Continuing the momentum from last quarter, the broader U.S. equity markets steamrolled ahead posting yet another quarterly gain to end the year. This represents the first time since 1998-99 that the S&P500 posted two consecutive years of 25% or greater gains. The outsized returns can be attributed to a resilient economy, strong labor market, robust consumer spending, solid corporate earnings, progress toward slowing the growth of inflation and the potential of artificial intelligence to grow corporate earnings. The S&P500 set 57 record highs throughout 2024, corresponding to a new high every 4.4 trading days. Additionally, volatility was low throughout the year. The largest price decline from peak to trough was approximately 8.5% in 2024. The historical average dating back to 1928 indicates an average price decline throughout any year for the index to be about 15%. With interest rates now squarely in the mid-4% range, we anticipate an increased and more normal level of market volatility in the months and quarters ahead. Short-term interest rates, as set by the Federal Reserve, were lowered twice this past quarter to end the year at 4.50%. That represents a full 1% lower for the year. Longer-term yields, as set by the market saw an increase in demand, as the 10-yr Treasury bond reversed the inversion that plagued rates to end last year. The unemployment rate ticked up to 4.2% to end the quarter and year, but was solidly below the 50 year average of 6.2%. With the remarkable run the stock market has had, our short-term outlook remains cautious. It is easy to see signs of market froth, with many investors fooled into thinking markets rise indefinitely leading them to take on too much risk for their age and tolerance. We continue to recommend staying balanced with investment allocations and taking profits when reviewing portfolios.
The S&P500 rose 2.4% in Q4, and a full 25% for the year. The tech heavy NASDAQ rose 6.4% for the quarter and 29.6% for the year. The DJ Industrial Average increased just 0.9% in Q4, but a respectable 15% for the year. Internationally, the EAFE lagged U.S. markets declining -8.1% in Q4, but eking out a gain of 3.8% for 2024. Fixed Income, measured by the Bloomberg U.S. Aggregate Bond index posted a loss of -3.1% for the quarter and a gain of 1.3% for the year. The 2-year U.S Treasury Bond ended the quarter at 4.25%, while the 10-yr ended the year at 4.57%. Gold ended the quarter down slightly -1%, but up for the year an impressive 27% gain. Crude oil reversed from the previous quarter’s loss and rose 5.3% in Q4, and up slightly 0.8% for the year. The average stock in Morningstar’s coverage universe ended the quarter trading 2% above fair market value. Financial Services and Healthcare ended the quarter the most overvalued at 9%, with Utilities at 8%. Consumer Cyclical, Energy and Basic Materials ended Q4 trading 15%, 11% and 8% below fair market value respectively1. The current P/E ratio of 29.86 for the S&P500 represents a valuation that grew again, to now represent an 85% overvaluation versus the historical average.
We look forward to navigating the equity and bond markets for our clients, while continually earning your business, your referrals and your respect in 2025. God Bless!
Jack A. Kennedy, Chief Investment Officer
1 Results referenced from Morningstar.com