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Market Commentary

Monthly Financial Markets Commentary — December 31, 2024

Stocks largely retreated in the month of December, as the "Santa Claus" rally ran into the realities of rising interest rates. The Federal Reserve Bank threw cold water on the party as it signaled it would not be cutting rates as much as earlier forecast, given rising long-term rates and stubborn inflation. Nevertheless, markets recorded significant gains in the fourth quarter of 2024, largely in reaction to the election of Donald Trump and perceived benefits to equity valuations from tax cuts and deregulation. It remains to be seen whether these effects will be offset or even swamped by the negative effects of tariffs and rising deficits. This is the second year in a row in which the S&P 500 has returned more than 20%, which is statistically rare.

Breadth in the market deteriorated in the final months of 2024, as investors returned to overvalued glamour stocks such as Apple and Broadcom, dumping more prosaic issues such as materials and utilities. This is not a healthy sign for the equity markets, as it generally portends a broad decline in the markets.

By historical measures, such as price-earnings, price-to-sales, market-cap-to-GDP, Schiller CAPE Ratio, stocks are significantly overvalued. This is not surprising given that every dip in the market since 2010 has proven to be a buying opportunity and an entire generation of investors and investment advisors believe the stock market only goes up. It is no coincidence that during this same period the Federal Reserve engaged in massive money printing, Traditional valuation measures based on GAAP earnings have been abandoned in favor of myriad alternative EBITDA measures that invariably result in a more flattering picture of the financial state of companies. Warren Buffet, who has a fairly good long-term track record in the stock market, has been raising cash at a furious pace and trimming positions such as Apple and Bank of America.

For 2024 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 25.02%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 29.15%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 14.88%. All returns are on a total return basis in that includes dividends.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned 1.36% for the year. The election of Donald Trump and the Republicans has led traders to believe that there is virtually no chance of reigning in the federal deficit, given prospective tax cuts. Higher deficits and interest rates drive up yields, which drives down the value of bonds. Credit spreads have narrowed to historic lows, indicating there is considerable froth in fixed income markets as well as equity markets.

The sectors in the equity market that performed the best in 2024 were Communications Services, Financials and Information Technology at 38.9%, 27.5% and 36.0%, respectively. Materials, Real Estate and Healthcare fared the worst at 1.6%, .90% and 1.0%, respectively.

The comparison of current price/earnings ratios and dividend yields as of December 31, 2024 to those of the prior year is as follows.

* based on 12-month trailing data

It is to be noted that much of the advance in the equity markets in 2024 was due to multiple expansion rather than fundamentals. Over the past year S&P earnings have increased only 4% yet the index has risen 40%; thus almost all the increase is due to multiple expansion, indicating ever more bullish views of the market and economy. Dividend yields have fallen precipitously; this is one financial measurement that cannot be manipulated by management to report rosier results.

Gold and crude oil most recently traded at $2.645.50 and $73.25, respectively, compared to $2,055.35 and $70.25 one year earlier. Gold has risen in reaction to global political instability and increased holdings by all central banks; crude oil has fallen recently due to softness in the global economy. Year to date Gold has outperformed the S&P 500 index.