Q4 Report 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, the financial markets largely took these headlines in stride. Stocks rose overall during the quarter to continue the rally that has been in place since October 2022, but did not enjoy the same kind of unrelenting strength they did after the prior two presidential elections. Meanwhile, bonds pulled back as intermediate and longer-term interest rates rose, though that only marked a return to price levels previously seen over the past couple of years. Commodities, as well, were largely contained within their prevailing ranges, with the exception of cryptocurrencies such as Bitcoin that broke to new highs. 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 completed not only a stellar 2024 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. The rally also narrowed into the end of the year as fewer stocks participated. Thanks in large part to that late swoon, only four of the S&P 500's eleven sectors actually ended the quarter in positive territory (the mega-cap- dominated Consumer Discretionary, Communication Services, Technology, and Financials sectors). The advance was, likewise, less impressive among smaller companies, as the small-cap Russell 2000 was basically flat over the three-month period 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 enjoy the same level of success as stocks 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 actually rose. This steepening of the yield curve was likely due to an associated rise in future projections for economic growth and inflation, as well as diminishing expectations for several additional rounds of Fed rate cuts. The higher longer-term rates during the quarter put downward pressure on bond prices, leaving popular bond indices down around 3%.

Commodities

Broad commodity measures have been rangebound for the past couple of years, and the fourth quarter mostly continued this lack of a defined trend. Crude oil, for instance, spent much of the period bouncing around between $67 and $72 per barrel, with only brief sojourns outside of this narrow $5 range. Similarly, the precious metals stalled out after enjoying a nice rally earlier in the year. Gold was essentially flat during the quarter and silver was down around 7%. Copper is often thought to be heavily tied to global growth expectations, and it also fell over the period. There were some outliers that gained ground, such as natural gas and some agricultural products, but for the most part it was an unexceptional quarter for commodities. A stronger U.S. Dollar may have played a role in that during the final months of the year.

Conclusion

Most investors will likely look back upon 2024 with fond memories. 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. Yet, investors largely remain bullish, with a record number of participants in the November Consumer Confidence report 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.