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The U.S. investment scene, in aggregate, churned out another unusually positive investment experience this past year, with 20+ percent gains heaped on top of 2023's historically unusual gains.
A breakdown shows that just about every U.S. investment category was showing double-digit gains. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—gained 2.63% in the 4th quarter, and ended the year with a 23.76% gain. The comparable Russell 3000 index gained 23.81% for the year.
Looking at large cap stocks, the Wilshire U.S. 2500 Large Cap index was up 2.63% in the fourth quarter, and posted a 23.94% gain in the year just passed. The Russell 1000 large-cap index finished the year with a 24.51% gain, while the widely-quoted S&P 500 index of large company stocks gained a modest 2.07% during the year’s final quarter and overall finished up 23.31% in calendar 2024.
Meanwhile, the Russell Midcap Index finished the 2023 calendar year up 15.34%.
As measured by the Russell 2000 Small-Cap Index, investors in smaller companies received an 11.54% gain for the year. The technology-heavy Nasdaq Composite Index surged to a 28.6% return in 2024, after gaining 43.14% in 2023.
This was a year when the foreign markets significantly diverged from the U.S. return profile--and not in a good way. The broad-based EAFE index of companies in developed foreign economies lost 8.38% in the final quarter of 2024, to finish the year with a slight 1.15% gain in dollar terms. In aggregate, European stocks were down 0.87% in 2024, while EAFE’s Far East Index gained 6.42%. Emerging market stocks of less developed countries, as represented by the EAFE EM index, gained 5.05% in dollar terms on the year.
Real estate securities continue their recent gains, albeit with a bit of a bumpy ride. The Wilshire U.S. REIT index lost 6.13% of its value gain in the final quarter, but still managed an 8.50% positive return for the year. Commodities returns also bounced around a bit; the S&P GSCI index posted a 3.15% gain in the 4th quarter, which overcame the negative returns for the rest of 2024; investors finished the year with a 2.61% gain. Utility stocks, as measured by the S&P 500 Utilities index, rewarded investors with a robust 19.58% gain.
In the bond markets, the inverted yield curve is still with us, although the inversion has flattened somewhat. Yields on 30-year government bonds rose to 4.78%; 10-year maturities were yielding 4.57%. But 3-month issues are yielding 4.31%, higher than 6-month (4.27%) and 12-month (4.14%) issues. Five-year municipal bonds are yielding 2.90% in aggregate, while 1-year munis are yielding 2.97%. This is not normal, but what it tells us is not clear.
Overall, it's fair to wonder whether U.S. companies, in aggregate, are 25% more valuable today than they were a year ago, or whether they've somehow increased their value by 40% over the past two years. Market movements are driven by several factors; only one of them is the actual, real, growth in the underlying value of the companies that are being traded, and there is seldom agreement on the precise measure of that valuation.
Short-term, and sometimes longer-term movements are driven by what economists delicately call 'sentiment,' which simply means what investors are willing to pay more (a bull market) or less (a bear) for companies and their earning potential.
Today, we are experiencing an unusual series of strong positive market returns, which is the definition of a bull market. But we don't know for certain that investors are overpaying for the earnings of the companies they are investing in--or, if they are, whether we are experiencing a small or wide divergence at the moment. But it's fair to say that the past two years are leading the markets toward a day when the rubber band will be stretched too far.
The experts who follow these matters say that ebullient investor expectations rest on the idea that artificial intelligence will transform the economy for the better, help companies achieve unusual productivity gains, and ultimately lead to higher values across the board. This, of course, is unproven speculation, but there are other reasons to be optimistic. The inflation rate has retreated back down to historical norms, and the Federal Reserve Board seems inclined to cut interest rates by another half a percent. All the predictions of a global recession failed to come true, and are now being discredited. The new Congress is more likely to lower tax rates than raise them.
A recent compendium that followed the annual ritual of predicting the year's market returns in advance (always around January 1) found an average forecast of an 8.2% return for the S&P 500 in 2025. The crystal ball-watchers are more convinced by the positive than the potential negatives; indeed, not one of the prognosticators forecast a loss in 2025. This is unusual in the face of so many uncertainties: about policies initiated by the incoming Presidential administration, growing federal debt, wars in Ukraine and Israel and mounting cyber threats.
The best course has always been to ignore the predictions, positive or negative, and manage your own sentiment through what might become, in the months ahead, a choppy investing experience. The alternative is to pull out of the markets into safe assets that pay no interest, which are guaranteed to lose value due to inflation. The threats are real, the uncertainties are always with us, and through it all, patient investors have always been rewarded in time.
Why would the future be any different?
Sources:
Wilshire index data: https://www.wilshireindexes.com/products/ft-wilshire-index-series-index-returns-calculator
Russell index data: http://www.ftse.com/products/indices/russell-us
S&P index data:
Nasdaq index data:
International indices: https://www.msci.com/end-of-day-data-search
Commodities index data: https://www.spglobal.com/spdji/en/index-family/commodities/broad/#overview
Utilities index: https://www.spglobal.com/spdji/en/indices/equity/sp-500-utilities-sector/#overview
International indices:
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
Bond rates:
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