Q4 2024 Market Review: Reflecting on Last Year’s Market Trends and Looking Ahead to 2025

Reflecting on 2024, and Looking Forward to 2025

The start of 2024 was marked by cautious outlooks from market experts, who cited multiple potential headwinds: lingering inflation concerns, uncertainty around interest rate policies, the upcoming presidential election, and ongoing global tensions. Despite these challenges, the market defied conservative predictions, with the S&P 500 Index repeatedly breaking record highs throughout the year. 

And while U.S. large cap stocks were the big winners, performance was positive across the major asset classes we focus on, as shown in the chart below.

Source: Dimensional Fund Advisors. Date as of 12/31/2024. Performance in USD. 

This performance, however, came amid a stream of attention-grabbing headlines focusing on Federal Reserve policy decisions, the outsized influence of the “Magnificent 7” tech stocks, and election-related uncertainties. Paradoxically, even the market’s achievement of new highs sparked anxiety among some investors who worried about potential corrections. Yet those who maintained their investment discipline through the noise and volatility were ultimately rewarded with strong returns.

The year served as another reminder that while financial media often amplifies both fear and FOMO (fear of missing out) to drive views and capture attention, maintaining a steady, long-term investment approach is more beneficial than reacting to headlines or attempting to time market movements.

Inflation, Interest Rates, and The Fed

2024 marked an interesting year in U.S. monetary policy. Many believe the Federal Reserve (the Fed) is seemingly on track to successfully manage a “soft landing” – bringing down inflation without triggering a recession, which is no easy feat.

After a couple of years of aggressive rate hikes to combat high inflation, the Fed shifted its approach in 2024 and began cutting rates. This decision reflected growing confidence that inflation was moving closer to its target level. The central bank implemented three interest rate cuts during the year: a larger half-percent cut in September, followed by two smaller quarter-point reductions in November and December. This brought the federal funds rate down from its range of 5.25-5.50% at the start of the year to 4.25-4.50% by year’s end.

As illustrated in the chart below, this careful balancing act appeared successful, as inflation continued to moderate while the economy maintained its strength.

Source: Federal Reserve Economic Data, Federal Reserve Bank of St. Louis. Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Percent Change from Year Ago, Monthly, Seasonally Adjusted.

The 2024 Presidential Election

The 2024 presidential race unfolded through a seemingly endless cascade of headlines, debates, and political twists that culminated in an outcome that defied expectations. While our focus here is on the implications for investors, we recognize that this transition of power resonates deeply with many Americans, given the profound issues facing our nation.

During presidential terms, it’s natural to wonder about potential impacts on investment portfolios. Political debates about the economy, healthcare, climate change, and social policies often stir intense reactions and concerns about market implications. While markets may experience increased volatility as investors react to political developments and media coverage, historical evidence suggests a different long-term story.

As shown in Exhibit 4, looking at data since 1926, the S&P 500’s performance during presidential terms reveals that markets have generally performed well regardless of which party holds the White House. This pattern extends beyond U.S. large-cap stocks to international markets, emerging markets, and bonds. The reason? Over longer periods, fundamental factors like economic growth, corporate earnings, technological advancement, global conditions, monetary policy, and demographics tend to drive returns more than political leadership. Companies continue to pursue profits regardless of who occupies the White House.

Source: S&P data © 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

While presidential administrations certainly influence economic policy, they represent just one factor among thousands that affect market performance. The business environment is shaped by a complex web of variables including global leadership decisions, interest rate movements, oil price fluctuations, technological breakthroughs, demographic shifts, and changing consumer preferences. These factors often interact in unexpected ways that can override policy intentions.

A compelling example of this complexity can be found in the energy sector during the first Trump presidency as illustrated in Exhibit 5. Despite policies widely viewed as favorable to traditional energy companies, the sector was consistently the market’s worst performer throughout his term, as shown in the chart below (keep in mind that many alternative energy companies are actually classified under different sectors). This counterintuitive outcome highlights how even explicitly supportive policies can be overwhelmed by other market forces – in this case, factors like changing global energy demand, technological advances in renewable energy, and shifting investor preferences played more significant roles than federal policy.

