VWG Wealth Management 2024 4th Quarter & Year-End Review

By VWG Wealth Management on January 8, 2025

Executive Summary

• Large U.S. stocks surpassed the most optimistic expectations in 2024. Solid corporate earnings, along with excitement over the promise AI large-language models (LLM) and for pro-growth initiatives of the incoming Trump administration, provided support. The S&P 500 Index rose 3.4% in the 4th quarter and 24.9% for the year, its second successive 20%+ gain. 
• U.S. smaller stocks and international stocks paled in comparison as large U.S. momentum stocks appeared to crowd out other equities. For the full year, the Russell 2000 U.S. small cap stock benchmark increased 11.4%. The MSCI ACWI ex-US benchmark for broad international stocks advanced 5.2%.  
• The U.S. economy maintained its resilience. Inflation moderated, employment held steady, and the consumer held firm despite softening home sales.  2024 GDP is expected to have grown by 2.6% and appears to be on solid footing for similar performance in 2025.  
• Longer-term interest rates rose strikingly in the 4th quarter, despite the Federal Reserve adopting a softening stance and making three short-term borrowing rate decreases beginning in September. The Bloomberg Barclay’s Aggregate Bond Index disappointed for the year, returning less than money market rates. 
• Despite VWG’s current and long-term optimism, several items have our attention as we enter 2025. U.S. large equity valuations appear rich, and investor sentiment is robust.  Higher long-term interest rates, rate volatility, potentially confusing policy narratives of the incoming Presidential administration, and a fragile geopolitical environment, all have the potential to set off bouts of uncertainty and volatility. 
• VWG recommends diversified balanced portfolios. Investors should maintain, and in some cases even increase, appropriate allocations to cash and quality, liquid short-term instruments. 
• As always, thoughtful financial planning and reviews should drive portfolio allocations and investment decisions.  

Review of the Markets

Large U.S. stocks finished the year strong, with the benchmark S&P 500 Index gaining 3.4% in the 4th quarter and 24.9% for the year. This second consecutive 20%+ annual return was the seventh such occurrence in over 100 years. The dominance of large US stocks surprised most strategists, reminding us to remain focused on the long term and avoid short-term predictions and noise. 

The resilience of the U.S. economy anchored the stock market buoyancy. Despite the threats of COVID, a responsive inflation shock, followed by an unprecedented sharp increase in interest rates – nothing has seemed to derail U.S. employment and the consumer.  Excitement around artificial intelligence (AI) and large-language models (LLM) provided periodic bouts of support. Breathtaking capital expenditures on the latest generations of complex processing chips and data centers caught great attention. The year ended with a further market push, fanned by the incoming Presidential administration’s plans to pursue growth initiatives, and reduce regulation and bureaucracy. 

Large stocks seemed to be ‘the only game in town,’ both domestically and overseas. The Russell 2000 Index benchmark for U.S. small stocks was flat for the 4th quarter. Its 2024 total return was 11.4%. International stocks fared even worse. The MSCI EAFE Index lost 7.7% in the last quarter.  It edged 3.5% higher for the year. The disparity in performance between the S&P 500 and the MSCI EAFE indices was its widest ever. The strength in the U.S. economy, the U.S. dollar, and market momentum drove this outperformance. 

Bond yields rose in the 4th quarter, and for the entire year, despite the moderating economy, slowing inflation, and the Federal Reserve’s “dialing back (of) policy restraint.” For the first time in four years, the FOMC reduced short-term interest rates by 0.50% in September. This was followed by 0.25% rate cuts in November and December. Astonishingly, longer-term interest rates rose, reflecting optimism on the economy and proposed growth initiatives of the incoming Presidential administration. In the three months following the Federal Reserve’s first interest rate cut in this cycle on September 19, the Bloomberg Barclay’s Aggregate Bond Index total return posted a loss of 2.6%. This sharply contrasts with an average gain of 2.2% in the first three months following past initial rate cuts in 1995, 2001, 2007 and 2019.   

The yield of the U.S. 10-year Treasury note finished the year at 4.57% after beginning the year at 3.88%. The Bloomberg U.S. Bond Aggregate Index edged 1.3% higher for the year.  It has lost value over the last three and five years (compounded returns). The S&P Municipal Bond Index increased 1.3% for the year. High yield bonds, as measured by the Bloomberg Barclays High Yield Bond Index, earned 7.7% for the year, reflecting the stable economy, and little if any corporate financial stress. 

Gold cooled in the fourth quarter, partly due to the surging U.S. dollar and spiking cryptocurrencies. Despite this, gold’s 2024 performance just about equaled that of the S&P 500. The NYMEX Gold continuous futures contract gained 27.4% for the year. Buffeted by contrasting narratives of purported oversupply and increasing macroeconomic tensions, crude oil was flat for the year.   

Looking Forward

The Federal Reserve, and the consensus of respected strategists, expect the U.S. economy to remain firm in 2025. Gross domestic product (GDP) grew at a solid 2.8% in the third quarter and is projected by the Fed to grow 2.1% in 2025. Employment has cooled but has held steady. The U.S. consumer continues to spend. Although far below the threatening COVID-induced levels, inflation (see the following chart) has not fallen to the Federal Reserve’s long-term target of 2%, causing the Fed to moderate its rate guidance for 2024. The Fed still holds an easing stance, now projecting two rate cuts in 2025. 

