Market Recap

The S&P 500 Index, consisting of the largest public companies in the US, ended the year up 25%.  This was the second year in a row with gains over 20%.  The returns were led by large technology companies, particularly those that participate in the artificial intelligence arms race.  The Russell 1000 Growth Index, which is heavily weighted toward these technology companies, was up 33% for the year.  The Russell 1000 Value Index, which is tilted toward the banking, healthcare and energy sectors, was up 14.4% for the year.  The Russell 2000 Index, representing the smallest US companies was up 11.5%. 

The MSCI-EAFE Index of large, developed stocks outside of the US was up only 3.8% for the year.  The index sold off heavily in the fourth quarter in response to worries over tariffs that may be imposed by the new Trump administration.  The MSCI Emerging Markets Index, dominated by companies in China and India, finished 2024 with a 7.5% gain.  After three years of steep declines, stocks in China were up in 2024, which helped the index.  Taiwanese technology stocks in the index were the largest contributor to positive returns for the year. 

The bond market was once again remarkably volatile throughout all of 2024.  Bonds recovered nicely through most of the year but sold off in the fourth quarter shortly after the US elections.  This was attributed to fears that the new administration’s policies would lead to higher inflation and higher Federal Reserve interest rate policy.  The Bloomberg US Aggregate Bond index ended the year up only 1.3%.  Given the level of geopolitical tensions in the world, inflation risks and concerns about the growing US National Debt, Gold ended the year up 27%, adding to a 13% gain in 2023. 

Investment Outlook & Portfolio Positioning

The US election is finally over and a peaceful transfer of power is under way.  After the election there was a 6% jump in the value of the S&P 500 Index of US stocks.  This move was commonly called the “Trump Trade” and was attributed to optimism that the new administration will cut regulations and lower corporate taxes, which could help earnings.  Then that gave way to a 3% drop in value attributed to fears that proposed policies would spike inflation and hurt revenues.  This back-and-forth jockeying will persist in the short run, especially as campaign promises get translated into actual legislative action.  In the long run, however, other factors will far outweigh politics in determining price movements and I don’t recommend making your mood about the state of politics, whether optimistic or pessimistic, factor heavily in your investment decisions. 

The US economy averted a highly anticipated recession in 2024, aided by historic levels of federal deficit spending, pandemic related stimulus programs that still haven’t been fully exhausted and massive amounts of corporate spending on advancing artificial intelligence.  We expect some softening of economic growth in 2025, but the risk of recession now appears low.  The new administration has promised lots of stimulative policies, which could help sustain economic growth.  We have positioned the portfolio with the expectation of positive economic growth in the US.  We have added to our allocation of smaller US companies, which could benefit from this growth, as well as starting with relatively cheaper valuations compared to the largest US companies. 

After spiking to 10% during the pandemic, inflation has steadily dropped to around 2.5-3.0%.  The Federal Reserve would like to see inflation closer to 2% before aggressively cutting short term interest rates.  However, they have become increasingly concerned that the new administration’s proposed economic policies could reignite inflation and they have taken a “wait and see” approach to changing rates.  It remains to be seen which policy shifts can actually be enacted and the magnitude of each.  Tariffs, and particularly the level of proposed levies, is one such policy that we will be watching closely.  Tariffs have been used as a lever in trade negotiations for many years and by many different countries.  They have been widely studied and there is plenty of historical data to review.  They are unequivocally inflationary with the country that levies the tariffs bearing the brunt of the costs through higher prices of both imports and competing domestic products.  Deglobalization, immigration reform, unfunded tax cuts and deficit spending can also all be inflationary.  We have positioned the portfolio to reflect the higher risk of inflation versus the Fed’s 2% target.  We continue to have a meaningful allocation to Gold, and we have shifted the Bond portfolio toward shorter duration and higher yielding bonds. 

We are optimistic about the trajectory of US economic growth, but we are quite concerned about the level of valuations in the technology sector.  Current market behavior resembles the dot.com bubble.  More and more people are taking up investing for sport.  New trading apps are designed more like gambling sites, with rewards, flashing lights and ringing bells associated with mundane trades.  Children are taking up “investing” in large numbers and portfolios are becoming increasingly concentrated in fewer companies, heavily tilted toward the most recent best performing stocks.  I’m seeing more highly confident traders enamored with their own genius for taking speculative risks in stocks, requiring no more research than reading the news or listening to podcasts.  Similar to the late 1990’s, many new investors have little regard for accounting reports or modeling financial statements to arrive at a reasonable price.  Valuations by most reasonable metrics are currently either exceeding or near the levels reached in the dot.com bubble.  Nvidia and Tesla are great businesses.  However, there is most definitely a point where the price you pay can exceed the value of these stocks.  The growth assumptions needed to justify current prices are unprecedented and they must also assume unabated growth at those levels for decades.  In a competitive market, that has never happened in history for a reason.  Competitors catch up and compete away profits.  New companies create new innovations and steal market share.  Accounting is boring, but necessary to avoid careless valuation mistakes. 

The concentration of money in a small number of stocks is the highest in history with nearly 40% of the value of the S&P 500 Index (500 largest US stocks) attributed to just 10 stocks.  Artificial intelligence is no doubt a game-changing advancement.  Perhaps similar in impact to the invention of the combine, telephone, automobile, television, personal computer or the internet.  Like these other breakthroughs, it isn’t going to be useful in mass application overnight.  The technology is also largely democratized and available to varying degrees of efficacy to everyone.  Early winners in the race to marketable applications will experience high profits, but eventually competition will cause those profit levels to mature.  We expect that the positive impact AI spending is having on the economy will be broadly shared.  We have shifted the portfolio substantially away from high valuation growth stocks in favor of growth at a reasonable price stocks, value stocks and stocks of small to mid-sized companies. 

We thank you for your continued trust in our firm and we welcome any questions or feedback that you have. 

Cordially,

Shane M. Alsworth, MBA, CFP®, CLU®, CIMA®

The views and opinions presented in this article are those of Shane Alsworth only (disclosures on back)

Sources: Morningstar/Ibbotson data, Ned Davis Research, BCA Research, Litman-Gregory, iMGP

*US large stocks (S&P 500 Index), US large cap growth (Russell 1000 Growth Index), US large cap value (Russell 1000 Value Index), US small stocks (Russell 2000 Index), (Developed international stocks (MSCI EAFE Index), Emerging Market stocks (MSCI EAFE EM Index), Core investment-grade bonds (Bloomberg U.S. Aggregate Bond Index), Floating Rate Loans (S&P/LSTA Performing Loan Index), US Dollar (DXY Index), Gold (Aberdeen Physical Gold ETF), Commodities (Bloomberg Commodity Index)

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