January 3, 2025
Market Review: 4Q 2024
Investors started 2024 with high hopes, anticipating continued GDP growth, slowing inflation, a more accommodative Fed, and climbing corporate profitability in the year.
2024 largely delivered on those expectations.
- Real GDP in the US continued to show solid signs of growth. In the third quarter alone, real GDP expanded by 3.1% on an annualized basis led by consumer spending, federal government spending, and non-residential fixed investments.
- Headline inflation continued to dissipate, falling to 2.7% year-over-year as shelter costs showed signs of easing, and core goods & energy prices fell.
- The Federal Reserve, after holding the Federal Funds rate steady at 5.5% for over a year, started cutting the Federal Funds rate in September 2024 and continued to cut through December, ending the year at 4.5%.
- Earnings and sales growth for the S&P 500 grew at a solid pace over 2024, with companies generally beating expectations.
- The US unemployment rate ticked up incrementally over 2024 to 4.2%, which remains low by historical standards, while jobless claims and layoffs were muted. Real wage growth was positive as average hourly earnings outgrew headline inflation.
Stock and bond markets reacted in kind as US large-cap stocks climbed 25%, US small-cap stocks gained 11.5%, and bond markets were up for the year. Intermediate-term bonds posted a total return of 3% – the second year in a row that bonds delivered positive returns after difficult years in 2021 and 2022. US large-cap stocks posted back-to-back years of +25% (2023 & 2024) for the first time since the late 1990s, with growth stocks leading the way, outperforming value stocks over both years.
In the fourth quarter, US stocks continued their upward trajectory as investors priced in potential boosts to growth and corporate profitability from a Trump presidency that could likely focus on tax cuts and deregulation. On the other hand, international markets started to reflect concerns about the potential impacts of a more aggressive foreign trade policy with international developed and emerging markets stocks falling 8% over the fourth quarter. Although bonds delivered positive results for all of 2024, they also lost value in the fourth quarter as the Fed indicated that the pace of rate cuts will likely slow into 2025, putting upward pressure on rates. Longer-term rates, measured by the 10-year Treasury, ticked higher to end the year at over 4.5%.
As we start the new year, the same drivers of returns in 2024 will likely still hold merit: inflation, interest rates, and corporate profitability. However, lofty valuations leave little room for error in meeting investor expectations. And as we head into a new presidential administration, the impacts of large policy changes have the potential to move markets and create volatility. We maintain a long-term view, investing in profitable, high-quality businesses, and continue to look for opportunities, as volatility brings risks but also has the potential to create rewards.
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