A Record Year for Stocks

Quarterly Insights – January 2025

The S&P 500 rose to an all-time high in the fourth quarter and extended 2024 gains  as the election results raised expectations for tax cuts and other pro-growth policies  in 2025, while the economy remained on solid footing and the Fed continued to cut  interest rates. The S&P 500 logged a modestly positive return for the fourth quarter  and an annual return greater than 20% for the second straight year.  

While the fourth quarter was positive for most of the market, it didn’t start that way as  anxiety over the election and an increased focus on the fiscal state of the U.S.  weighed on sentiment in October. Presidential polls tightened materially in October  and left the race too close to call, increasing political and policy uncertainty.  Additionally, much of the financial media’s focus in October was on the potentially  negative fiscal consequences of both candidates’ policies. Specifically, a Wall Street  Journal article focused on possible large future increases in the deficit and national  debt that could cripple future economic growth. Those fiscal concerns, along with  stronger-than-expected economic data, pushed Treasury yields higher and the 10- year Treasury yield rose from 3.75% at the start of October to over 4.20% by  Halloween. That rise in yields combined with political and policy uncertainty  pressured stocks and the S&P 500 finished October with a modest decline, falling  0.91%.  

Those headwinds on stocks were short-lived, however, as Donald Trump convincingly  won re-election while Republicans took control of both houses of Congress,  completing a “Red Sweep.” Reminiscent of 2016, the Trump and Republican victories 

proved to be bullish catalysts as investors embraced the idea of future tax cuts,  deregulation and a pro-business administration. That helped the S&P 500 rise above  6,000 for the first time. Shortly following the election, however, investors were  reminded of the volatile nature of a Trump presidency, as the president-elect  nominated several unorthodox supporters to prominent cabinet positions. These  surprises caused investors to contemplate policy risks to the pro-growth agenda  and stocks dipped mid-month. However, the withdrawal of Attorney General  nominee Matt Gaetz and the nomination of Scott Bessent as Treasury Secretary  helped to calm investor nerves about the president-elect’s cabinet and stocks  resumed their rally in late November and closed the month near all-time highs.  

In December, renewed focus on the potential economic benefits of an incoming  Trump administration combined with the “Goldilocks” economic environment of solid  growth and continued Fed rate cuts to send the S&P 500 to yet another all-time high  near 6,100. However, that rally stalled mid-month as President-elect Trump doubled  down on his support for other unorthodox cabinet nominations and lobbed tariff  threats at major trade partners including Canada, Mexico and China. Market  volatility increased as the Federal Reserve cut interest rates at the December  meeting but also reduced the number of expected cuts in 2025 to just two (from  four). That sparked a sharp selloff in stocks that continued into year-end, causing the  S&P 500 to finish slightly positive for the month, but well off the highs.  

In sum, 2024 was a very strong year for the broad markets as the Fed seemingly  achieved a soft economic landing and aggressively cut interest rates, while foreign  and domestic political risks and drama failed to derail the rally. 

Q4 and Full-Year 2024 Performance Review  

Despite the late year dip in stocks, all four major U.S. stock indices finished the  quarter with a positive return. The Nasdaq was the best performing major index in  the fourth quarter and outperformed the other three major indices on a combination  of earnings-driven AI enthusiasm combined with growing uncertainty on when future  pro-growth economic policies could actually be enacted. For the full year, the  Nasdaq also was the best performing major index although it only slightly  outperformed the S&P 500, as that index benefitted from the large weightings to tech  stocks and financials. The Dow Industrials and Russell 2000 both also finished the  year with solid gains, but they relatively underperformed the Nasdaq and S&P 500.  

By market capitalization, large caps outperformed small caps in the fourth quarter  and for the full year, thanks mostly to strength in large-cap tech stocks on the  aforementioned AI enthusiasm and strong earnings. Small caps did see a solid rally  initially in the fourth quarter on hopes for pro-growth policies from the incoming  administration, but the Fed’s guidance to fewer rate cuts in 2025 weighed on small  caps later in December and the Russell 2000 finished the quarter with only a slight  gain.  

From an investment-style standpoint, growth significantly outperformed value both  in the fourth quarter and for the full year. The reasons were familiar: Artificial  intelligence enthusiasm powered tech-heavy growth funds early in 2024, while in the  fourth quarter solid AI chipmaker earnings extended those gains. Additionally, doubts  about the timeline for implementation of pro-growth policies from the incoming  administration weighed on value stocks late in the year.  