Source: Dimensional Fund Advisors. The annual returns are Russell 3000 Index Global Industry Classification Standard (GICS) sector returns. Real estate investment trusts (REITs) are shown as a separate category to illustrate their exclusion from certain funds. REITs are classified according to the GICS. Real Estate is excluded from the chart because it did not exist as a GICS sector category prior to September 2016.

Disclosure: S&P/MSCI changed the GICS methodology after market close September of 2018 to rename “Telecommunication Services” to “Communication Services” and to reclassify a number of companies to that sector. Dimensional reports these changes in company membership to Communication Services starting October 2018, but changes the name historically to Communication Services to maintain consistency. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. The GICS was developed by and is the exclusive property of MSCI and S&P Dow Jones Indices LLC, a division of S&P Global.

The key takeaway is that while presidential policies matter, they operate within a much broader context. Companies must navigate numerous challenges and opportunities regardless of who occupies the White House – from global competition and technological disruption to changing consumer preferences and environmental pressures. These multiple layers of influence mean that predicting sector or company performance based solely on presidential policies, no matter how supportive they might appear, often proves unreliable.

Magnificent 7

While 2024’s market narrative was dominated by the remarkable performance of the “Magnificent 7” – Apple, Microsoft, Nvidia, Meta, Alphabet, Amazon, and Tesla – their success highlights both opportunities and potential risks in today’s market. 

These tech giants, which collectively make up a significant portion of the S&P 500 index, have driven much of the market’s gains through their leadership in artificial intelligence and other technological innovations. Their outsized influence means that many investors’ portfolios, particularly those tracking major indices, may have more concentration in these companies than they realize.

However, history offers countless examples of market leadership by a few stocks changing unexpectedly, from the boom and bust of the “Nifty Fifty” stocks of the 1970s to the dot-com bubble of the late 1990s. While the Magnificent 7 companies have performed well recently, their current market dominance doesn’t guarantee future outperformance. 

Diversification continues to serve as a key risk management tool by helping to protect against both company-specific risks and broader sector declines. A well-diversified portfolio includes not just different companies, but exposure to various sectors, market capitalizations, and geographic regions. This approach recognizes that future market leaders are difficult to predict and therefore aims to maintain broad exposure, seeking to manage risk while providing opportunities to benefit from returns across various segments. 

Why are We Still Invested in International Markets?

While we’re on the topic of diversification, let’s talk about investing in international markets. 

When most Americans think of “the market,” they typically focus on the S&P 500, yet this index only represents around half of global stock market value. This narrow focus reflects “home country bias” – the tendency to heavily favor investments in one’s own country. While U.S. stocks have indeed outperformed international markets in recent years, historical data shows that market leadership has alternated between U.S. and international over different decades, with no consistent pattern of dominance.

A diversified approach that includes both U.S. and international stocks has historically helped moderate portfolio volatility while capturing returns from both markets. This is particularly important for retirees, who can be vulnerable to poor investment timing. The relative performance between U.S. and international markets is also significantly influenced by currency fluctuations – when the U.S. dollar is strong, international assets appear less valuable, and vice versa.

Rather than trying to predict which market will outperform, a more prudent approach is to maintain broad global diversification that roughly mirrors the natural proportions of world markets. This strategy acknowledges that while we can study past performance patterns, predicting future market leadership is impossible. The key is not to avoid international investments simply because of their recent underperformance, but to maintain a disciplined, globally diversified approach.

Looking Ahead to 2025

As we enter 2025, as with every new year, financial markets face several uncertainties that will likely influence investment conditions throughout the year. The Federal Reserve’s management of rates remains a central focus, with diverse opinions about whether the current rate environment will persist or shift significantly. Technology sector dynamics, particularly around the Magnificent 7 stocks and AI developments, continue to spark debate. Global economic conditions and the new administration may create both challenges and opportunities across various market sectors.

However, 2024’s market performance reminded us yet again that attempting to predict short-term market movements or make investment decisions based on future predictions often proves futile. The year demonstrated that markets can climb despite – or sometimes because of – unexpected developments. While analysts and economists will continue to offer predictions on everything from interest rates to technological disruption, historical evidence suggests that maintaining a disciplined, well-diversified investment approach aligned with long-term goals can help manage risk and may offer additional benefits.

Your Abacus advisor welcomes the opportunity to discuss your investment strategy and how it aligns with your financial objectives as we move through the year.

Here’s to a healthy, prosperous, and joyful 2025!