Market Approach
Stocks closed lower to end 2024 as investors wrapped up another booming year that raised the S&P 500 to its second consecutive annual gain exceeding 20%, spurred by enthusiasm for rate cuts, economic strength and artificial intelligence (“AI”). The S&P 500 surged 23.4% in 2024, building on a gain of 24.2% from last year. The two-year gain of 53% is the best since the nearly 66% rally in 1997 and 1998. Despite the strong year-to-date performance, Wall Street struggled in December’s final days, with investors taking profits in some of 2024′s biggest winners and fears mounting over rising rates into year-end 2024.
The enthusiasm surrounding AI and its potential productivity boost helped power the major averages to a string of record highs throughout the year. AI chip darling Nvidia and iPhone giant Apple — members of the so-called Magnificent 7 — rose 171% and 30%, respectively, and notched new highs of their own in 2024.
Developments in Washington, D.C., helped fuel the rally in the second half of the year. The Federal Reserve has cut its benchmark interest rate by a full percentage point since September, bolstering confidence that the U.S. economy can sustain its recent growth. Stocks also rallied sharply following President-elect Donald Trump’s win in November, as traders cheered the prospect of lower taxes and a looser regulatory approach under a Republican administration.
As if the bond rout in 2024 wasn’t bad enough, fixed income investors face multiple challenges in the year ahead, including one under-the-radar worry about short term notes coming due. Nearly $3 trillion of U.S. debt is expected to hit maturity in 2025, much of it of a short-term nature that the Treasury Department has been issuing in large amounts over the past few years. Normally, the Treasury Department likes to keep bill issuance to just over 20% of total debt. But that share has slowly moved higher in recent years amid ongoing battles over the debt ceiling and budget and Treasury’s need to raise immediate cash to keep the government operating. In 2024, Treasury issuance totaled $26.7 trillion through November, an increase of 28.5% from 2023, according to the Securities Industry and Financial Markets Association.
Treasury Secretary Janet Yellen faced criticism earlier this year from congressional Republicans and economist Nouriel Roubini, who charged that the department was issuing so many bills in an effort to keep near-term financing costs low and spur the economy during an election year. Scott Bessent, President-elect Donald Trump’s choice for Treasury secretary, also was among the critics. However, yields have soared since late September, just after the Federal Reserve took the unusual step of lowering its benchmark borrowing rate by a half percentage point. With yields and prices moving in opposite directions, it has made it a miserable year for the Treasury market. The iShares 20+ Year Treasury Bond ETF lost more than 11% in 2024, compared with a 23% gain for the S&P 500
The yield on the 10-year Treasury rose to 4.57% at year-end 2024 from 3.74% on the last trading day of the third quarter. The two-year yield, which more closely tracks expectations for what the Fed will do with short-term rates, climbed to 4.24% at year-end 2024 from 3.63% at September 30, 2024.
Bank stocks, although volatile at times, rallied significantly after the U.S. election, but drifted lower late in the year. A December sell-off came after the Federal Reserve signaled that rate cuts are likely to be less aggressive in 2025 and prompted a spike in the Chicago Board Options Exchange Volatility Index — a measurement of the 30-day expected volatility of the S&P 500 — which for the week hit a peak intraday high of 27.6 on December 18th after opening at 15.6. Bank stocks generally ended the year in positive territory. The KBW Nasdaq Bank Index posted an 11.4% rise during the fourth quarter of 2024 (although down by 8.3% in December) compared with the 9.5% rise in the third quarter of 2024. This index was up by 32.8% in 2024 but still down by 3.6% over the past three year period. By comparison, smaller banks also posted positive returns during the fourth quarter of 2024, with the S&P U.S. SmallCap Bank index increasing by 6.4% in the quarter (although down by 10.0% during the month of December) with the index being up by 14.7% during 2024 while posting a three year decline of 4.3%. The S&P U.S. MidCap Bank index increased by 4.3% during the fourth quarter of 2024 (down by 10.9% in December) compared to the increase of 15.5% during the third quarter of 2024 leaving it up by 28.3% in 2024 but down by 34.8% over the past three years. By comparison, the S&P 500 was up by 2.1% during the fourth quarter of 2024 leaving it up by 23.3% during the year. The S&P 500 was up by approximately 23.4% during the past three year period compared to the 3.6% decline for the KBW Nasdaq Bank Index and the 23.4% increase in the technology heavy Nasdaq. The Nasdaq increased by 6.2% during the fourth quarter of 2024 and was up by 28.6% during 2024.