On a sector level, only four of the 11 S&P 500 sectors finished the fourth quarter with a  positive return, although all 11 sectors ended 2024 with gains. The Consumer 

Discretionary sector was, by far, the best performing sector in the fourth quarter  thanks in large part to a big Tesla (TSLA) rally and as the outlook for consumer  spending remained solid, with low unemployment and the prospects of tax cuts and  other pro-growth measures coming in 2025. The Communication Services and  Financials sectors also performed well and benefited from expectations for less  regulation given the incoming administration. For the full year, Communication  Services and Financials were the best performing sectors and both benefited from  strong earnings as well as general AI enthusiasm and an un-inversion of the yield  curve, respectively.  

Looking at sector laggards, Materials was the worst performing sector in the fourth  quarter and posted a substantially negative return while Healthcare also declined  sharply. Those two sectors were the worst relative performers for 2024 as the  Materials sector was only fractionally positive for 2024 while Healthcare logged a  small gain. Concerns about regulation and poor earnings results weighed on the  Healthcare sector in 2024 while the Materials sector was consistently pressured by  concerns about the Chinese economy, tariff and trade risks as well as general global  demand concerns.  

S&P 500 Total Returns by Month in 2024 

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 

1.68 %

5.34 %

3.22%

– 4.08 %

4.96 %

3.59 %

1.22 %

2.43 %

2.14 %

– 0.91 %

5.87 %

– 2.38 %

Source: Morningstar 

US Equity Indexes

_{Q4 Return} 2024  Return  

S&P 500 2.41% 25.02% 

DJ Industrial Average 0.93% 14.99% 

NASDAQ 100 4.93% 25.88% 

S&P MidCap 400 0.34% 13.93% 

Russell 2000

0.33%

11.54%

Source: YCharts  

Internationally, foreign markets badly underperformed the S&P 500 in the fourth  quarter and produced solidly negative returns thanks to lackluster growth prospects  and surprising bouts of political uncertainty in developed and emerging markets.  Emerging markets and foreign developed markets saw similar negative returns in  the fourth quarter as the South Korean political crises and worries about Chinese  growth pressured emerging markets while political turmoil in France and Germany  weighed on developed market performance. For the full year, foreign markets again  badly lagged the S&P 500 but did finish with modestly positive returns. Emerging  markets outperformed developed markets on a full-year basis thanks to Chinese  stimulus announcements in the second half of 2024, which raised investors’ hopes  for an economic rebound and boosted emerging market performance relative to  those foreign developed markets.  

International Equity Indexes

MSCI EAFE TR USD (Foreign  

_{Q4 Return} 2024  Return  

_Developed) -8.06% 4.35%  MSCI EM TR USD (Emerging Markets) -7.84% 8.05% 

MSCI ACWI Ex USA TR USD (Foreign  Dev & EM)

-7.50%

6.09%

Source: YCharts 

Commodities saw mixed performance in the fourth quarter as a late surge in the U.S.  dollar weighed on parts of the complex. Gold finished the quarter with a slightly  negative return thanks mostly to a drop in December as the U.S. dollar rose to two plus-year highs. Oil, meanwhile, saw a solid gain in Q4 thanks to some better-than expected Chinese economic data, which boosted future demand expectations. For  2024, most commodities saw modestly positive returns on rising demand  expectations following global rate cuts. Gold logged strong returns on the year  thanks to consistent geopolitical uncertainty and sticky inflation, while oil also rose  slightly on OPEC supply discipline and more optimistic global growth estimates in  2025.  

Commodity Indexes

S&P GSCI (Broad-Based  

_{Q4 Return} 2024  Return  

_Commodities) 3.81% 9.25%  

S&P GSCI Crude Oil 5.24% 0.13% 

GLD Gold Price

-0.38%

27.19%

Source: YCharts/Koyfin.com  

Switching to fixed income markets, the leading benchmark for bonds (Bloomberg  Barclays US Aggregate Bond Index) realized a moderately negative return in the  fourth quarter as concerns about U.S. federal deficits combined with expectations for  fewer rate cuts in 2025 to pressure bonds, although the benchmark did log a slightly  positive gain for 2024.  

Looking deeper into fixed income, longer-duration bonds declined solidly in the  fourth quarter while shorter-duration debt logged a small positive return. The  outperformance by shorter-duration debt was driven by continued Fed rate cuts as 

well as more resilient inflation and growth metrics (which weighed on longer duration debt). Shorter-duration debt also outperformed long-term bonds on a full year basis thanks to the start of the Fed rate cutting cycle, while U.S. fiscal concerns  and the resilient growth and inflation outlook weighed on the longer end of the yield  curve. Short duration debt finished the year with solidly positive returns while longer  duration bonds posted a slightly negative annual return.  

