Wall Street got coal in its stocking for Christmas, as the S&P 500 fell 2.4% and the Russell 2000 fell 8.3% in December. High quality fixed income also struggled, with the Bloomberg Aggregate off 1.6% last month.
The big headwind for markets last month was a hawkish Fed. While the Fed cut rates by a quarter point at its December meeting, it penciled in just two rate cuts for 2025 (down from an original projection of four). Investors — particularly U.S. fixed income and U.S. small cap stock investors — seem increasingly worried about inflation.
That said, it was a great year for U.S. stocks, with the S&P up 25%, the Russell 2000 up 11%, and the Nasdaq up 29%. The story of 2024 was one of “U.S. exceptionalism,” as our markets outdistanced those of most other countries.
A look ahead…
A new year brings new — or maybe the same — questions for Wall Street: Will the Fed pull off a soft landing? What are the economic and market implications of a second Trump Administration? Will ex-U.S. stocks finally shine? Will the world prove a more peaceful place? Is the inflation genie back in the bottle? Can U.S. stocks continue to rally?
The Fed meets January 28th and 29th and Wall Street expects the Fed Funds Rate to stay put at 4.25% to 4.5%. We think investors can deal with a slower, more modest series of rate cuts; rate hikes would be a whole different story.
The MSCI China Index was up 20% in 2024, its first positive year since 2020. Investors will be watching China closely for signs its economy is pulling out of its deflation-driven funk and its nascent stock market rally has legs.
A look at a datapoint worth discussing…
Of all the questions noted above, the one we have gotten the most often of late is, “Can the bull market in U.S. equities continue?” — especially as the S&P 500 just registered back-to-back 20%+ years for the first time in 25 years.
Our answer is yes, as share prices tend to track earnings, and for now Wall Street expects S&P 500 profits to grow by about 15% this year. Stepping back, we see parallels between today’s market and that of the 1990s, as 25+ years ago, the Fed was cutting rates, the economy was coming in for a soft landing and Wall Street was increasingly fixated on the transformative power of the Internet, akin to today’s interest in AI (artificial intelligence).
