2024 Q4 Market Commentary: Extremes
Heading into 2024, we were coming off a banner year in the markets. The US stock market was up over 26% in 2023, international stocks were up over 10%, and even bonds were up over 5%. With a big election on the horizon, many investors expressed concern that these strong returns couldn’t possibly continue. The wars in Ukraine and the Middle East were ongoing, and it seemed clear that market volatility had to come back. The average expectation for 2024, according to top Wall Street strategists, was a gain of 1.9% for 2024. And just like last year, those experts were wrong.
US Large-Cap Stocks led the way again in 2024 with a 25% return, while US Small-Cap stocks were up 12%. Outside of the US, developed market international stocks finished the year up 4%, and emerging market stocks were up 8%. Bonds didn’t fair as well, with the Bloomberg US Aggregate index up just 1%, but high-yield bonds did much better with an 8% return. Commodities had another strong year with a 9% return, as did real estate, which was up 8%.
We covered the futility of trying to predict what will happen in the markets in last year’s annual review, but it’s always helpful to have a reminder of just how difficult it is. Every January, we look back on the past year to see what happened, and we think this time will be different, but we will be able to predict what happens next. There’s nothing wrong with playing this prediction game, so long as you don’t let it control your investing approach.
Rather than adjusting your portfolio to match your predictions, you should be rebalancing your portfolio back to your target allocations. With Large-Cap US stocks outperforming every other asset class over the past two years, now might be the time to trim from that asset class, even if that means paying tax on capital gains. Conversely, your international stock allocation might be below your target after underperforming in recent years, so you might want to add to that asset class.
This type of rebalancing is how we manage client portfolios, and it takes all the emotion out of the decision making. We aren’t adding to certain asset classes because we think they’ll outperform this year, we are adding to them because this diversified approach has worked over the long-term and we think it will continue to work in the future. Could Large-Cap US stocks outperform again this year? Absolutely, but that wouldn’t make trimming from them now a bad move over the long-term.
While we won’t try to predict what will happen in the short-term, the extremes we’ve seen develop in recent years might give us some hints as to what will happen in the long-term. What extremes am I talking about? The same ones we have been talking about for several years now, but they keep getting worse:
- Growth vs Value – Growth stocks outperformed Value stocks by 19% in 2024 after outperforming by 31% in 2023. The ratio of growth to value ended the year at its highest level since March 2000.
- Large vs Small – Large-Cap Stocks outperformed Small-Cap stocks by 13% in 2024 after outperforming by 9% in 2023. The ratio of large to small stocks hit its highest level since October 1999 this year.
- US vs International – US stocks outperformed international stocks by almost 20% in 2024 after outperforming by 8% in 2023. We have now entered historic levels of outperformance of US stocks compared to international stocks.
- Mag 7 vs Everything Else – The market cap-weighted S&P 500 outperformed the equal weight index by 12% in 2024 after outperforming by 12% in 2023. The primary driver of this outperformance is the tremendous returns of the magnificent seven stocks – Nvidia, Meta, Tesla, Amazon, Google, Apple, and Microsoft, all but one of which outperformed the S&P 500 last year.
There’s no telling when these extremes might reverse course, but it seems unsustainable for them to continue the current trajectory forever. You could make a compelling argument for why each of these trends are happening right now, but what won’t always be the case. The world is constantly adapting and changing, and markets will move along with those changes.
The only thing we can be sure of in the short-term is that 2025 will surprise us in ways we can’t anticipate right now. Will interest rates be higher or lower? Will the dollar be stronger or weaker? Will US stocks continue to outperform? These are all things we can’t know, and frankly, which don’t matter. If you have a strong financial plan in place and a well-diversified portfolio, the short-term surprises are all just bumps in the road. If you feel you need to revisit your financial plan, please reach out to us.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.