December 2024
US Economy: Consumption unphased.
The U.S. economy continued to demonstrate underlying growth and stability, evidenced in consumer spending and the labor market. Personal income (+0.6%) and spending (+0.4%) on balance surprised to the upside while unemployment remains at 4.1%, little changed from the last few months. Still, manufacturing data (49.7 in Nov.) remains soft amid rising concerns about steep U.S. tariffs on imports from Mexico and China under the Trump administration.
US Stocks: Small-cap rebound.
U.S. equities jumped in Nov. bringing one-year returns above 30% for both large-cap (+33.9%) and small-cap (+36.4%) stocks. Previously lagging small caps were the strongest performers with signs of investors taking profits on expensive Magnificent 7 tech stocks and rotating into smaller companies. Better valuations in combination with the possibility of protectionist trade policies, deregulation and tax cuts could be tailwinds for smaller companies.
Foreign Stocks: Headwinds abound.
International stocks lagged their domestic counterparts as the U.S. dollar continued a rally begun in October, combined with a spate of headwinds, including political instability in France (-4.2%) and a tick up in Eurozone inflation to 2.3%. Tailwinds included signs of economic strength in both the U.K. (+1.4%) and Japan (+0.7%). The emerging markets performed poorly, with Brazil (-7.1%) a notable laggard on accelerated inflation and U.S. trade tensions.
Fixed Income: Rates do an about face.
U.S. interest rates reversed the rise they had from September through election day. After peaking near the middle of November, the yield on the 10-year US Treasury fell to 4.3%, below where it had started the month. At root, inflation has trended down globally, if not universally, and President-elect Trump’s nominee for Treasury secretary, former hedge fund manager Scott Bessent, was welcomed by debt/deficit hawks in the bond markets.
Real Assets: Cold snap.
Real assets sought after for their income yields outperformed as interest rates fell: Both REITs and infrastructure gained nearly 3.5% in Nov., more than most publicly traded assets outside of U.S. equities. Commodities were generally down with results mixed. While gold (-3.8%) gave back some of its outsized gains as geopolitical uncertainty calmed, energy benefited from a spike in natural gas prices (+13.7%) on wintry weather across much of the U.S.
Alternatives: Lower volatility, same great taste.
The uptick in U.S. stock and bond volatility that had been a mid-year boon for hedge funds has dissipated for now as contested U.S. election failing to materialize. Still, hedge funds have performed in line with expectations and are likely to post returns somewhere between stocks and bonds for full year 2024. Going forward, hedge funds and credit remain important portfolio diversifiers with equity valuations stretched in many markets.
Source of data: Bloomberg
Equities Total Return
| NOV | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 5.9% | 28.1% | 33.9% |
| U.S. Small Cap | 11.0% | 21.6% | 36.4% |
| U.S. Growth | 6.8% | 31.9% | 38.1% |
| U.S. Value | 6.5% | 22.4% | 29.7% |
| Int’l Developed | (0.6%) | 6.2% | 11.9% |
| Emerging Markets | (3.6%) | 7.7% | 11.9% |
Fixed Income Total Return
| NOV | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 1.1 | 2.9% | 6.9% |
| TIPS | 0.5% | 3.5% | 6.3% |
| U.S. High Yield | 1.1% | 8.7% | 12.7% |
| Int’l Developed | 1.1% | 0.5% | 3.1% |
| Emerging Markets | 1.1% | 6.7% | 8.6% |
| Tax-Exempt | |||
| Intermediate Munis | 0.8% | 2.2% | 3.9% |
| Munis Broad Mkt | 1.6% | 2.9% | 5.4% |
Non-Traditional Assets Total Return
| NOV | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 0.4% | 4.3% | 1.5% |
| REITs | 3.6% | 14.0% | 24.2% |
| Infrastructure | 3.4% | 20.5% | 25.6% |
| Hedge Funds | |||
| Absolute Return | 0.7% | 4.7% | 5.4% |
| Overall HF Market | 0.7% | 5.1% | 6.1% |
| Managed Futures | 1.5% | 0.8% | (0.5%) |
Economic Indicators
| NOV-24 | MAY-24 | NOV-23 | |
|---|---|---|---|
| Equity Volatility | 13.5 | 12.9 | 12.9 |
| Implied Inflation | 2.3% | 2.4% | 2.3% |
| Gold Spot $/OZ | $2643.2 | $2327.3 | $2036.4 |
| Oil ($/BBL) | $72.9 | $81.6 | $82.8 |
