Monthly Market Update — September 2021

Key Points

  • LARGE WAS IN CHARGE In 2024, U.S. large-cap stock funds averaged a +17.4% gain, topping all other broad categories. That significantly outpaced international-stock funds, which saw a much more modest +4.8% rise. Despite the impressive stock fund performance, bond funds attracted the majority of investment. 
  • TINA STILL TRIUMPHANT The term “TINA” (There Is No Alternative) gained popularity in financial circles in 2013 as a rationale for investing in equities amidst low bond yields. Despite elevated bond yields in recent years, the TINA philosophy still prevails, as evidenced by the sustained high allocation to equities.  
  • THE FED, INFLATION, AND FIXED INCOME For the first time since the post-Global Financial Crisis, real yields on fixed-income investments have turned positive, offering bond investors a return that surpasses the rate of inflation. As a result, fixed-income investors can maintain their lifestyles without assuming as much credit risk.
  • BUSINESS OPTIMISM SOARS The NFIB Small Business Optimism Index for November jumped to its highest level since June 2021, posting its largest monthly increase since July 1980. This surge in optimism, largely attributed to recent election results, was most notable in the ‘Expect Economy to Improve’ component.
  • DOLLAR DOMINANCE Speculation regarding the viability of the U.S. dollar as the world’s reserve currency was greatly reduced following its robust performance in 2024, where it reached an all-time high in SWIFT global payments and rose an impressive +7.1% in 2024 while every other major currency lost value.
  • EARNINGS GROWTH EXPECTED TO BROADEN Third-quarter corporate earnings surprised to the upside, and Wall Street analysts estimate they could grow by 15% in 2025, which is well above the expected 9.5% growth in 2024 and the trailing 10-year average (annual) earnings growth rate of 8.0% (2014 – 2023). Importantly, the contribution of 2025 earnings is expected to broaden beyond primarily just the “Magnificent 7” companies.

Market Summary

Asset Class Total Returns

[Market Update] - Asset Class Total Returns December 2024 | The Retirement Planning Group

Source: Bloomberg, as of December 31, 2024. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

A slump in December didn’t take much away from a banner year for U.S. stock investors. Despite a -2.4% setback in December, the S&P 500 Index posted its fifth-largest annual return of the past 20 years, the 16th-largest since 1957, and enjoyed back-to-back years with returns above 20% for the first time since 1998. For the full year, the S&P posted an impressive total return of +25.0% for the year. The index notched 57 record highs throughout the year and posted positive performance in all four quarters, driven by several factors, chief among them the Federal Reserve (the Fed) finally starting a rate-cutting cycle, a continued run-up in technology names driven by the artificial intelligence (AI) craze, and Donald Trump’s conclusive election victory. The 2023-2024 period was the index’s best two-year run since 1997-1998. Continued strength in mega-cap technology stocks remained a key theme as the equal-weighted version of the S&P 500 returned less than half that of the headline cap-weighted index. It was actually the fifth consecutive positive quarter for the S&P, its longest quarterly streak since 2021. Even other mega-cap indexes like the Dow Jones Industrial Average, which is price-weighted rather than cap-weighted, had a solid but distant +15.0% total return in 2024. The small-cap Russell 2000 Index, which enjoyed a +10.8% post-election pop for the month of November, gave back most of those gains in December, dropping -8.3% for the month. The left its calendar year return at just +11.5%. That’s the fourth consecutive year now that small caps have lagged large caps, something that hasn’t happened since a 5-year stretch of underperformance from 1994-1998 (small caps subsequently went on to outperform large caps for six straight years from 1999-2004). 

Speaking of lagging, non-U.S. stocks have been perpetual laggards relative to their U.S. equity counterparts. Developed market international stocks (as measured by the MSCI EAFE Index) slid -2.6% in December, were down -8.1% for the fourth quarter, and managed just a modest +3.8% total return for the year. For the fourth quarter, the MSCI EAFE trailed the S&P 500 by -10.5% on a total return basis, the worst quarterly underperformance since the third quarter of 2008 during the Global Financial Crisis. The -21.2% underperformance to the S&P 500 was the largest annual deficit since 1997. The S&P has now outperformed the MSCI EAFE in 6 of the last 7 years and in 12 of the last 15 years. The six consecutive years of outperformance for non-U.S. equities from 2002 to 2007 are now a distant memory for many (most?) investors, and they’re starting to vote with their wallets. As discussed in the TINA STILL TRIUMPHANT section below, money flowing into international stock mutual funds and exchange traded funds was just a fraction of what U.S. stock funds gained in 2024 ($11.6 billion versus $177.2 billion, respectively). Weakening European economic activity combined with a strengthening U.S. dollar made European equities (the MSCI Europe ex U.K. Index) the anchor of the international equity underperformance. European stocks lagged global equities by the largest margin (by about -17%) since at least 1990. In contrast, Japan (Nikkei 225) rose +19% in 2024, and when combined with 2023, it is up +54%, its best two-year stretch in a decade. The MSCI Emerging Markets Index fell -8.0% in the fourth quarter and wasn’t much better than developed international for the year with a +7.5% annual total return – although it was the first time emerging markets beat developed markets in four years. The Chinese economy is beginning to exhibit a deflationary spiral, but thanks to a number of enormous stimulus moves during the year, the Shanghai Composite was able to climb +13%, its strongest year since 2020. Hong Kong’s Hang Seng Index snapped a four-year losing streak, jumping 18%. The big laggard in Asia was South Korea; its Kospi Index declined -10% in 2024 as the country was mired in political turmoil. 

