A Retrospective on 2024 Market Performance and a Look Ahead to 2025
The year 2024 marked a period of robust gains for the U.S. stock market, echoing the strong performance of the preceding year. The S&P 500 surged by approximately 25%, while the Nasdaq Composite, heavily weighted towards technology stocks, experienced an even more impressive 31% climb. The Russell 2000, representing small-cap companies, saw an 11% increase, and the Dow Jones Industrial Average, a bellwether of blue-chip stocks, posted a 14% gain. This remarkable two-year streak of substantial growth signifies a rare occurrence, with back-to-back 20% gains observed only eight times since 1950, the last instance being in 1997-1998. Historically, following such periods of strong performance, the market has continued its upward trajectory in the subsequent year six out of eight times. However, it’s crucial to analyze the current market environment and its underlying fundamentals to assess the potential for continued growth in 2025.
A key consideration when evaluating the market’s prospects is its valuation. Comparing the current market environment to the 1997-1998 period reveals a notable difference in the price-to-earnings (P/E) ratio of the S&P 500. While the P/E ratio started below 20 in 1997 and rose to over 32.5 by the end of 1998, the current ratio hovers slightly below 30, albeit still significantly above its five-year average of less than 21. This suggests that the market may be somewhat overvalued compared to its historical average. While this doesn’t preclude further gains in 2025, as evidenced by the 19.5% increase the market experienced in 1999 following the 1997-1998 rally, it warrants a cautious approach. Investors should carefully consider the factors driving market performance and assess the broader economic landscape to make informed investment decisions.
One potential headwind for equities in 2025 stems from developments in the bond market. Throughout 2024, yields on the 30-year Treasury bond experienced a significant rise, climbing from around 4% at the beginning of the year to nearly 4.8% by year-end. This upward trend in bond yields is particularly noteworthy considering the Federal Reserve’s monetary policy stance. Contrary to expectations of further rate cuts, the Fed implemented three consecutive rate reductions in 2024 and adopted a more cautious outlook, as signaled by Chairman Jerome Powell at the most recent Federal Open Market Committee (FOMC) meeting. While a cautious stance is not inherently negative, the combination of rising bond yields and a potentially less accommodative monetary policy could pose challenges for equity markets in the coming year. Understanding the interplay between these factors is crucial for navigating the investment landscape in 2025.
As the year drew to a close, market sentiment turned somewhat bearish. The S&P 500 experienced a 1% decline on the penultimate trading day, and futures indicated a further 1% drop in pre-market trading. This downward pressure can be attributed to several factors, including Treasury Secretary Janet Yellen’s warning about potential extraordinary measures if Congress fails to raise the debt ceiling promptly, as well as a sell-off in Boeing shares following a plane crash in South Korea. The market’s end-of-year performance and the prevailing volatility, as measured by the VIX, which increased by nearly 13% to just under 18, suggest a potentially choppy trading environment in the near term. Investors should be prepared for heightened volatility and potential short-term fluctuations as the market navigates these uncertainties.
While the two-year market rally has been remarkable, the emerging selling pressure and macroeconomic concerns raise questions about the sustainability of this upward trend. Although trading volumes typically decline during the holiday season, an uptick in activity may occur as traders adjust their portfolios for year-end. The confluence of factors such as debt ceiling negotiations, rising bond yields, and a more cautious Fed stance warrants close monitoring as we enter 2025. Understanding these dynamics will be paramount for investors seeking to navigate the market effectively in the coming year.
Beyond the market’s performance, the passing of former President Jimmy Carter casts a somber note on the year’s end. While his presidency faced economic challenges, his legacy of decency, humanitarianism, and commitment to human rights is widely acknowledged. His work with Habitat for Humanity and advocacy for global human rights stand as testaments to his character. A National Day of Mourning scheduled for January 9th, with markets closed in observance, provides an opportunity to reflect on his contributions and the values he embodied.
