By Kyle Tetting
What a year!
As I write this just before Christmas, the S&P 500 has eclipsed a year-to-date gain of more than 25%. Growth stocks have more than doubled the return of value stocks, though I am certainly not complaining about the double-digit returns I’ve seen on my value stocks.
And, despite a 2022 full of coal for nearly every investable asset, three-year returns – starting in 2022 – have come around to above average for broad measures like the S&P 500. All told, it’s been a fantastic year for most investors.
Bonds
We tend to start with stocks when thinking about investments, but the landscape for bonds seemed to be showing greater strength as well for much of the year. Mid-year returns for bonds looked compelling as the prospects for ongoing rate cuts pushed longer-dated bond yields lower. Persistent modest inflation moved rates a bit higher through the end of the year and took away some of the mid-year gains, but intermediate bonds look poised to finish the year meaningfully positive – doubly so for shorter-dated bonds.
At their core, bonds aren’t a source of sizable price improvement. They are a source of income from the underlying interest payment of the bonds. To that end, while higher yields through year-end have dampened 2024 bond returns, they’ve created a better opportunity for the road ahead for bonds.
Learn more
2024 Investment Outlook Seminar, a Money Talk Video with Kyle Tetting
State of the balanced investor, a Money Talk Video with Adam Baley
My outlook for investing in 2025: 2-0-2-5, by Adam Baley
Stocks
Most U.S. stocks were considerably positive, but there were a few signs of weakness over the year. On the stock sector level, materials and energy stocks slowed significantly as oil and materials prices moderated after a period of high inflation. Add in some persistent weakness in real estate – a traditional value sector along with energy and materials stocks, and it’s clear why more traditional value businesses lagged a bit during the year.
Dollar
Perhaps the most significant struggle in 2024 came from dollar strength. While foreign stock markets trailed the U.S. all year, the disadvantage was further emphasized when factoring in currency exchange. Broad measures of foreign stocks like the MSCI EAFE index saw as much two-thirds or more of return eroded by a dollar that had gained nearly 7% against a broad basket of foreign currency.
A stronger dollar remains an appealing prospect on its face, however it poses a challenge for both U.S. investors in overseas businesses as well as U.S. businesses looking to sell to consumers abroad. A strong dollar makes U.S.-produced goods more expensive when purchased in other currencies. Also, investments denominated in other currencies are less attractive when returned to a stronger dollar. The silver lining, at least for the U.S. economy, is that exports account for only around 11% of gross domestic product.
Global economy
Beyond stocks and bonds, the global economy continues to undergo transition, with some continual slowing in many of the major manufacturing economies and geopolitical risks weighing on much of the world.
The eurozone, in particular, was aided by the summer Olympics and pent-up travel demand, which buoyed service-sector growth in summer, even as much of the manufacturing economies continued to struggle. Add in the Russia-Ukraine war, ongoing and renewed conflict in the Middle East and persistent questions on China’s growth, and it is no wonder the U.S. remained a more compelling investment story throughout the year.
Fundamentals
More than most, 2024 was a strong reminder that for all the headlines, markets respond to earnings and interest rates.
As the Federal Reserve embarked on rate cuts, and corporate earnings fell nearly in line with expectations, investors gained confidence in their equity exposure. Such confidence pushed earnings multiples toward notably elevated levels. An expensive stock market reflects the optimism investors now share that earnings growth forecasts aren’t overly optimistic, and the Fed won’t need to quickly pivot toward either faster rate cuts or a return to rate increases.
It hasn’t been without bumps and bruises, but gains across the past few years have been considerable and well founded.
Economic and investment certainty isn’t possible, but cautious optimism and appropriate balance continued to prove a winning strategy. In short, and at least for now, the soft landing remained intact through 2024, and investors have been rewarded for their patience after a painful 2022.
Kyle Tetting is president of Landaas & Company, LLC.