Quarterly Market Summary for Q4 2024

Summary

With dividends reinvested, the S&P 500 gained close to 25% in 2024, but only 2.4%[1] of that came in the final three months.  Stocks lost one percent in October (as is typical in the month leading into a presidential election). Stocks then rose 5.7% in November in what many market pundits referred to as the “Trump bump”, as investors looked favorably on the potential for less regulation and more merger activity.  December saw the market give back almost half of that (-2.5%) as investors digested the policies of the president-elect and winced at their inflationary implications.  Bonds had a fairly poor quarter (-3.1%) as interest rates rose sharply post-election.  As a result, the full-year gain was cut to 1.3%.  Small and mid-cap stocks are even more sensitive to interest rate movements than large caps; they rose 9% post-election, then gave almost all that back very quickly to finish the quarter with just a 0.3% advance.  Interestingly enough, there was no “Santa Claus rally” during the final trading days of 2024.

The biggest losers in November’s election may have been foreign stock investors.  Largely because of threatened tariffs, foreign stocks lost -7.6% in U.S. dollar terms last quarter.  Weakening prospects for economic growth in both Western Europe and China also played a part.  Latin America, led by Brazil, was by far the poorest-performing region last quarter.  Asia also struggled as Indian stocks took a breather after strong performance earlier in the year.  Europe lost close to -8% during the quarter and the “winner”, Japan, still gave back five percent.  Many argue as to whether there is value to be had in investing outside the U.S. It is true that foreign markets are less expensive in terms of valuation, but the growth rates and the profit margins of their companies tend to be quite a bit lower.  With a company like Taiwan Semiconductor, however, you can get a high growth rate and a high profit margin with a price-to-earnings multiple lower than the average U.S.  stock.  Foreign stock investors just have to be more selective, which is why we very seldom index our foreign stock exposure, and why we underweight foreign stocks versus the global benchmark. 

Bonds had a rough quarter.  They rose over -3% to end the year up just 1.3%.  A lot of bond analysis focuses on inflation as if that were the only important factor in where bonds prices go.  Another factor and one that is taking on increasing significance these days is issuance versus demand.  Simply put, if you try to sell more bonds than the bond market has the capacity or interest in buying, prices are going to go down - regardless of what inflation is doing.  Inflation didn’t jump last quarter but because buyer interest in financing U.S. debt declined, the U.S. government had to offer higher yields to attract borrowers.  Since corporate and mortgage debt is priced as a spread over U.S. government debt (because the government is less likely to default than a private payer), everybody’s borrowing costs rose.  Only those bonds where the yield is attractive (higher) relative to government bonds (yet their default risk is still low) provide good returns in this environment.

Gold and cryptocurrency had a strong year.  Gold rose largely because investors worldwide sought an alternative to questionable central bank and government policies.  Cryptocurrencies surged as U.S. regulators approved ETFs that hold individual crypto tokens, such as bitcoin and Ethereum.  They got a further boost after the election as President Trump promised to be a big crypto advocate.

Activity

Typically, markets are quiet into an election, and afterward, a narrative emerges in terms of which industries will be winners and which will be losers under the new regime.  This time, it happened, but with a twist.  It wasn’t about which industries would be losers but which countries.  Tariff threats dominated the post-election market environment, so most market participants (even those overseas) figured that the best thing to do was invest in the U.S. to avoid that risk.  The U.S., primarily because of its economic size and military strength, has the least to lose if global trade breaks down, though everyone would be a loser to some extent.  Doing the math, the prudent play for asset allocators was to reduce international exposure, both developed and emerging, relative to US equity exposure.  The second part of the tariff equation is higher interest rates, further stressing bond market didn’t have to do much.  We were already defensive on the bond side and therefore had a lot less to lose from rising rates.

The other portfolio management consideration we had to address was determining the appropriate amount of large-cap technology exposure.  Too little and you increased the amount you under-performed the index (which held over 35% in just eight companies at year-end); too much and you introduce too much risk to the portfolio since all investment manias ultimately end.  In some portfolios, we added, and in some, we subtracted.  More on this in the Commentary section. 

Outlook

Writing this on Friday afternoon, January 17th, it is difficult to say where we are going to go from here.  At this point, the U.S. economy is fairly strong and corporate earnings are expected to post low double-digit gains.  Interest rates usually determine if the market will perform better than earnings would suggest or worse. So far this year, interest rates are up a little bit, so market gains have been modest.