In bond markets, a reexamination of how much further the Federal Reserve (the Fed) will continue cutting interest rates—consensus is evolved to much less than some had hoped early in the year—resulted in an unusually high level of bond market volatility and left yields near their highs as the calendar turned to the new year. As a reminder, the Fed kicked off the easing cycle with a jumbo-sized 50 basis point (bp) rate cut. It subsequently delivered two additional 25bp cuts and appears committed to continue lowering interest rates further in 2025. But the big question is how low will the Fed go? Forecasting Fed actions has been difficult, with quite disparate views even among Fed policymakers. The most hawkish Fed governor expects just two more 25bps rate cuts, while the most dovish members expect the Fed to cut rates by another 175bps by the end of 2025. In mid-December, after delivering the final 25bp cut of the year, the Fed itself confirmed a slower and shallower rate cut cycle for 2025. The change of view is on the back of higher inflation forecasts predominantly – the Core PCE deflator is now expected to end 2025 at 2.5% rather than 2.2% as previously thought and isn’t expected to get down to 2% until 2027. The upside shift in the market’s expectation for the effective fund rate at the end of 2025 is noteworthy. It is now up to almost 4%. In other words, the market is questioning whether the Fed delivers a final 25bp cut to get the funds rate below 4%. The 30-year U.S. Treasury yield hit the highest level since November 2023 at the end of the year, settling at 4.78%. Yields have climbed steadily since early December, reflecting investor bets on stronger U.S. economic growth, elevated inflation, and large budget deficits. More investors have come around to the belief that the economy can handle higher rates and that inflation will persist at a level above the Fed’s 2% target. Starting in November, investors were betting that the Fed would reduce rates just twice in 2025, rather than the four times the Fed signaled in September. When most Fed officials also came to forecast just two cuts in those Dec. 18 economic projections, traders immediately stepped up bets that the central bank would cut just once or not at all. Bond prices move in the opposite direction of bond yields. The reset to fewer rate cut expectations took a toll on bond returns. The widely tracked Bloomberg U.S. Aggregate Bond Index (the Agg), which includes investment-grade corporate bonds and mortgage-backed securities as well as Treasurys, returned +1.1% in 2024 after falling -1.6% in December. For the fourth quarter, the Agg was down -3.0%. That was the first time in three quarters that the Agg declined, and it was the largest quarterly decline since the third quarter of 2023. Still, it was the second consecutive year that the Agg was positive, the first time that’s happened since 2019 and 2020. 

Unlike the U.S. bonds, non-U.S. bonds lost ground in 2024, with the Bloomberg Global Aggregate ex-US Bond Index down -4.2% for the year, following a -6.8% drop in the fourth quarter alone. Rising global bond yields and a stronger dollar weighed on international bond returns. The first half of 2024 saw broad based disinflation, and over the summer, global central banks felt confident they could start normalizing monetary policy. However, by the end of the year, like U.S. bond investors, international bond investors reduced their hopes for rate cuts. U.K. government bonds were big laggards as the long duration of U.K. debt made it particularly sensitive to rising yields. Japanese bonds also underperformed as the Bank of Japan became the final major central bank to end negative interest rates. In Europe, the collapse of two French governing parties sparked investor concerns about the trajectory for French debt.

[Market Update] - Market Snapshot December 2024 | The Retirement Planning Group

Source: Bloomberg. Data as of December 31, 2024.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes

