2024 At a Glance

Happy New Year!

From everyone here at IMG, we hope you enjoyed your holiday season and that 2025 is off to a great start. Like many of us who took some time off during the holidays, so too, did the markets, with the S&P 500 and Dow Jones Industrial Average (DJIA) both taking a step back during December, down (-2.4%) and (-5.1%), respectively. Despite this slight reprieve, 2024 was another impressive year for stocks with the S&P 500 up 25% and the DJIA up 15%. The S&P 500 having two back-to-back years of 20%+ returns has occurred just ten times since 1871.

The Fed has made a lot of progress and inflation continues to trend downward toward their 2% target. Prices in November rose 2.7% from a year ago, a significant retreat from the peak rate of 9.1% for the year ending June 2022, according to the Bureau of Labor Statistics consumer price index (CPI). Core inflation, which excludes food and energy, was up 3.3% in November from a year ago. Worth noting is that the shelter index, which reflects housing prices and rent, increased 4.7% over the last year, the smallest 12-month increase since February 2022, a possible sign of easing real estate inflation. Higher interest rates upended the housing market, as higher mortgage rates, elevated home prices, and historically low housing inventory made home ownership out of reach for many. As a result, real estate inflation has been much slower to abate than consumer prices.

Inflation has cooled over the last 18 months with supply chain recovery and continued job growth. Recently, the U.S. Labor Department’s Bureau of Labor Statistics reported that the U.S. economy added 256,000 new jobs in December, far more than expected and higher than the 212,000 in November. The unemployment rate changed little at 4.1%. In addition, the U.S. economy remains strong, driven by robust consumer spending. Americans continue to earn more, with personal income increasing $71.1 billion in November. Consumer spending increased by 3.5%, in the third quarter, the most since early 2023, thanks to rising incomes. Consumer spending makes up nearly 70% of gross domestic product. Real gross domestic product (GDP), the broadest measure of economic output, increased at an annual rate of 3.1% in the third quarter of 2024, up from 3% in the second quarter, according to the U.S. Bureau of Economic Analysis. Output growth surged in the US, led by a booming services economy.

2024 was another outstanding year for stocks. After surging 26.3% in 2023, the S&P 500 climbed another 25% in 2024, notching 57 record closes. Ten out of 11 sectors posted positive returns for the year, while the Materials sector finished flat. Communications (+40.2%) was the standout sector, followed by Technology (+36.6%), Financials (+30.6%) and Consumer Discretionary (+30.1%). The technology-heavy Nasdaq Composite finished up 29.6% in 2024. The breadth of the market also widened this year to include utilities and industrials segments, which gained 23.4% and 17.5%, respectively. Still, much of the positive performance is due to the outsized influence of a handful of mega capitalization technology names. Through December 24th, the Magnificent Seven accounted for more than 53% of the stock index's total return, including dividends, according to S&P Dow Jones Indices.

Growth outperformed value in 2024 for a second year in a row, which is not surprising given the AI momentum. Growth companies are generally expected to grow their sales and cash flows at a faster pace than the overall market. They can be young, unproven, volatile firms in innovative fields, many of which pay little to no dividend. The Russell 1000 Growth index finished the year up 33.4% compared to the Russell 1000 Value index, which was up 14.4%.

Aside from Materials, which finished the year flat, Healthcare (+2.6%) and Energy (+5.7%) dragged on relative performance.

2024 was a roller coaster ride for fixed income investors, with yields hitting highs and lows quarter after quarter. The U.S. 10-year treasury began the year at 3.88%, peaked in April at 4.7%, fell back to 3.78% at the end of the third quarter, and rose again to close the year at 4.57%.

Throughout most of the calendar year, the back-and-forth nature of interest rate movements was driven by inflation data and subsequent expectations on what the Federal Reserve’s reaction would be toward monetary policy and discount rate moves. As referenced earlier, the Fed ultimately cut interest rates three consecutive times to end the year; September (50 basis points), November (25 basis points) and December (25 basis points). While many expected rates to decline across the curve with the ease in monetary policy, we have witnessed higher longer-term rates as of late with inflation appearing to have stalled just above the Fed’s 2% target and investors now looking to a new presidential administration. Election years add an additional component to rate cycles as investors digest potential new policies and their impact on future economic growth and inflation. Long term yields were further boosted after the Fed’s December meeting where Chairman Powell stated the central bank’s near-term inflation forecast changed and members-initiated forecasts higher than where targeted inflation had been previously.

With the rise in rates, returns in the fourth quarter were negative for the majority of fixed income sectors as the inverse relationship between interest rates and bond prices had prices declining across the intermediate to long end of the curve. The short end of the curve (U.S. Treasury Bills) and credit exposed sectors were the bright spots, generating positive returns as the Fed lowered rates on the front end/short term and the U.S. corporate markets continued to perform well with healthy balance sheets.

As we head into 2025, the Fed and other global Central Banks who also lowered rates in 2024 will closely monitor inflation and the new administration’s policies to gauge if it is appropriate to leave rates as is or continue lower. Given the continued level of uncertainty of where interest rates will end the year; we remind our clients to stay the course and that bonds continue to play a valuable role in achieving long-term financial goals.

Gold outshined the S&P 500 in 2024, up 26.1%. Managed Futures aside, all other diversifying equity asset classes were positive for the year, albeit underperforming the S&P 500.

Fixed income diversification was beneficial in 2024. Floating rate loans (+9.05%), High yield (+8.19%) and emerging market bonds (+5.68%) all added significant value year to date, nearly all sectors produced positive total returns with the exception of the sectors positioned on the longest end of the interest rate curve.

2024 saw an end to the U.S. Federal Reserve’s 2 ½ year war on inflation and a shift in monetary policy to cutting rates. Inflation has come down closer to the Fed’s 2% target, unemployment is low, and consumer spending is strong, buoyed by healthy wages. However, rate cuts came later than expected (September) and were fewer than projected. Stocks have soared 20%+ for two consecutive years and valuations are high, which may lead to volatility. As we begin a new year, you can rest assured that our portfolios are positioned to protect you throughout the changing economic and geopolitical landscape.