Rockbridge Institutional – December 2024 Market Review

Market Review

Here are the recent returns from various market indices:

Market	Quarter	Year	5 years	10 Years
US Large Cap (S&P 500)	2%	25%	14%	13%
US Small Cap (Russell 2000)	0%	12%	7%	8%
Int’l Developed (EAFE)	-8%	4%	5%	5%
Emerging Markets (MSCI Index)	-8%	8%	1%	4%
Short-term Bonds (Treasury 1-3 yr)	0%	4%	1%	1%
Intermediate-term Bonds (Treasury 3-5 yr)	-2%	2%	0%	1%
Long-term Bonds (Treasury 5-7yr)	-5%	-1%	-1%	1%
Inflation (CPI)	1%	2%	4%	3%

Stocks

We have witnessed more volatility in domestic stocks lately. Stocks dropped in response to the Fed’s rate cut but have come back some since. Except for the S&P 500, it was a flat-to-down quarter, especially in international and emerging markets.

Recent periods notwithstanding, 2024 was a good year for stocks (international developed markets the exception). The S&P 500 continues to be driven by just six companies: Amazon, Apple, Google, Meta (Facebook), Microsoft, and of course Nivida, that are expected to benefit from the continued development of AI. In 2024, an equally weighted portfolio of these six companies was up 60%; Nvidia was up 177%.  The results in domestic small cap markets and emerging markets are above long-term averages. A portfolio diversified among both domestic and non-domestic markets earned 10% in 2024.

Developed international markets did not keep pace. This relative performance does not reflect earnings shortfalls but primarily how market values these earnings.

Look at how the S&P 500 stands out in all periods; this result is again driven by just the few tech companies that are expected to participate in the development of AI.

Elections triggered expectations for an improved investment landscape, which pushed stocks upward. Cryptocurrencies especially gained, but don’t pay any attention.

Bonds

The accompanying picture showing bond yields for several maturities (Yield Curve) tells the 2024 bond story – short-term bond yields falling but rising at the longer end. Consequently, returns on short-term bonds exceeded returns at the longer end.

In recent periods bonds have not contributed much to the results of a well-diversified portfolio. This will not always be the case.

The changes in bond yields over the past year have brought the Yield Curve to a more typical pattern signaling little change in rates.

Inflation

Inflation in 2024 matched the goal of 2%, which was achieved without triggering a recession and contributed to a positive stock market environment. However, inflation at 4% for the past five years meant general price levels increased 20% over the period, which is still painful.

The difference between the 5- and 10-year nominal and inflation-adjusted yields is 2.3%, which is the market’s projection of inflation over those periods. This number is little changed from the beginning of the year.

Uncertainties Ahead

Stock prices and returns are based on continuous trading by informed buyers and sellers, both of whom make decisions on their best assessment of the future. As new information comes in, prices change – either up or down. Some of today’s uncertainties include:

• A correction in domestic large cap markets. Recent S&P 500 returns are unprecedented. The enthusiasm for the future of AI in just a few tech companies has produced a nice run. A reasonable concern is that AI is oversold.
• Renewed inflation. While inflation currently seems in check, an environment of tariffs, deficits and reduced immigration could bring inflationary pressures.
• Remaining diversified to international markets has been like “waiting for Godot.” Yet, based on the evidence that markets eventually revert to long-term averages, we continue to wait for our patience to be rewarded. We’ll see.
• Political disruptions. Voters expect disruptions from the Trump Administration. The extent and economic impact of these disruptions is uncertain.

Adding to the uncertainty of these “known unknowns,” there are “unknown unknowns” as well. Predicting this uncertain future is rarely rewarded – the best approach is enduring the uncertain future by remaining diversified.