4th Quarter and Full Review for 2024

Overview

Investment returns were mixed during the 4th quarter of 2024, with stocks continuing to rise before ultimately limping to the finish line during the final two weeks of trading. Interest rates rose, placing downward pressure on bonds, which declined as The Fed announced less rate cuts are to be expected for the year ahead. Additionally, the markets are pricing in what 4 more years of a Trump Presidency could bring, as across the board tariffs and excess fiscal spending could keep inflation elevated. However, lower tax rates and deregulation of certain industries could provide tailwinds with a more pro-business administration expected.

For the full year, stocks surged to all-time highs while bonds provided meager but positive returns. Most economists had forecasted a recession over the past few years, which has not come to fruition. In fact, it is estimated that the economy grew by 2.7% for 2024, and currently recession risk over the next 12 months appears low with Goldman Sachs projecting only a 15% chance of recession for 2025. Additionally, earnings for businesses have been strong with analysts expecting a 14.8% earnings growth for S&P 500 companies for 2025 (Factset). Still, with stock valuations near their all-time highs, we do expect periods of volatility in the year to come, which would be entirely normal for any given year.

Equity Markets

During the 4th quarter stocks advanced by 2.41% as marked by the S&P 500 Index. However, the Dow Jones Industrial Average was up only .67% while the tech-heavy NASDAQ Index performed better, rising a generous 6.35%.

The Federal Reserve induced an easing monetary policy that when combined with strong corporate earnings created an environment for continued robust returns in 2024. For the full year, stocks climbed just over 25% in 2024 (S&P 500). This marks two straight years of a greater than 20% gain which has not happened in the stock market since 1997 and 1998. The S&P has advanced by 53% over the past two years, following a poor 2022, where the Index declined by over 20%.

For the second straight year, much of the gain in U.S. markets can be attributed to a select company of the largest tech stocks, often referred to as the “Magnificent 7” (Apple, Microsoft, Nvidia, Google, Meta, Amazon, and Tesla). These stocks rose roughly 63% after rising 75% the previous year. (The S&P 500 is a cap weighted Index that gives a higher allocation to larger stocks and these 7 stocks have pulled the S&P 500 forward once again in 2024.) To compare, an equal-weighted S&P 500 Index returned 12% less than the popular cap-weighted S&P 500 Index.

Global Markets

International stocks performed poorly during the 4th quarter with the EAFE Index and MSCI Emerging Markets Index both declining by just over 8%. Most of this appears to be attributed to a fear of a global economic slowdown as well as a strong U.S. Dollar. Global Central Banks are easing monetary policy, but this has been viewed by markets as a sign of economic weakness compared to the U.S. where rates are just being adjusted downward to bring them to a normalized rate. Lower inflation has allowed interest rates across the globe to decline.

For the year, the International EAFE Index advanced just 3.82% and has advanced annually at a rate about 1/3 that of the U.S. (see chart below). As previously mentioned, the “Magnificent 7” led most of the advancement of the U.S. market. Since these companies are based in the U.S., the EAFE Index does not hold these companies and the current composition of stocks within the Index have had lackluster growth, comparatively.

Fixed Income

The 4th quarter of 2024 was not kind to bond investors with the Aggregate Bond Index dropping 3.06%. Historically, this is a large move downward for bonds, because investors typically allocate to bonds for stability. This drawdown was caused by longer term interest rates trending higher, which is dictated by the market (remember, The Fed only sets the 1-day lending rate). For example, the 10-year Treasury yield rose from a low of 3.6% in September up to around 4.6% by year end. When interest rates rise, existing bond prices fall as we saw in 2022 when the Bond Index sold off 13%. Bond prices are currently more attractive, given their now higher yields, despite three rate cuts.

The continued higher interest rate environment will be something to watch for in 2025. These higher rates also mean mortgages and lending across the board remains expensive. For example, 30-year mortgage rates are back up to around 7%. Higher rates also increase the cost of debt for companies. This tends to hit small cap companies the hardest as there are often higher levels of debt associated with these firms compared to large cap companies. On a positive note, cash invested in money markets continues to pay just above 4% for those investors that want to keep a portion of their portfolio liquid.

The Fed

The Fed cut rates in November and December to a range of 4.25%-4.5%. More consequential was their indication in December that they will only cut rates two times for all of 2025. The Fed previously expected to cut rates 4 times in 2025, meaning that they are slowing their rate cutting policy dramatically. This triggered a selloff in the stock market, which declined around 3% once they made this announcement on December 18th. Bonds also sold off as previously mentioned as interest rates moved higher.

While inflation has cooled off dramatically, it remains slightly elevated and above The Fed’s targeted 2% rate. Additionally, The Fed may also “wait and see” for any economic effects of the Trump administration’s policy in 2025 and beyond before committing to any course. Many economists believe that Fiscal stimulus and tariffs can put upward pressure on prices, making inflation stickier, which could cause The Fed to cut rates slower or pause their rate cuts altogether. Given the dramatic swing in stock prices sparked by The Fed’s comments in December, investors will continue to keep a close eye on the Central Bank in 2025.

Cryptocurrencies

Cryptocurrencies surged in 2024 with Bitcoin hitting over $100,000 at one point before settling to $93,000 per coin at end of the year. Cryptocurrencies have seen more demand and financial products; Bitcoin and Ethereum ETFs have made them easier to invest in. President Trump also paved the way for an easier regulatory environment for crypto moving forward as current SEC Chair Gary Gensler is set to step down in January. “Gensler has been labeled as ‘Public Enemy No. 1’ by the crypto community,” (npr.org). With Gensler stepping down, we expect companies to find new ways to market cryptocurrency to consumers in the years ahead.

2025 Outlook

Over the past two years we’ve seen the market surge by over 50%, so naturally we expect some cooling off for 2025. The average intra-year decline of the S&P 500 is around 14%, so expecting a correction of this magnitude after stocks surged would not be abnormal.

Still there are plenty of reasons why the market could do well again this year. The economy continues rolling and inflation has moderated. Even if The Fed cuts rates at a slower pace, rate cuts are still accommodating for the stock market. Additionally, the incoming administration will push to extend the 2017 Tax Cuts and Jobs Act which may keep taxes lower for longer. Lastly, analysts are expecting corporate earnings to grow at 15% for 2025 and the trend for tech stocks to continue driving the economy seems possible with advancements in A.I.

At CRA, we thank you for continuing to trust us with your portfolios and financial planning. We look forward to partnering with you in the year ahead, and we wish you and your family a healthy, happy, and prosperous year in 2025.

Best, 

CRA Investment Committee

Matt Reynolds CPA, CFP®

Tom Reynolds, CPA 

Robert T. Martin, CFA, CFP®

Gordon Shearer Jr., CFP® 

Jeff Hilliard, CFP®, CRPC®

Joe McCaffrey, CFP® 

Phillip Tompkins, CFP®

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