2024 4th Quarter Market Commentary

Top Headline for Q4: Onward & Upward?

As we close out 2024, it’s hard to ignore the incredible rise in “risk assets” during the year and in the years following the COVID pandemic. The S&P 500 Index finished 2024 up over 25% and is now up nearly 100% in the 5 years ending December 31, 2024. 25% is well over two times the long-term average return for the S&P 500 index, and the index has reached 25%+ in 4 of the last 6 years. It’s been quite a run. It’s hard to ignore the apparent relationship between U.S. budget deficits, which have reached unprecedented levels post COVID, and equity performance. Earnings are strong for U.S. companies, many of whom are the biggest beneficiaries of the excess government spending. While U.S. equity performance has been exceptionally strong, we are beginning to see some similar, or better, results from inflation-hedges (e.g., the Gold ETF, GLD, rose 26.7% in 2024, and the Bitcoin ETF, GBTC, was up 137.3%). 

While it seems to be the golden age for risk assets, we’re starting to notice some weakness beneath the surface. It has been well-documented that the recent rise in the U.S. equity market has been driven by a handful of stocks. In fact, as we close out 2024, over 30% of the size-weighted index value is in the 10 largest companies – one of the highest levels in the last 100 years. Moreover, although the S&P 500 Index was up 2.1% during the 4th quarter, seven of the eleven major S&P sectors were actually negative, including two that were down double digits (i.e., Health Care (XLV) was down 10.3% and Materials (XLB) was down 12.2%). 

General Market Update

US Equities: The cap-weighted S&P 500 Index rose 2.1% during the quarter while the equal-weight S&P 500 Index (RSP) was down 1.9%, finishing the year up 12.8%. This gap marks a reversal of the prior quarter as the technology sector surged following the U.S. election and the lowering of interest rates by the U.S. Federal Reserve Bank (the “Fed”). As expected in this environment, the technology-heavy Nasdaq Composite was up 6.2% in Q4 (28.6% for the year). Small caps, as defined by the Russell 2000 Index lagged their large company counterparts, finishing flat for the quarter and ending the year +10.0%.

International and Emerging Market Equities: After rising materially in Q3, international equity markets reversed course in Q4. The Schwab International Equity ETF (SCHF), which holds stocks of developed markets excluding the United States, was down 8% during the quarter, and the Schwab Emerging Markets ETF (SCHE) was down 6.2%. Much of the international equity movement can be tied to the Chinese stock market where, after rising sharply in Q3 (i.e., up 25%+ in response to unprecedented government stimulus), it gave back some of those gains.  

Fixed Income and Credit: Volatility has continued in the fixed-income markets. In the 2nd half of 2024, the 10-Year U.S. Treasury Bond (“10Y UST”) dropped to around 3.6% in response to expected rate cutting by the Fed, and then surged nearly 100 basis points before finishing Q4 at 4.57%. The significance of this recent move is that it could force the Fed to slow down rate cutting which, in turn, could hurt business profitability as capital costs remain elevated. In general, the fixed-income markets appear to be getting nervous regarding government spending, fiscal policy and inflation. It’s noteworthy that many economists see the new administration’s “pro-tariff” stance as inflationary. We continue to favor short to medium term bonds in this environment as long-term bonds remain at unattractive premiums to inflation while presenting significant volatility risk. 

Pro-Inflation Investments: The “inflation narrative” has officially reached the mainstream media as precious metals, crypto-currency, commodities and other inflation hedges have become a common topic in the financial media. We continue to watch for a rise in fiscal conservatism by governments which could hurt the momentum but, thus far, balancing a budget has not emerged as a priority. In this environment, we continue to like inflation hedges in portfolios. 

A Look Ahead

In many respects, the U.S. equity market should be in a tricky spot. There are many potential threats to equity market momentum: high levels of equity market concentration, a rise in labor unrest (e.g., strikes), a 10-Year Treasury Bond yield approaching 5% and lawsuits attacking monopolistic practices of “big-tech.” However, markets seem unphased. We continue to believe that high levels of liquidity, excess government spending, and general investor optimism are the likely cause of the continued momentum. It’s hard to bet against the U.S. equity market generally and especially when the U.S. government is running trillion-dollar budget deficits. 

We continue to see the potential for significant volatility in bond portfolios. Long-dated bonds (i.e., those with maturities far into the future) will likely experience continued volatility as the Fed’s monetary policy reacts to inflation metrics. Furthermore, Republican-controlled government potentially drives volatility through material changes to policy. If inflation cannot be contained and the Fed continues to lower rates, we would not be surprised to see the 10-Year Treasury Bond yield back above 5%. Moreover, any actual economic slowdown could send these rates back down below 3%. In any case, volatility creates opportunity, and we will be watching closely.

We’d like to close by thanking everyone for continuing to put your trust in Patina Wealth. We find our work extremely rewarding and are thankful to have the opportunity to assist you with your investments. Here’s to a prosperous 2025!