Happy 2025! We hope your year is off to a great start.
Traditionally, our annual market recap blog highlights what happened in the markets and economy over the past year. This time, however, we’re starting with what did not happen in 2024.
2024: What Didn’t Happen
At the beginning of 2024, concerns were rife: being an election year that can be notoriously volatile, there were fears of market volatility, a looming recession, rising inflation, persistent high interest rates, and even the potential for a stock market crash. Yet, as the year unfolded, these anxieties largely did not materialize.
What DIDN’T happen:
- No recession: The economy grew by approximately 3%.
- Inflation stayed steady: Inflation remained manageable at around 3%.
- Minimal election-year volatility: Markets remained relatively calm.
- No stock market crash: Instead, the markets had a stellar year.
Market Performance Highlights
2024 turned out to be an excellent year for investors, particularly in the stock market. Here are some key numbers:
- S&P 500 Index (500 largest U.S. stocks): +23%
- Dow Jones Industrial Average (30 large U.S. stocks): +13%
- Russell 2000 Index (2000 small U.S. stocks): +10%
- MSCI World Index (international stocks): +19%
- Barclays Aggregate Bond Index (bonds): +1.25%
The S&P 500’s remarkable 23% growth marked the second consecutive year of 20%+ returns—a feat not seen since the late 1990s. However, it’s worth noting the disparities in returns among indices, particularly between the S&P 500 and other benchmarks like the Dow Jones.
The Impact of Market Weighting
The S&P 500 is a market-weighted index. This means the larger a company is, the more weight it carries in the index, thus it has a greater impact on the overall performance of the index. The S&P 500’s performance was largely driven by its top seven companies: Amazon, Alphabet (Google), Apple, Meta, Microsoft, NVIDIA, and Tesla. These tech giants were up an impressive 67%, significantly influencing the index due to its market-weighted structure.
In contrast, 80% of the stocks in the S&P 500 underperformed the index average, with only 20% outperforming. If the S&P 500 were equally weighted, it would have returned just 11% for the year.
Diversification Matters
Why point out the market weighting of the index? Most investors, including our clients, hold diversified portfolios that span various asset classes—from small-cap and international stocks to bonds, mid-cap, and value investments. A typical diversified portfolio* of 60% stocks (including international and small cap) and 40% bonds would have seen an average return of about 12.6% in 2024.
Other Key Economic Developments
Federal Reserve rate cuts: For the first time in four years, the Federal Reserve reduced interest rates by a total of 1% through multiple smaller cuts.
GDP Growth: The US economy grew by approximately 3% as measured by GDP.
Low unemployment: Despite a slight uptick in the first half of the year, unemployment remained low at approximately 4%.
Looking Ahead to 2025
While no one can predict the future with certainty, here are some insights and considerations as we navigate 2025:
Stock Market Expectations: Of 17 major strategists forecasting the S&P 500, 16 anticipate positive returns for 2025, though most expect single-digit growth rather than another year of double-digit gains.
Federal Reserve Policy: The Fed is likely to slow its rate-cutting pace, potentially implementing just two cuts in 2025, bringing the target rate to around 3.4%.
Key Concerns:
Concentration Risk: The top 10 stocks in the S&P 500 now account for 40% of the index’s weight. If these large-cap tech companies falter, they could drag the entire index down. This underscores the importance of diversification.
Policy Impacts: Proposed tariff and immigration policies from the new administration may contribute to higher inflation. However, other policies could benefit smaller businesses and support economic growth
A Positive Outlook: The economy remains strong, and we maintain a positive long-term outlook. As investing is for the long-term, the focus should never just be on any one given year. As always, we emphasize the importance of staying diversified and keeping a long-term perspective in your investment strategy.
Reason to Celebrate
On a personal note, 2025 marks a milestone for us: our 40th year in business! We are incredibly honored and proud of the relationships we’ve built with our clients over the past four decades and look forward to many more years of collaboration. Stay tuned for details about a special celebration event later this year.
Here’s to a successful and prosperous 2025!
*Assumes 60% SP500, 40% Barclays Agg Bond Index, 10% Russell 2000, 10% MSCI World Index. Indexes are unmanaged and can not be invested into directly. No investment strategy, including diversification, can guarantee a profit or protect against loss in periods of declining values. Investing involves risk including the potential loss of principal. Past performance is no guarantee of future results.