| U.S. Dollar Index | 127.7 | 122.2 | 121.5 |
Our Take
While volatility may settle by the fireplace and take the end of the year off, our focus remains on sourcing long-term opportunities for clients and identifying new risks that may manifest themselves in an environment marked by higher geopolitical and economic uncertainty and possible spikes in volatility. What we are paying careful attention to in the near term:
- Interest rates and government spending. For now, data has validated market expectations for an economic soft landing and the Fed hasn’t disappointed market expectations for lower interest rates. That said, market forces, not the Fed, control longer-term interest rates which remain elevated from where they were over the last 15 years. It is possible, if not probable, that economic growth will be constrained by higher rates and government debt service.
- Prospects for a second wave of inflation. Despite a big drop in price increases to below 3% annualized, U.S. inflation remains above the Fed’s 2% target and could accelerate under Trump policies that favor higher U.S. tariffs, deglobalization and tax cuts. At the very least, inflation could resist declining from current levels and that may mean the Fed won’t be as supportive to financial markets with rate cuts in the year ahead. Currently, financial markets are pricing in a Fed Funds rate that is 80 basis points lower by year end (4.25% – 4.50%).
- Trump administration and policies. U.S. Treasury Secretary pick Scott Bessent was seemingly viewed as a safe choice by the bond markets given indications that he is a moderate who favors reduced government spending. As we move into 2025, policy priorities for tax cuts and the quick imposition of tariffs in a number of key industries could have short-term inflationary consequences. Also, specifics on big tech regulation could present pointed or broad headwinds for the economy and the market-driving tech industry.
- Financial market complacency. Financial markets look expensive in many areas and new developments could sap equity markets of both enthusiasm and their lofty valuations in dramatic fashion. Moreover, an unexpected shock to the system is always possible but be more likely during periods of higher uncertainty, where we find ourselves today. Some of our diversifying portfolio exposures are likely to hold up a bit better than others if we experience equity and/or bond market volatility from either expected or unexpected sources.
In 2024, portfolios have gained from strong absolute returns in most asset classes although U.S. equities have been the greatest benefactors. Consensus expectations for substantial volatility manifested briefly over the summer and persisted through U.S. elections only to settle down quickly in November. With such performance, it is easy to be complacent and lose sight of long-term portfolio objectives. One of our jobs is to evaluate portfolio risk in light of those long-term objectives even when it is tempting to “let it ride.” That said, all of the above considerations continue to point to more volatile financial markets in 2025.
As we near year-end, we are in the process of updating our capital markets assumptions and reviewing our strategic asset allocation recommendations. That process, with a nod to the likelihood of volatility returning in 2025, is indicating that the most attractive strategies on a risk-adjusted basis are those that help diversify the public equity component of portfolios.
Given the big runup in U.S. publicly traded equities in 2024, rebalancing to match long-term strategic allocations is especially advisable now. Yes, capital gains taxes are a consideration, but the proverbial tax-tail should not wag the dog: a disciplined approach to rebalancing is one of the most important levers we have to manage risk and compound wealth over time. The timing of rebalancing, however, should consider each client’s tax situation; for some, portfolio rebalancing in early January may make more sense.
An additional area of focus is asset classes likely to benefit from a more lax regulatory environment under the Trump administration. This includes private equity, which could see a ramp-up in deals starting next year.
