4th Quarter 2024 Market Update
December was a mixed month for markets, as investors pulled back from most U.S. stocks due to concerns over rising interest rates and economic uncertainty. Despite the year-end sell-off, all three major U.S. indices finished the quarter and year in positive territory. The S&P 500 lost 2.38 percent in December but managed a 2.41 percent gain for the quarter and an impressive 25.02 percent gain for the full year. The Dow Jones Industrial Average dropped 5.13 percent in December but was up 0.93 percent for the quarter and 14.99 percent over the full year. The technology-heavy Nasdaq Composite led the way with a 0.55 percent gain in December, which contributed to a 6.35 percent gain for the quarter and a 29.57 percent rise for the year.
Despite the mixed results in December, fundamentals were supportive. Per Bloomberg Intelligence, the average earnings growth rate for the S&P 500 in the third quarter was 9.1 percent. This is well above analyst estimates at the start of earning’s season for a 4.2 percent increase and highlights the continued fundamental health of U.S. companies. Over the long run, fundamentals drive market performance, so the continued earnings growth during the quarter was encouraging. Looking forward, analysts Mixed Month for Markets expect to see continued earnings growth in the fourth quarter and throughout 2025.
Technical factors were supportive as well to end the year. All three U.S. indices spent the entire month well above their respective 200-day moving averages. (The 200-day moving average is a widely monitored technical signal, as prolonged breaks above or below this level can signal shifting investor sentiment for an index.)
International equities experienced a challenging end to the year. The MSCI EAFE Index fell by 2.27 percent in December, which contributed to an 8.11 percent decline in the fourth quarter and just a 3.82 percent gain for the year. Emerging markets held up a bit better but also saw a year-end drop. The MSCI Emerging Markets Index lost 0.09 percent in December and fell 7.84 percent in the fourth quarter. On a full-year basis, however, the emerging markets index was up 8.05 percent in 2024. A strengthening dollar and rising political upheaval contributed to the year-end declines for international stocks. Technical factors were challenging for international stocks as the MSCI EAFE Index spent most of the month below its 200-day moving average, while the emerging markets index fell below trend by the end of the month.
Bonds Fall as Federal Reserve Updates Guidance
The stock market weakness was echoed by bond markets, which were also down to end the year. Long-term interest rates rose notably in December as the 10-year Treasury yield rose from 4.17 percent at the end of November to 4.57 percent at year-end. The Bloomberg Aggregate Bond Index lost 1.64 percent for the month and 3.06 percent for the quarter; however, it managed to eke out a 1.25 percent gain for the year.
The rising interest rates were due in part to updated guidance from the Federal Reserve following the conclusion of the Fed’s December meeting. The Fed lowered short-term interest rates by 25 basis points, which was widely expected. Less expected was the updated economic projections that showed the average Fed member expected to see just two more 25-basis-point rate cuts through the end of 2025, which was less than forecast. This means the Fed remains cautious about the economy and inflation and that it will be making decisions on a meeting-by-meeting basis in 2025.
High-yield bonds were also down for the month, as the Bloomberg U.S. Corporate High Yield Index dropped 0.43 percent in December, but managed a 0.17 percent gain for the quarter and a strong 8.19 percent return for the year. High-yield credit spreads were volatile in 2024 and ended the year at 2.9 percent.
Positive Economic Updates
Despite the volatility to end the year, the economic updates released in December continued to point toward solid economic growth. The November job report showed an encouraging rebound in hiring during the month following a weather-driven slowdown in October.
Consumer sentiment also showed signs of improvement, with the University of Michigan Consumer Sentiment survey improving for the fifth consecutive month in December. Historically, higher levels of consumer confidence have helped support faster spending growth, so this was an encouraging sign for future consumer spending.
Speaking of consumer spending, the November retail sales and personal spending reports came in strong, indicating solid consumer spending during the important holiday season. As seen in Figure 1, this now marks three consecutive months with strong retail sales growth. This is a positive sign for the health of the overall economy in the fourth quarter, given that consumer spending accounts for the majority of economic activity in the country.
Risks to Monitor
Political risks remain for markets both domestically and abroad. While the impact on markets has so far been minimal, this could change at a moment’s notice. While the solid economic updates released in December were welcome, the stock market turbulence during the month served as a reminder that markets face real risks as we kick off 2025. Domestically, the primary risk is political. With a new administration and Congress, investors will be keeping a close eye on any policy proposals that could impact markets, especially when it comes to the inflation outlook. Part of the rise in long-term interest rates at year-end has been attributed to rising investor concerns about inflation in 2025 due to the policy uncertainty from Washington.
Foreign risks also remain that should be watched. The wars in Ukraine and the Middle East, as well as the recent political turmoil in France and South Korea, are prime examples of the geopolitical uncertainty that could impact markets. While the direct impact of these events has been limited so far for U.S. investors, we need to keep an eye on these potential sources of risk.
Positive Outlook for the New Year
Overall, though, we are still in a pretty good place to start the year. Markets fundamentals were impressively resilient throughout 2024, and this momentum is expected to carry over into 2025. Analysts expect to see continued earnings growth throughout the year, supported by a strong job market and rising consumer confidence.
Looking ahead, we believe the most likely path forward for the economy and markets is further growth and appreciation in the upcoming months. With that being said, December’s mixed results are a valuable reminder that we may face short-term setbacks along the way. Given the potential for short-term turbulence, a well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. If concerns remain, however, you should speak with your financial advisor to go over your financial plans.
