2024 has been a surprisingly mixed year. While the main US indexes (the S&P 500 and NASDAQ-100) showed solid performance, most diversification beyond these two indexes did little to help portfolios. The US Small Cap, International, and Emerging Markets Indexes all did less than half as well as the large US Indexes. This was largely due to only a handful of very large companies in the large US Indexes doing well, while about 1/3 of the S&P 500 stocks are actually down this year.
There was an interesting shift around mid-year of leadership in the strongest stocks. NVIDIA (NVDA), for example, while the darling of the first half of 2024, is nearly flat since mid-June. In contrast, Palantir (PLTR), a lesser-known tech stock, has had an impressive run for the entire year that began when NVDA slowed.
One of the many factors that has me thinking this run may hit an end sooner than later is that the P/E Ratio (Price-Earnings valuation of the stock market) is pushing into extremely high numbers. And what happens at these points? The market tends to return much lower numbers over the next several years, at least historically. I plan to dive more into these factors on our next webinar on January 9th.
In the bond market, the major indexes (like the Aggregate Bond Index (AGG) or the 10-year Treasury (IEF)) are close to being flat for 2024. 20-year Treasury Bonds (TLT) fared much worse, down over -7% through Christmas this year. These are all interest rate sensitive indexes, which I thought would have fared better in a falling interest rate environment. But nope, they have struggled.
I mentioned last month that “In contrast, there are economically sensitive bond markets (think Floating Rate, High Yield, Preferreds, etc.) that held up much better than these broad indexes.” That has continued to play out in December. While these sectors of the market aren’t exciting, they represent an area in which we’ve thrived over the past few years. Using them has helped us manage volatility and risk of the “safe” side of the portfolio mix.
The Federal Reserve did, again, cut rates another 0.25% as expected. However, the market threw a bit of a tantrum and dropped nearly -3% after it was suggested that the Fed would be slower to cut rates more in the future – going into 2025. Not sure why the dramatic over-reaction, but then, the market can be like a moody teenager sometimes. And I’m not convinced that even the market knows what it wants regarding interest rates right now.
Looking ahead to 2025, it isn’t yet clear where leadership in the market will come from. The current sentiment is that some of the more heavily regulated sectors, like Finance (Banks, Insurance, Brokerage, etc) might become the stronger part of the market. And typically, Technology sectors do well no matter who is in charge politically.
Chart of the Shiller PE Ratio. (Source: multpl.com/shiller-pe)
Our Shadowridge Long-Term Trend indicator has gone negative as of December 12th, but had peaked right at the end of November. This has been one of the weakest readings we’ve seen in quite some time. And even with a bottom hitting on December 19th, it will be interesting to see if it can regain a positive reading. If it climbs and fails, then we’ll see that as time to get very defensive in our models.
Our Mid-Term Cycle indicator similarly went negative on December 9th, but like the Long-Term Trend, it also bottomed on December 19th. It is bouncing back quickly and we’re now watching to see how high it can bounce. If it fails, then this may help confirm it is time for a more risk-off approach.
As of Wednesday night (December 25th, 2024), our Shadowridge Dashboard showed Positive to Negative market sectors as 2 to 9. The positive sectors are Technology and Consumer Discretionary. Interesting that the defensive sectors are showing so much weakness when the trend data is negative. We would have expected sectors like Consumer Staples and Utilities to be strong here, but that’s not the case.
Only 1 RGB Bond Index is currently trending positive, above its 50-day Moving Average. The floating Rate sector is the only positive right now, and the Economic side remains strong against the Interest Rate side of the bond market.
RGB Economic and Interest Rate Sensitive Bond sectors (Source: ShadowridgeData.com)
The Bond market should be looking stronger under these conditions, but it just isn’t. So we continue to favor areas like High Yield and Floating Rate over the major bond indexes (like the Aggregate Index or Treasury Index). It is possible we may see a big shift going into the New Year. We’re not yet seeing signs of that, but it is a factor we’re watching closely right now.
Bottom Line: While we leaned into the market in November, December had us doing the opposite, and now we want to see more strength come into the market. Historically, we see a “Santa Clause Rally” from Christmas to a couple of days into the New Year. We may see that as a time for the market to rebound after the Fed-driven sell-off. But after that, it’s a whole new year.
Stay safe out there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.