falling into a recession when the economy is slow. To do that, it changes what is known as the “federal funds rate”, which helps set borrowing rates throughout the rest of the economy. By making it easier- or harder- to borrow, the Fed seeks to control the pace of economic growth. In December, it lowered interest rates by a quarter point, dropping it to 4.25% - 4.50%. This was the third decrease in 2024, and it brought the rate back to the level where it was in December 2022. During the Fed meeting, they indicated they would probably drop rates two times in 2025. They also stated that the unemployment rate remains low, while the rate of inflation remains somewhat elevated. Central bankers don't believe the Fed will hit their desired 2% inflation target rate until 2026, possibly not until 2027. Of interest is the fact that 10- year treasury interest yields jumped higher after the December Fed announcement. These delays in lowering rates and the speculation surrounding a “soft landing” in the economy, coupled with the fact that inflation has been slow to get under control, are of concern to fixed income (bond) investors.
US Equity Market (Stocks): As stated above, the S&P 500 finished the year with another very positive performance, marking it the second consecutive year in which it produced gains exceeding 20%. These returns were bolstered by technology, as the NASDAQ returned almost 30%. From a purely an investment standpoint, the Trump victory is a real positive. It eliminates the democratic threat of higher personal taxes and increasing corporate tax rates. It also eliminates any discussion of taxing unrealized gains. Moreover, the market is focusing on the continuation of the 2017 Tax Cut Act that was set to expire the end of this year, reductions in government regulations, the prospect of the country becoming energy independent again, increased mergers and acquisitions activity, an end to government expansion, and an economy that became stronger at year end on
both an absolute basis and relative to expectations. Conventional wisdom says that gridlock in Washington is good for the market as it keeps both parties in check, but prior periods of full GOP control have been accompanied by better than average returns. Of concern is the current valuations of the S&P 500 as its P/E (price/earnings) ratio ranks it in the 96th percentile compared to all periods since 1929, and the forward multiple of 23.3 ranks in the 90th percentile. As a function of elevated mortgage rates, the housing market is greatly suppressed. Individual wages are rising but are down 2.5% against inflation. Our government deficit (government spending versus government income) was almost two trillion dollars last year. Consumer spending is still strong, but personal debt is rapidly growing. The implementation of tariffs may well be the market’s biggest concern with the incoming administration- will they actually be implemented or are they a tool for negotiating better trade deals abroad? If they are implemented, will they be an asset or a liability to the country? Overall, investors continue to look favorably at the stock market.
Overseas Equity Market (Stocks): Geopolitical pressure remains prevalent around the world. The wars in Israel and Ukraine continue to be a concern. Trump’s interest in making Canada and Greenland US states has sparked heated discussion. The implementation of US tariffs on various countries has hindered the growth of overseas markets- witnessed by the fact that the MSCI ex US Index dropped by 8% in the fourth quarter of 2024. Despite the above, certain countries posted positive results. Under new government leadership, the Argentina Merval index finished the year with a huge 170% return. Other stellar performers were Taiwan, Hungary and Turkey, all with returns in excess on 28%. Central banks around the world are continuing their accommodative posture as they lower interest rates to control inflation and spur their respective economies.
Conclusion: The market jumped 4.2% in the days following the Trump election. Most investors recognize the fact that Trump measures his success by the performance of the stock market. These positives, coupled with the strong US economy, make us “positive” on the US market throughout 2025. Certainly, we may have some volatility, as we work through the effects of the tariffs, but we think this will affect the overseas markets more than ours. Thus, we are “neutral” concerning these equities for now. This may and probably will change within the next three to six months. Regarding the fixed income markets we steer more toward the short end of the spectrum than issues with longer term maturities.
In closing, permit us to express our sincere appreciation for the opportunity to be of service to you. As always, should you have any questions or wish to discuss the above in more detail, please do not hesitate to contact us.