Source: U.S. Bureau of Labor Statistics. As of November 30, 2024 

The U.S. equity market is demonstrating remarkable resilience. Despite elevated interest rates not experienced since 2009, corporate finances are healthy, and balance sheets are strong. S&P 500 corporate earnings are projected to accelerate in 2025 and 2026, beyond 2024’s 9% rate of growth. 

Two concerns are valuations and sentiment. Evercore ISI’s Julian Emanuel points out that “The S&P 500 at 25 times trailing twelve-month (TTM) price/earnings ratio (P/E) puts multiples in the top decile since 1960. Only the internet boom and the post-pandemic surge saw the S&P 500 trade more expensive.” 

Source: Bloomberg, Evercore ISI Research. As of November 2024. 

Helping to fuel these stretched multiples is the theme of “American Exceptionalism” that has begun to overwhelm global money flows. Although partly justified by the unprecedented earning growth by the so-called “Magnificent 7,” this narrative has the potential to become excessive. The US is 4% of the world’s population, 25% of global GDP, owning 33% of global corporate profits, and over 66% of the MSCI World Stock capitalization. The last time such an imbalance occurred was in the late 1980’s when Japan held 40% of world stock capitalization, with less than 20% of global corporate profits.   

However, valuations alone are not a marker of near-term risk. Schwab’s Liz Ann Sonders¹ states with supporting research that “valuation is more of an indication of sentiment, and we think that today’s stretched valuations are a product of enthusiasm. It’s hard to argue that high multiples in and of themselves represent a risk to the market’s near-term performance.”  

Sentiment is running high. Schwab portrays this with the accompanying chart showing that U.S. households are holding a near-record share of their assets in equities. They believe that “this doesn’t prevent more momentum in the near-term, but longer-term enthusiasm should be tempered with regard to expected returns over the next decade (per the yellow line below), assuming the historical connection remains tight.”   

Source: Charles Schwab, Bloomberg, 2024 Ned Davis Research, Inc. As of June 2024.

Portfolio Positioning

Although we remain constructive on the U.S. economy, corporate earnings and U.S. stocks, there are some items of concern that we’ll be watching in 2025: 

U.S. economic data sets, and the Federal Reserve’s interpretation and market’s reaction to them, continue to surprise in multiple directions. Fixed income volatility, as measured by the Bank of America MOVE Index, has been at levels over the past three years not seen since the 2008-2010 global financial crisis. In addition, the 0.69% move to 4.57% in the 10-year Treasury yield cannot be ignored. Any further increase in longer rates will put pressure on equities and other assets.

The first year of an incoming presidential administration is often volatile in terms of messaging and policy, and the proposed platforms by the incoming administration appear confusing at a high level. It is inevitable that markets will experience some jitters as new policies, and the key players overseeing them, take form. Independent oil analyst Paul Sankey² states “it is not clear which contradictory policy aims will prevail, which could set off a ‘pinball’ (sporadically volatile) market based on which comments and actions are spotlighted.” Proposed policies to increase the use of tariffs, and to extradite large numbers of undocumented foreigners, are contradictory to the stated goals of accelerated economic growth while keeping inflation in check. Extending tax cuts and trimming corporate tax rates may be problematic to the already extreme level of federal debt and the holders of U.S. treasuries. Increasing U.S. hydrocarbon production past already record levels while pushing prices lower contradicts classic supply/demand dynamics and the financial incentivization of producers.   

The global stage today holds many risks that threaten disruption. Respected analyst and GZERO’s founder Ian Bremmer³ views the current geopolitical environment as “exceptionally fragile, possibly more so than at any other point since the Cold War.” Contributing factors include numerous ongoing military conflicts (including Ukraine and the Middle East), multiple global political crises (including France, Canada and Korea), economic strains in the Eurozone and China, and the declining credibility of the United States’ ability to affect international order. 

These concerns, paired with our optimism, are strong arguments for holding diversified, balanced portfolios. These should contain: 

• Assets and strategies that can benefit from continuing growth and optimism 
• Assets and strategies that can withstand and even benefit from some inflation 
• Assets and strategies that can generate consistent cash flows under varying economic conditions 
• Assets and strategies that can withstand volatility  
• Assets and strategies that offer liquidity and capital preservation  

As always, financial planning comes before strategizing the portfolio and the placement of specific investments. Your financial plan should align with both your current situation and your future needs and goals. Any significant changes should be communicated to your VWG advisor to be incorporated and updated into the plan. The carefully considered financial plan should drive the appropriate allocation of assets dedicated to living needs, emergency needs, and to long-term appreciation, aspirational, and legacy goals. Those assets should be invested appropriately, considering expected liquidity needs, timeline, required rate of return, and acceptable levels of risk and volatility.   

The VWG team hopes that your 2024 has been a year filled with joy, adventure, personal growth, and time spent well. We wish you and your family an even better 2025!  It is our pleasure and deep honor to serve you and your families. The entire VWG team thanks you for your trust. We are committed to continue working hard to earn it in the coming year.   

Regards,

VWG Wealth Management

Suzanne, Ashley, Rashmi, Kay, Brandi, Lynette, Michelle, Mary Kate, Lilly, Ryan, Ryan, Ryan, Justin, Elana, John, Rick and Jeff