Q4 2024 Review | Market Update

Q4 2024 - Coasting to the Finish

The final months of 2024 were expected to be a time of transition for investors. The Federal Reserve pressed forward with their first set of interest rate cuts since March of 2020, while U.S. voters elected a new administration after another contentious election. While many anticipated that such major events would result in heightened volatility, markets largely took these headlines in stride. The result was a more muted quarter for the major asset classes than many prepared for at the outset of October.

Equities
The fourth quarter was not only the finale of a stellar year for the stock market, but the S&P 500's first back-to-back years of 20%+ gains since the late 1990s. Additional progress was made in the final three months, yet much of those returns came in October and NOvember before the broad market pulled back in December with only four of the eleven sectors finishing in positive territory: Consumer Discretionary, Communication Services, Technology, and Financials. Small cap companies were basically flat after initially spiking higher after the election. The result was an "ok" quarter for stocks, though one that previously looked much more impressive in mid-to-late November.

Bonds
Bonds did not see the same success in the fourth quarter. Since bond prices move inversely to interest rates, many assumed the more accommodative Federal Reserve lowering rates would provide a tailwind for bonds. However, while the shorter end of the yield curve that is more sensitive to Fed policy did decline as expected, longer-term yields moved higher. This move in interest rates caused bond indices to be down around 3%.

Conclusion
Most investors will likely look back upon 2024 fondly. The fourth quarter did not really do anything to alter that perspective, even if bonds did fall and stocks slowed into December. After consecutive years of the S&P 500 gaining more than 20%, it may be tougher for stocks to maintain the same trajectory without experiencing more bumps and volatility along the way. Historically, it's highly unlikely we will see three years of +20% gains. Yet, investors largely remain bullish, with a record number of participants expecting equity prices to be higher 12 months later. Sentiment may, therefore, be a little too optimistic heading into 2025, increasing the risks if reality does not measure up to the loftier projections. However, the U.S. economy continues to show resilience and there is hope that more rate cuts by the Federal Reserve and a new administration in Washington may help to bolster economic growth.