Fourth Quarter 2024 Market Overview

2024 saw its share of volatility, but markets were positive overall, albeit lower than they were before December’s correction. On December 18th,the Federal Reserve cut rates to the expected 25 bps but also provided guidance that they expected only two rate cuts in 2025 in anticipation of sticky inflation, disappointing some investors. The S&P 500 was down nearly 3%, and the tech-heavy NASDAQ index was down 3.6% that day. ¹Mikolajczak, Chuck. “Stocks Dive After Fed Cuts Rates, Signals Slower Easing Pace in 2025.” Reuters, 19 Dec. 2024, www.reuters.com/markets/us/futures-inch-higher-markets-await-fed-decision-2024-12-18/#:~:text=NEW%20YORK%2C%20Dec%2018%20(Reuters,cautious%20path%20of%20easing%20next.

International equity returns declined as the dollar had its strongest quarter since 2016. ²Dulaney, Chelsey. “Why the Dollar’s Epic Rally Has Some Room to Continue.” Wall Street Journal 2024 Year-End Review, Print Edition 1/2/2025. Page R2. The dollar rose 7.7% in the fourth quarter, and international equities were down around the same amount. ³Source: Morningstar Direct. Data as of 12/31/2024. Part of the dollar rally is seemingly in anticipation of the incoming President’s policies, including potential tariffs. It is worth noting that the degree to which those policies will be implemented is unknown. Even with a dour December, equity markets were positive across the board for the year with U.S. stocks leading the way.

Source: Tamarac Reporting, Morningstar Direct and JP Morgan, as of 12/31/2024. Please see important disclosures below.

After we saw the market rally broaden out in the second half of the year, December brought a swift correction, and U.S. Small Cap stocks were down 8.3%. By comparison, U.S. Large Cap stocks fell a modest 2.4%. ⁴Source: Morningstar Direct. Data as of 12/31/2024. While U.S. Small Cap stocks were still positive for the quarter and posted double-digit returns for the year, December effectively halted the broadening of the U.S. rally. Large Cap stocks in the U.S. were the most resilient and ended the year up over 25%.

The resilience of U.S. Large Cap stocks is also seen in valuation measures. U.S. Large Cap stocks, as represented by the S&P 500, ended the year with a price-to-earnings ratio (a measure of how expensive an investment is) of 22.2x, well above the long-run average of 16.8x. ⁵JPM Guide to the Markets, Monthly Edition. Slide 5 “S&P 500 valuation measures”. Data as of 12/31/2024. Within the S&P 500 the top 10 stocks, which largely benefited from the AI rally in the U.S., had a P/E ratio of 28.8x. ⁶JPM Guide to the Markets, Monthly Edition. Slide 11 “S&P 500: Index concentration and valuations”. Data as of 12/31/2024. These stocks have been on an incredible run since 2023, and they are now quite expensive relative to history.

Bonds were also impacted by the Fed announcement in December with the yield on the 10-Year Treasury hitting 4.5% on December 18th, holding that level through the end of the year. ⁷“Resource Center | U.S. Department of the Treasury.” U.S. Department of The Treasury, January 6, 2025, https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2024. Yields may stay elevated for longer if inflation remains sticky and the Fed slows the pace of rate cutting. High Yield bonds enjoyed a strong year as recession fears subsided.

Despite a rough December, markets were positive for the year, and U.S. equities enjoyed a strong 2024. Increased concentration and valuation in U.S. Large Cap stocks does pose concerns, but that is why we stay diversified with exposure to areas of the market that do not face the same predicament. We do not claim to know when markets will move in a certain direction, but once again we have seen that investors who stay disciplined in the face of uncertainty are generally rewarded.

Important Disclosures 

Team Hewins, LLC (“Team Hewins”) is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.

The volatilities of any comparative indices included in this presentation may be materially different from the individual performance attained by a specific client in a Team Hewins strategy. In addition, client holdings may differ significantly from the securities that comprise the indices. The indices have not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather are disclosed to allow for comparison to the performances of certain well-known and widely recognized indices. The indices are unmanaged, include reinvestment of dividends, capital gain distributions or other earnings and do not reflect any fees or expenses. Indices cannot be invested in directly. Set forth below are descriptions of the indices included in the presentation.

Past performance is not an indication of future returns. Comments provided herein reflects Team Hewins’ views as of the date of this write up and are provided for informational purposes only. Such views are subject to change at any point without notice. Some of the information was obtained from third party sources believed to be reliable but the information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. Due to various risks and uncertainties no reliance should be placed on any such statements or forecasts when making any investment decision. Nothing presented herein is or intended to be investment advice or a recommendation to buy or sell any securities and no investment decision should be made based solely on the information provided. Team Hewins is not responsible for the consequences of any decisions or actions taken as a result of information provided in this writeup and does not warrant or guarantee the accuracy or completeness of the information. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses.

Source: © [2023] Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising.

Index returns for JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds) sourced from Tamarac Reporting and JP Morgan.

Index Descriptions 

• S&P 500 Index (Large Cap U.S. Stocks): measures the performance of large capitalization U.S. Stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, NYSE MKT, and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.

• Russell 2000 Index (Small Cap U.S. Stocks): An unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that index and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group owns the Russell Index data, including all applicable trademarks and copyrights.

• MSCI EAFE Index (International Developed Stocks): The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

• MSCI Emerging Markets Index (Emerging Markets Stocks): is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 25 emerging countries around the world.

• Bloomberg Barclays US Aggregate Bond Index (Investment Grade U.S. Bonds): includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.

• Bloomberg Barclays Muni Bond Index 1-10 Yr Blend (1-12) (Int-Term Municipal Bonds): A market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index. The 1-10 Year Municipal Blend index tracks tax-exempt municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years.

• ICE BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index (High Yield U.S. Bonds): Tracks the performance of US dollar-denominated below-investment-grade (BBB rated) corporate debt publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis.

• JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds): The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The index limits the weights of countries with larger debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.