CWG Investment Committee: 2024 Recap and 2025 Preview
The economy demonstrated remarkable resilience in 2024, with strong GDP growth of 2.7% year-over-year, robust consumer spending growth of 3.7%, and core inflation easing to 2.8%, dispelling recession fears from the prior year’s aggressive rate hikes. This favorable backdrop allowed the Federal Reserve to pivot toward a more accommodative stance, cutting rates by 100 basis points.
Corporate earnings responded positively, with S&P 500 profits expected to grow by 9.4% for 2024 once Q4 earnings season wraps up. Next year’s profits are projected to increase by 14.8%, according to FactSet estimates.
Against this economic strength, equity markets had a stellar year. The S&P 500 rose 23.3%, producing a two-year total return of 53.1%, its best back-to-back run since 1997 & 1998.
Much of the rise was due to earnings growth, higher profit margins, and surprising price-multiple expansion in the face of rising long-term interest rates.
The strong performance of the Nasdaq 28.6% was led again by the Magnificent 7 names and spoke to a concentration of the most profitable companies, leading a broader but still narrow stock rally in 2024. The DJIA again fell behind, gaining just 12.9%.
Small-cap equities posted solid returns, with the Russell 2000 advancing 11.5%, lagging their large-cap counterparts.
Sector performance was led by Communications, Technology, Financials, and Consumer Discretionary, each gaining more than 30%. Meanwhile, Materials, Healthcare, and REITs were relative laggards.
While 2024 was great for stocks, almost no gains were had for Treasury bonds, rising 0.6% on average. The iShares Core Aggregate Bond ETF (AGG) rose 1.4%. The 20+ Year Treasury ETF (TLT) lost 7.8%.
While the Federal Reserve lowered its Fed Funds rate numerous times, long-term interest rates went up including mortgage rates starting on September 17, 2024. Long rates have yet to stop climbing with the 30-year mortgage nearing 7% presently.
Concerns over expansive fiscal and monetary policies, plus a likely renewal of Trumps 2017 tax cuts seems to have spooked bond investors.
Our planning and investment strategies implemented by CWG worked well for our clients this past year. Proprietary models captured nearly all the benchmark gains and avoided losses from longer dated fixed income securities.
U.S. stock performance continues to dominate the World MSCI index and totals some 70% of the global public capital market valuation, with America having less than 5% of the world population. This is a new record and frankly an astounding statistic.
Our American exceptionalism reflects qualities of resilience and innovation. The U.S. dollar’s reserve currency status is a great tilt in our favor. A slow death European capitalism continues. China has become “un-investable” for a broad array of prominent investors due to concerns over unpredictable government interventions and adverse demographics. Japan has a declining population and slow growth.
While this impressive bull market seems poised to extend into 2025, we are reminded of the adage "May you live in interesting times," as several risks loom large, including high valuations. Any negative catalyst may trigger a 10% drawdown.
The incoming administration appears inclined to use tariffs as its primary negotiation tool, potentially disrupting global supply chains, increasing input costs, and weighing on corporate margins. Tariffs could also stoke Trade War 2.0, reviving geopolitical and economic volatility, as retaliatory measures and reduced global trade weigh on confidence.
Inflation, while contained for now, remains a lingering threat. Should it remain above the Fed's 2% target, it could necessitate a prolonged period of higher interest rates, creating further pressure on valuations. Compounding this is the staggering national debt now exceeding 120% of GDP in peacetime, a level widely recognized as unsustainable.
These risks could prompt bond traders to push long rates higher which would stop Fed rate cuts and hurt stock market multiples.
Source: FactSet data
On the positive side of Washington policies, the new administration is expected to be more business friendly, regulation light, and war adverse.
We anticipate increased volatility as 2025 progresses, but not enough to derail the ongoing bull market.
The U.S. economy remains robust, providing a solid foundation for continued growth. Historically, single-digit gains for the S&P 500 often follow consecutive years of +20% returns. Such a result in 2025 would mark a healthy continuation of this exceptional market run.
We look forward to working with you in the coming year to help you meet or exceed your financial goals!