Turning to the corporate bond market, high-yield bonds outperformed higher quality but lower-yielding investment grade debt in the fourth quarter as the election  results boosted investor confidence for continued economic growth, resulting in  investors accepting higher yields in exchange for greater risk. For the full year, high yield bonds logged a solidly positive return while investment-grade bonds were only  slightly positive, again reflecting investor preference to take on more risk in exchange  for a higher yield/return, given underlying economic confidence.  

US Bond Indexes

_{Q4 Return} 2024  Return  

BBgBarc US Agg Bond -3.06% 1.25% BBgBarc US T-Bill 1-3 Mon 1.19% 5.32% ICE US T-Bond 7-10 Year -4.59% -0.52% 

BBgBarc US MBS (Mortgage 

_backed) -3.16% 1.20%  BBgBarc Municipal -1.22% 1.05% BBgBarc US Corporate Invest Grade -3.04% 2.13% 

BBgBarc US Corporate High Yield

0.17%

8.19%

Source: YCharts 

Q1 and 2025 Market Outlook  

Markets begin 2025 with great expectations as anticipation of tax cuts and pro business deregulation, a continued economic soft landing and ongoing Fed rate cuts  helped propel stocks higher throughout 2024 and the S&P 500 completed the best  two-year run since the late 1990’s.  

Starting with politics, investors are eagerly awaiting the implementation of pro growth policies from the Republican Congress and Trump administration, which  includes an extension of the 2016 Tax Cuts and Jobs Act and possible additional  corporate and personal tax cuts, along with sweeping deregulation. If executed,  those policies should result in increased corporate earnings, personal incomes and  spending (all of which are positive for stocks).  

On growth, the Federal Reserve appears to have achieved the elusive economic soft  landing, as economic activity is solid, unemployment is historically low and inflation  has declined substantially. That allowed the Federal Reserve to aggressively cut  interest rates in 2024 and investors expect rate cuts to continue in 2025 and to  further support continued economic growth.  

Finally, geopolitical tensions remained high in 2024 but investors finished the year  with hopes for progress on ceasefire agreements between Israel and its antagonists  (Hamas and Hezbollah) and between Russia and Ukraine.  

And, if all these expectations are realized, we should all expect another strong year of  returns in the markets.  

However, as we all know, nothing in the markets is guaranteed and while the outlook  is positive as we begin 2025, there are significant risks to the outlook we must  acknowledge. 

Politically, Republicans hold small majorities in the House and Senate and large,  complicated tax cut bills could easily be delayed (or derailed). Additionally, while  investors have focused on potential positives of pro-growth policies, increased trade  tensions and possible tariffs could create unanticipated market and economic  headwinds.  

On growth, the economy remains in a “sweet spot” with solid, but not spectacular,  growth and the Fed can claim a soft landing has been achieved. However, growth  can still slow as rates remain historically high and elevated stock valuations imply  complacency in the markets regarding the possibility of an economic slowdown.  

Geopolitically, while hope for progress on resolution of major global conflicts is high,  nothing is guaranteed and the possibility exists that both conflicts spread in 2025.  

Finally, global bond markets are expected to have a bigger influence on stock returns  in 2025 and if bond investors think aggressive tax cuts or fiscal spending will  dramatically increase the deficit or national debt, bond yields will rise and present a  headwind on stocks (as we saw in 2022).  

Bottom line, while the outlook for markets is positive as we start the year, we won’t  allow that to create a sense of complacency because as the past several years have  shown, markets and the economy don’t always perform according to Wall Street’s  expectations.  

As such, while we are prepared for the positive outcome currently expected by  investors, we are also focused on managing both risk and return potential because  the past several years demonstrated that a well-planned, long-term focused and  diversified financial plan can withstand virtually any market surprise and related 

bout of volatility, including multi-decade highs in inflation, historic Fed rate hikes, and  geopolitical unrest.  

At Trubee Wealth Advisors, we understand the opportunities and risks facing both the  markets and the economy, and we are committed to helping you effectively  navigate this challenging investment environment. Successful investing is a  marathon, not a sprint, and even intense volatility is unlikely to alter a diversified  approach set up to meet your long-term investment goals.  

Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as  we’ve worked with you to establish a unique, personal allocation target based on  your financial position, risk tolerance, and investment timeline.  

We thank you for your ongoing confidence and trust and please rest assured that  our entire team will remain dedicated to helping you successfully navigate this  market environment.  

Please do not hesitate to contact us with any questions, comments, or to schedule a  portfolio review.