All that said, we are soon to see the impact of tariffs on a scale we have never seen before (if the new President’s words are to be believed).  We know that tariffs did not work in the late 1800s, and we know that they did not work AT ALL after the Smoot-Hawley Act was passed in 1930.  However, it could be argued that the U.S. depended more on foreign trade in the late 19th and early 20th centuries then and was not the economic powerhouse that it is now.  Since Trump’s election, markets have definitely made the calculation that since America is less dependent on its trading partners, it has less to lose from a trade war.  As a result, investors have shifted assets out of countries and currencies that would be vulnerable to an economic attack from the United States.  As U.S. investors, we have benefitted from this shift in the short run (more demand for dollar-based assets).  It remains to be seen how long the benefit lasts.  Whatever we do is bound to, at some point, produce a counter-response.  It is for this reason that many strategists look for the first half of the year to be stronger than the second half.

Commentary  -  Risk Management Amid a Possible Speculative Bubble

2024 was another strong year for the U.S. stock market so it is probably a good time to discuss market returns and portfolio returns, as well as risk tolerance and fiduciary duty.  Hopefully, this will help you to understand why stock index returns can differ a lot from portfolio returns in both directions (but typically, index returns are higher when the market is up).

First of all, I would like to point out how much investing has changed over the years.  One hundred years ago, even sixty years ago, most investing was done through the trust department of banks.  That is where people with significant wealth put their money because banks had a duty of care that stockbrokers didn’t have.  If a bank lost your money through imprudent investments, it was legally liable to you. If you lost money with a stockbroker, on the other hand, you needed to prove fraud to have any recourse.  Investing got a jolt in the 1960s as the stock market soared on the back of new technologies—integrated circuits, mainframe computers, instant photography, etc. Investors got frustrated by the safe but low-yielding options offered them by banks (bonds, preferred stocks, etc.), so as they did in the 1920s when cars and radio were the big new things, they began to speculate.  Ultimately, this ended in tears as well.  The first oil crisis in 1973-74 was a harsh reminder that even technology can fall prey to a global economic contraction.

The tension between investing and speculating has evolved over the last fifty years.  Fiduciary investing became dominated by mutual funds and then indexed exchange-traded funds (ETFs), with speculation being done through individual stocks and privately traded vehicles.  Speculators had their day trading phase in the late 1990s and then moved on to leveraged ETFs, leveraged single stock ETFs, SPACs, meme stocks, cryptocurrencies, and zero day-to-expiration option contracts (0-DTE) more recently.  New innovations in speculation have historically always happened just before the top of a market cycle (because at the beginning of a cycle, investors are more cautious than greedy).  It seems to me that we are probably near the top of the cycle now partially because[2] of all of the new speculative vehicles that have been recently introduced, but admittedly, this is a gut feeling and not something I can know for certain.

As a Registered Investment Advisor (RIA), however, I have certain legal responsibilities, and as a Chartered Financial Analyst (CFA), I have fiduciary[3] and ethical requirements.  I am, therefore on the investment side of the equation, not the speculative.  As such, I am more like a bank than a broker.  There are risks I cannot take with a client’s money, even if the client wants me to.  That doesn’t mean I’m always going to be correct. Putting all of someone’s money in Apple or Tesla ten years ago was not prudent from a fiduciary standpoint; it might have resulted in a complete loss.  Obviously, we now know that it didn’t – those stocks turned out to have been far more lucrative than any diversified portfolio one could have owned.  Things always look clearer in hindsight.

There is another component to what securities regulations and the CFA Standard require of me that you might not be aware of—abut you should be.  As a fiduciary, I place your interests ahead of my own and my firm’s interests.  Part of that is not lying to you making misrepresentations.  The person on TV or radio selling you gold, real estate, or bitcoin is not similarly bound because those offerings are not securities.  No, gold is NOT guaranteed to keep up with inflation.  Sometimes it does, sometimes it doesn’t.  Gold can and has trailed inflation for decades at a time.  And, NO, you cannot buy top-quality real estate offering double-digit returns at below-market prices.  The seller is not an idiot.  If it is indeed top quality, high-returning real estate, and you offer a below-market price, somebody will outbid you.  I say these things because I am frustrated with the current get-rich-quick environment—I see many things that I recognize from bad times past.  One of them is technology mania.

I don’t want to sound like a Luddite when I discuss artificial intelligence (AI).  I believe AI will revolutionize many fields. It will change forever the way we do certain things.  That said, similar things were said about the personal computer, the internet, fiber optics, and cloud computing, and ultimately all came true.  Yet these permanent changes in the way we live and work did not prevent investors from experiencing substantial drawdowns. Each of these areas went through what is known as the Gartner Hype Cycle. 

Gartner Hype Cycle

Source – The Gartner Group

Stocks soared on the promise of the new technology (the sky was almost literally the limit), then fell back sharply as profits were slower in coming even as usage of the new technology ramped up.  Eventually, the new technology generated profits that could be predicted and valued, and gains in these stocks were more linear than exponential.  

