20/20
No, not the year 2020, nor are we referring to a perfect vision for the New Year. It refers to a rare feat for the largest 500 stocks in the U.S., as measured by the S&P 500. Since 1900, the S&P 500 has only achieved 20% plus returns in back-to-back years four times. This happened in 2024 as U.S. stocks returned 23%, on top of the 24% they returned in 2023. It was the two best consecutive years since 1997 and 1998.
2024 was a year that defied expectations. Not only did we get back-to-back 20% returns, but the stock market set new all-time highs on 57 different days—the fifth most in history.
Much of the talk over the last two years concerned The Magnificent 7 (the seven largest technology stocks in the US) and their outsized performance and market impact. They have created real wealth for our clients. But another interesting thing happened in the second half of 2024: Different stocks and industries started improving. Only one of the Magnificent Seven stocks (Nvidia) made the list of the best performers in 2024. The others were from sectors outside of technology.
This reinforces our belief that investing in broad indexes allows us to capture wealth creation outside the headlines. As readers of this publication may remember (and we have cited it before), the founder of Vanguard, Jack Bogle, famously said, “Why look for the needle in the haystack when I can buy the haystack?” That philosophy has served our clients well, and the stock market has delivered impressive results over the last two years.
Bonds
The U.S. Aggregate bond index (a broad measure of all investable bonds in the U.S.) returned 1.25% in 2024, which seems relatively paltry compared to the 20% plus the stock market has given us. But bonds provide the ballast of the portfolio. When the equity markets go sideways or correct, bonds keep us steady. As the chart below illustrates, with the rare exception (2022 being the most pronounced), bonds hold their value when the stock market drops. This is the power of diversification. As we rebalance into bonds (more on this below), they now give us income, as we can earn 4% to 5% interest on our bonds.
Importance of rebalancing
FOMO, or Fear of Missing Out, is real. While chasing some of the best-returning stocks or asset classes from 2023 and 2024 can be tempting, we know the power of rebalancing. Using history as our guide, we know that staying the course—which includes rebalancing—has historically served to mitigate risk and improve long-term returns. That is a way to sell some of our winners and invest those proceeds into some of the least favored assets.
As one of our favorite charts illustrates, asset allocation may not be at the top of the performance list, but it is not at the bottom. Diversification and rebalancing are ways we can build and maintain wealth.
2022 is a good example; inflation spiked to 9%, and the Federal Reserve had its fastest and steepest rise in interest rates in its history, resulting in steep declines in both the stock and bond markets. But we know you, our valued clients, stayed the course, allowed us to rebalance, and benefited from the returns we have received from the equity markets in 2023 and 2024. 
This is why we manage your investments according to your plan and your stage in life. We will continue monitoring and rebalancing portfolios to ensure our client's risks and rewards are appropriate.
2025 Outlook
While we don’t know the future, we will monitor several things in 2025 that will impact the markets, even if only in the short run. As for most years, the year ahead is characterized by uncertainty.
Politics – Tariffs: While they make the news quite often and are a topic that will sell headlines, there is still much uncertainty around them. Will they drive prices up and be inflationary? Will corporations' earnings be hit if they cannot pass on the increased costs to consumers? And will there even be any new tariffs? These are all answers that will be years in the making, but we know the market does not like uncertainty, and this will provide that throughout 2025.
The Federal Reserve and interest rates: 2024 was relatively easy for the Federal Reserve. After raising rates historically fast in 2022, they were finally able to cut interest rates in 2024 as inflation moved closer to its 2% target. Now, the Fed is trying to balance its dual mandate, maximum employment, and price stability. To do that, they are trying to set rates at the neutral rate, at which they are not stimulating or slowing the economy. The problem is that no one knows for sure what that rate is. So, whereas the market got the interest rate cuts it wanted in 2024, we are not sure what 2025 will bring. The consensus now is for two more rate cuts, but it could be more, or it could be none, or it could be a raise. Inflation and the unemployment rate will dictate that. But this adds more uncertainty to 2025.
This will affect everything from interest on your money market funds to the yield we get on bonds to (more indirectly) mortgage rates and auto loans.
The Federal Deficit: The deficit is getting more attention now as it has continued to grow since COVID-19 spending. There is the new DOGE (Department of Government Efficiency) program, but most Government spending is on non-discretionary spending such as Social Security and Defense. What does this mean for government spending and employees who may be affected? Could we reduce the deficit and thus reduce the interest the government pays on its outstanding loans? U.S. Government Bonds are still the safest investment, but we will see movement on the deficit to give us more long-term stability.
Artificial Intelligence: Has been THE news story for the markets in 2024. Some pundits describe the advancements in artificial intelligence as the fourth industrial revolution. We know the Artificial Intelligence revolution is real, but it will have starts and stops. How will companies harness their efficiency? Will it make workers more productive so we can continue to grow our economy? Once again, these questions will be answered over the next several years, but they bear watching. As Warren Buffett believes, don’t bet against U.S. companies; they may not be perfect, but they tend to figure it out
As always, it is a pleasure to serve our clients. Please contact your Financial Advisor if you have additional questions or thoughts on the above. We wish you and yours an excellent 2025.