LARGE WAS IN CHARGE IN 2024

Consistent with the major asset class indexes, investors in U.S. large cap stock funds had a lot to cheer about in 2024. According to data from LSEG (formerly Refinitiv Lipper), the average U.S.-stock fund (mutual funds and exchange-traded funds) gained +17.4% in 2024, including a +1.2% gain in the fourth quarter. U.S. equity funds have now risen impressively for two straight years, even though the 2024 performance didn’t quite match the previous year’s +21% average fund gain. Large-cap growth funds roared ahead nearly +30% for the full year, topping all the major fund categories. Midcap growth funds were up +16%, and small-cap growth was up +14.7%. International-stock funds couldn’t keep up with their U.S. counterparts, with the average fund in that cohort rising just +4.8% in 2024, hampered by a -7.3% drop in the fourth quarter. Bond funds rose modestly for the year overall. Funds focused on investment-grade debt (the most common type of fixed-income fund) were up +1.8% for the year after falling nearly -3% in the fourth quarter. Plenty of investors participated in the U.S. stock fund gains, sending more than $177 billion to domestic stock mutual funds and ETFs during the year, compared to just $11.6 billion to international stock funds and ETFs. But bond funds received the lion’s share of investors cash in 2024, a large share of that earlier in the year before expectations for Fed rate cuts were reigned in. Overall, investors plowed about $488.6 billion into bond funds in 2024, according to Investment Company Institute (ICI) estimates.

U.S. Large Cap Funds Led all Mutual Funds and ETFs in 2024

2024 Total Returns and Fund Flows by Fund Type

[Market Update] - 2024 Total Returns and Fund Flows by Fund Type December 2024 | The Retirement Planning Group

Source: LSEG, Investment Company Institute, The Wall Street Journal.


TINA STILL TRIUMPHANT

The term TINA (There Is No Alternative) was originally coined by Herbert Spencer, a British intellectual in the 19th century, to defend classical liberalism and laissez-faire government. However, it gained widespread popularity in the financial circles thanks to Jason Trennert, a market strategist and founder of the firm Strategas, who used it in 2013 to describe the idea that equities were the only viable investment option due to low interest rates on bonds. Bond yields are no longer low, even after the Fed has cut rates by 100 basis points (1%) yield of the 10-year U.S. Treasury bond sits at 4.7% as of this writing. With yields elevated and more attractive for a couple years now, many market observers feel that TINA is over and that investors do indeed now have viable alternatives to equities. New acronyms like TARA (There Are Reasonable Alternatives) and CINDY (Credit Is Now Delivering Yield) have emerged to reflect this shift. But, evidence still points to the TINA philosophy prevailing, particularly the aggregate asset allocation of the major asset classes. The chart below shows that as of November 30, 2024, equity allocations are near their peak historical levels. Following periods of strong equity outperformance, like 2023 and 2024, it is not uncommon to see equities overweight and fixed income underweight. But, the data show that equities increased towards 60% through 2013 and has persistently maintained levels over 60% for the vast majority of the last decade.

 

Equity Allocations Dominate Fixed Income

Aggregate industry asset allocations from January 1993 to November 30, 2024

[Market Update] - Equity Allocations Dominate Fixed Income December 2024 | The Retirement Planning Group

Source: Vanguard Investment Advisory Research Center calculations using data from Morningstar.

Note: Black line illustrates current equity allocation (62.6% as of November 30, 2024) to visualize the variance of equity allocations (dark green area) through time.

THE FED, INFLATION, AND FIXED INCOME

One aspect of fixed income demand that isn’t well appreciated or broadcast is that, for the first time in a long time, real (i.e., inflation-adjusted) yields are now positive. And they are not only positive but at their best levels since the post Global Financial Crisis (GFC) levels. For a couple of years after the COVID pandemic, real bond yields were negative, meaning bond investors were not getting sufficient income to outpace the rate of inflation. Their bond investments were paying less than the inflation rate. Of course, the Fed went on a rate hiking cycle in 2022 and 2023 to fight and curb the rate of inflation. As a result, for the last couple of years, inflation has come down, and bond yields have risen and remained elevated. Importantly, the spread of bond yields over inflation is now at levels fixed-income investors haven’t enjoyed since before the GFC. For investors on fixed incomes, this is an important and welcome development that means they no longer must take additional credit risk to maintain their lifestyles and spending levels. Baird Funds points to this as a primary catalyst for their expectations of continued strong inflows into bond funds in 2025.

Real Yields are Positive Again and Above Pre-Pandemic Levels

U.S. Aggregate Index Inflation-Adjusted Yield*

[Market Update] - Real Yields are Positive Again December 2024 | The Retirement Planning Group

* Bloomberg U.S. Aggregate Bond Index yield minus Core PCE (trailing 3-month average annualized)

Source: Bloomberg, Baird.

BUSINESS OPTIMISM SOARS

On December 10, the National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index for November jumped to 101.7 from an unrevised 93.7 the prior month. It was the first release since the election and marked the highest level for the index since June 2021. It was also the largest sequential increase since July 1980. All 10 component indexes rose except for the Current Inventory component, which was unchanged from the prior month. The biggest improvement came from the Expect Economy to Improve component, which was up +41 points to a net +36% reading, the highest since June 2021. Expect Real Sales Higher was also up a strong +18 points to a net to +14%, the highest since June 2020, before the COVID shutdowns. “The election results signal a major shift in economic policy, leading to a surge in optimism among small business owners,” said NFIB Chief Economist Bill Dunkelberg. Small business owners appear to be very happy with the way the election turned out. The survey showed a spike in the “political climate” was the biggest reason cited for the jump in optimism. The Small Business Optimism Index follows spikes in optimism for several regional Federal Reserve bank surveys and homebuilder sentiment indexes.