When I have written in the past about the concentration of investment returns and market capitalization in a surprisingly small number of companies, this is what I’m talking about.  The idea that it is not financially prudent to concentrate so much of one’s investment portfolio in one industry (technology) or in one country (the U.S., obviously).  An institutional investor like the Minnesota Public Employees Retirement Plan or an endowment like the University of Washington’s UWINCO would never be invested that way.  Your money shouldn’t either. 

So, getting back to the question of what one should expect in a year like 2024, here is how I see it:  Large U.S. stocks returned 25%.  The biggest 7 stocks gained 64%, but the other 493 companies in the S&P 500 gained around 18%.  Stocks smaller than that averaged 11.5%.  Since large caps are 80%+ of the market, weighting large stocks higher relative to small gives one about a 22% expected return on an all-U.S. portfolio (22.5% with a modest top 7 overweight).  Foreign stocks gained a dismal 5.5%, and that was only achieved by virtue of a 10.6% emerging markets return. In contrast,  developed markets ex-U.S. gained 3.2%.  It was difficult to achieve even that 5.5% because it required just under 9% in China (one of the best-performing foreign markets last year)[4].  Given that about two-thirds of global market capitalization is in the U.S., a global stock portfolio should have returned about 17% last year[5].  It would not have been a stretch to have foreseen that U.S. stocks could probably outperform, so a three-quarters U.S.-to-foreign ratio seems more appropriate.  That puts global stock returns at 18.2%.

The rest of a portfolio is made up of bonds and alternatives.  The Bloomberg Aggregate Bond Index  gained 1.3% last year, but no good bond manager failed to beat that easily[6] because short-term rates were closer to 5%.  Let’s agree on 3% for U.S. bonds as a reasonable return.  International bonds gained about 4.5%; since 5/7 of the global liquid debt market is the U.S., we wind up with a net global bond return of 3.5%.  Alternatives like gold would have added to returns last year, but other commodities (chiefly oil) and real estate would have negated much of gold’s impressive surge. 

In the end, a naïve (indexed) 50:50 stock and bond portfolio would have returned about 9.6% before fees (17%+2.2% divided by two), whereas an intelligently-weighted portfolio would have returned closer to 11% (18.2%+3.5%).  Obviously, actual portfolios will almost certainly have a different stock-bond ratio than 50:50. This exercise should provide a template to figure out expected performance.  In some years, active individual mutual funds and ETFs give us a bigger boost because we are able to lean into established trends.  In other years, however, markets shift away from factors that have been previously very successful, and that shift takes a while to reveal itself as permanent[7].

I realize in that in this commentary, I’ve thrown a lot at you.  There was just so much to say.  I wanted to explain why I feel we are in another era that is fraught with danger for investors.  I wanted you to know how much thought goes into portfolio construction.  I feel it is very important for you to be able to distinguish between investment and speculation, and though we on the investment side don’t always get it right we always have your interests first.  Lastly, I wanted you to know how we assess 2024, a rare year in which one area the market was exceptionally strong but so much more of it provided much more modest returns. 

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DISCLOSURE

Past performance is no assurance of future results. Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota. Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration. This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A complete list of all recommendations will be provided if requested for the preceding period of not less than one year.   It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.  Opinions expressed are those of Trademark Financial Management and are subject to change, not guaranteed and should not be considered recommendations to buy or sell any security. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395. Please read the disclosure statement carefully before you invest or send money. Any reference to a chart, graph, formula, or software as a source of analysis used by Trademark Financial Management staff is one of many factors used to make investment decisions for your portfolio.  No one graph, chart, formula, or software can in and of itself be used to determine which securities to buy or sell, when to buy or sell them, or assist any person in making decisions as to which securities to buy or sell or when to buy or sell them.  Any chart, graph, formula, or software used is limited by the data entered and the created parameters. The data was obtained from third parties deemed by the adviser to be reliable. Nonetheless, the adviser has not verified the results and cannot be assured of their accuracy.

[1] Charles Schwab “It was a Very Good Year” commentary and table, Jan 6, 2025.

[2] And also because of the current high historical valuation of the market.

[3] Fidiciary is defined as someone who is required to act in the best interest of someone else.  The CFA Standard requires me to act with reasonable care and exercise prudent judgment. 

[4] Trump might have aimed at China post-election, but the bullets hit Europe.

[5] Vanguard’s flagship Total World Stock ETF gained 16.5% in 2024

[6] We are in an era where the top stocks are extremely difficult to beat but the top bonds (by issuance) are very easy to outperform.

[7] Last year “wide moat” investment strategies broke down.  Wide moats are businesses with high barriers to entry that make them hard to compete with.  Alphabet (Google) has a wide moat (search), but so does Boeing.  There is no guarantee that these companies will be well managed.