U.S. Equity Investment Environment
The S&P 500 reached several all-time highs in the fourth quarter, finishing higher by 2.4%, and extending its 2024 gains to 25.0%. Donald Trump’s re-election and a Republican “Red Sweep” of Congress fueled expectations for tax cuts, deregulation, and pro-growth policies in 2025. In December, however, previous optimism was met with volatility from trade tensions and reduced projections for Fed rate cuts in 2025.
The “Magnificent Seven” accounted for 53% of the S&P 500’s 2024 total return, which highlights the significant outperformance of a small group of stocks relative to the rest of the index. Consumer discretionary led all sectors, up 14.3% this past quarter and 30.1% for the year, followed by communication services, returning 8.9% during the last three months and 40.2% year-to-date.
The materials sector experienced the worst performance, down 12.4% in Q4, and slightly negative in 2024, making it the only sector with a negative annual return. For the quarter and year, small-and mid-capitalization issues underperformed the S&P 500 and growth-oriented issues outperformed value stocks.
International Equity Environment
Foreign developed markets performed poorly with the MSCI EAFE Index retreating 8.1% for the quarter and advancing only 3.8% for 2024. This weakness was due in part to meager growth prospects and political instability in France and Germany, despite the European Central Bank cutting interest rates by 25 basis points in October and December. In addition, the U.S. dollar strengthened against major currencies, providing headwinds for international equities.
Japanese stocks performed relatively well, down 3.6% in the fourth quarter, driven by a significant depreciation of the Japanese yen. Emerging markets faced pressure from South Korea’s political crisis and concerns over Chinese growth. The MSCI Emerging Markets Index performed on par with its developed counterparts, declining by 8.0% in the fourth quarter but rising 7.5% over the year as investors evaluate concerns about the impact of Donald Trump’s proposed tariffs, particularly in China. Despite its poor fourth quarter performance, China managed to rebound 19.4% in 2024.
Fixed Income Environment
The Bloomberg U.S. Aggregate Bond Index posted a loss of 3.1% in the final quarter, pressured by U.S. deficit concerns, resilient inflation metrics, and reduced expectations for 2025 rate cuts, but finished the year 1.3% higher. In December, the Federal Reserve reduced interest rates by 25 basis points, to a range of 4.25–4.5%, and introduced uncertainty regarding the “extent and timing” of future rate cuts, suggesting a slower pace in 2025 than previously expected. Although the consensus is that two 25-basis-point cuts are now expected in 2025, down from the four anticipated in September, some forecasters now predict the Fed will not cut rates at all.
As a result, shorter-duration bonds outperformed in Q4 and for the year. The 10-year-Treasury yield rallied noticeably, finishing the year at 4.57%, amid concerns over potential inflationary policies arising from a Republican victory and market uncertainty regarding the Fed's future actions. The Bloomberg Municipal Bond Index declined 1.2% this past quarter, but advanced 1.1% on the full year. Despite rising yields, high-yield bonds continue to outperform on a quarterly and yearly basis, up 0.2% and 8.2%, respectively. Long-dated Treasury bonds, which are more sensitive to changes in interest rates, experienced the sharpest decline, down 8.6% for the quarter and lower by 6.4% for 2024.
Commodities Environment
The S&P GSCI Index advanced 3.8% in Q4, finishing the year up 9.3%. Energy was the best performing component of the index in Q4, up 7.5%, and 9.9% for 2024, due to improved Chinese economic data and higher expectations for global demand. Precious metals declined this past quarter, with Gold dropping 0.5% due to the U.S. Dollar’s recent surge, but rallied 26.6% over the year, as central banks continue their efforts to diversify their reserves and reduce their reliance on the U.S. dollar.
