Market Update: December 2024

Though December had its challenges, both stocks and bonds closed the year with positive returns. Here's a detailed breakdown.

What Helped the Market:

1. Strong U.S. Equities:
   • The S&P 500 Index reached several all-time highs in early December before pulling back slightly towards the end of the month.
   • Small-cap stocks rallied after the U.S. presidential election, with the "Magnificent Seven" tech giants (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla) driving significant gains. These companies benefitted from expectations of strong earnings growth and a favorable regulatory environment in 2025.
2. Solid Economic Indicators:
   • The U.S. economy showed resilience, with GDP growth averaging 2.5% over the first three quarters. Strong job growth and consumer spending helped the economy avoid a recession.
   • Retail sales exceeded forecasts for six consecutive months, indicating robust consumer demand. November retail sales rose by +0.7%, marking a strong start to the holiday shopping season.
3. Federal Reserve Support:
   • The Federal Reserve cut short-term interest rates by -0.25% during their December policy meeting, supporting short-term bond performance.
   • An active Fed, combined with lower inflation and a resilient economy, provided a solid foundation for capital markets.

What Hurt the Market:

1. Volatility and Uncertainty:
   • The S&P 500 Index declined by -3% on the day of the Fed’s December policy meeting due to uncertainty about future rate cuts.
   • Rising long-term interest rates weighed on stocks for the remainder of the month.
2. Impact on Small Cap Stocks:
   • Higher borrowing rates negatively impacted small cap stocks, which rely more on debt financing for growth. Small caps fell by -8.3% in December.
3. Underperformance of International Markets:
   • Non-U.S. developed market stocks underperformed due to uncertainty around economic growth and future interest rate paths. Emerging market stocks also faced challenges, though they slightly outperformed developed markets.

Key Takeaways for Investors:

1. Resilience of U.S. Markets:
   • U.S. equities, particularly large cap growth stocks, continued to show strong performance despite some volatility. The focus on AI and technology remains a key driver of growth.
2. Economic Stability:
   • Strong job growth and consumer spending were crucial in avoiding a recession. The positive trends in retail sales and GDP growth are encouraging signs for the future.
3. Cautious Fed Outlook:
   • The Federal Reserve’s cautious approach to rate cuts highlights the importance of balancing economic growth and inflation. Investors should be prepared for potential rate changes and their impact on various asset classes.
4. Diversification and Regular Reviews:
   • Maintaining a diversified portfolio is essential to managing risk and ensuring stable returns across different market conditions.
   • Regular meetings with your financial advisor are crucial to staying updated on changing market environments and adjusting strategies accordingly.
   • It's also important to verify that your investment management team has discretionary trading authority to respond rapidly to market changes and optimize your investment decisions.

Overall, while 2024 ended on a mixed note, the underlying economic strength and strategic Fed actions set a positive tone for 2025. Stay informed, stay diversified, and keep the conversation open with your financial advisors. Here's to navigating the markets together!