Small Business Sentiment Surges

NFIB Small Business Optimism Index

[Market Update] - NFIB Small Business Optimism Index December 2024 | The Retirement Planning Group

Source: National Federation of Independent Business, Bespoke Investment Group.

DOLLAR DOMINANCE

The famous American author Mark Twain was in London in 1897 when rumors spread that he was gravely ill or even dead. In response, Twain humorously remarked, “The report of my death was an exaggeration.” As for the U.S. Dollar, the phrase could be metaphorically applied to suggest that any rumors about its decline or demise might be overstated. Despite fluctuations and challenges, the U.S. dollar remains a dominant global currency and a key player in international finance. In fact, at the end of 2024, the U.S. dollar was at an all-time high as a percentage of SWIFT payments (SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication, a network of over 11,000 global banks that allows them to securely send and receive instructions financial transactions). The U.S. dollar represented about 48% of SWIFT payments, with the next heaviest currency, the Euro, was down to about 22%, an all-time low. Beyond that, other major currencies, like the British pound, the Japanese yen, and the Chinese yuan, were all well under 10% of SWIFT payments. The Wall Street Journal (WSJ) cited some statistics for the WSJ Dollar Index, which highlight the banner stretch the U.S. dollar has enjoyed had recently:

—Up three of the past four years

—Up five of the past seven quarters

—Up for three consecutive months

—Up +2.8 points or +2.8% in December, the largest one-month point and percentage gain since Oct. 2024

—For Q4-2024 it gained +7.1 points, or +7.4%, the largest quarter percentage gain since the Q4-2016

—Largest three-month point gain since Nov. 2008 and largest three-month percentage gain since Dec. 2016

—Highest closing value since Friday, Nov. 4, 2022

U.S. Dollar: “Reports of My Death are Greatly Exaggerated”

U.S. Dollar vs. World Currencies in 2024

[Market Update] - U.S. Dollar vs. World Currencies December 2024 | The Retirement Planning Group

Source: TradingView.

EARNINGS GROWTH EXPECTED TO BROADEN

One of the big themes throughout 2024 was the economy’s resilience, a trend that persisted right into the end of the year. A renewed pickup in leading macroeconomic indicators like manufacturing new orders and consumer confidence were evident as the calendar turned to 2025. Corporate Earnings surprised on the upside in the third quarter, and according to FactSet data, Wall Street analysts estimate they could grow by 15% in 2025, which is well above the expected 9.5% growth in 2024 and the trailing 10-year average (annual) earnings growth rate of 8.0% (2014 – 2023). The latest earnings show a picture of margin expansion, and a pickup in productivity has supported companies’ bottom lines. Evidence of a more balanced advance in earnings thus far is mixed, as Technology and related sectors still dominated cyclicals and energy in the third-quarter earnings season. Like market returns, earnings growth in 2024 was overwhelmingly driven by the Magnificent 7 companies (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla). Breaking down the expected 9.5% earnings growth for the S&P 500 in 2024, the Mag 7 is expected to have annual earnings growth of 33% in 2024 versus just 4.2% for the 493 other S&P 500 companies. However, the market rally turned more broad-based following the U.S. election. Looking forward, expectations are for earnings growth in companies outside Technology and mega-caps to also close the gap with those leaders. Expected election impacts, such as growth-boosting policies and deregulation, plus the extension or addition of tax cuts, will have to be balanced with the potential for disruptive effects of tariffs and curbs on immigration. But overall, the potential policy mix is expected to be disproportionately favorable for the U.S. over other regions and with the double benefit of being higher than historical averages (i.e., double-digit growth) and to broaden out beyond just the Mag 7 companies. That expected 15% earnings growth in 2025 is expected to be a more balanced 21.3% for Mag 7 companies and 13.0% for the 493 other S&P companies. That would be a very healthy market development that could sustain the rally through 2025.

Earnings Growth Expected to Broaden

% Earnings-Per-Share Growth Year-Over-Year

[Market Update] - Earnings-Per-Share Growth Year-Over-Year December 2024 | The Retirement Planning Group

Data as of 11/11/24 and represents year-over-year change in earnings-per-share for S&P 500 Index and the technology and media industries within the S&P 500 Index. Earnings per share is the projected growth rate in earnings per share for the next five years. S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Indices are unmanaged and not available for direct investment.

Source: Bloomberg, Wellington.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

[Market Update] - Asset Class Performance December 2024 | The Retirement Planning Group

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.


Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.