Year-End 2024 Investment Commentary Summary

January 17, 2025

Market Recap

The U.S. economy and the stock market proved stronger than many had anticipated in 2024. The S&P 500 Index notched 57 new all-time highs on the way to a 25% gain for the year – the second year in a row with a gain north of 20%.

The robust gains in U.S. stocks were driven by a healthy U.S. economy, moderating inflation, and rate cuts from the Federal Reserve. Of course, enthusiasm around artificial intelligence (AI) played a meaningful role, as companies associated with the theme, namely Nvidia and Broadcom, were big contributors to this year’s stellar returns. Within the U.S. stock market, Large Cap Growth stocks (Russell 1000 Growth) once again led the charge ending the year positive 33%, outperforming Larger-Cap Value Stocks (Russell 1000 Value) and Smaller-Cap Stocks (Russell 2000) which ended the year up 14.4% and 11.5% respectively.

Overseas, returns were not nearly as strong. Calendar-year returns for most foreign markets were dragged down by fourth-quarter losses following Trump’s victory, which sparked fears of tariffs and a stronger dollar leading to an economic slowdown. Developed international stocks (MSCI EAFE) posted a modest 3.8% gain. Emerging markets stocks (MSCI EM Index) had a volatile year, finishing the year up 7.5%. Much of that volatility can be attributed to the Chinese stock market (MSCI China Index) which had a strong year (up 19.4%) but was volatile, with significant swings in investor sentiment.

Within the bond markets, returns for the year were mixed across fixed-income segments. The benchmark 10-year Treasury yield experienced significant volatility amid concerns around inflation, interest rates, and the impact of potential tariffs under the Trump administration. After starting the year with a yield of 3.88%, the 10-year Treasury ended the year higher at 4.58%. Against this backdrop, the interest-rate sensitive Bloomberg U.S. Aggregate Bond Index was only slightly positive at 1.3%. Conversely, short-term and credit-sensitive sectors of the bond market—both areas we emphasized in our portfolios—performed well during the year. The Bloomberg Short-Term Treasury Index rose 5.3%, and high-yield bonds (ICE BofA Merrill Lynch High Yield Index) were up 8.2% for the year.

Investment Outlook and Portfolio Positioning

Looking ahead, our base case is that the U.S economy will continue to grow, albeit slower, with a low probability of recession. This should be a supportive backdrop for both bonds and stocks, although we expect the pace of gains to slow. Given stretched valuations for large-cap growth stocks, we continue to think it’s likely that the market gains will broaden to include small and mid-caps and non-tech sectors of the market.

As of year-end, we target a full strategic weighting to equity investments in alignment with our allocation frameworks, while remaining diversified across geographies, including the U.S., developed international, and emerging markets. Within our global equity allocation, we also remain neutral relative to our growth and value tilts. In fixed-income we continue to be significantly underweight within our allocation framework to core bond investments and interest rate risk relative to a traditional bond benchmark, while emphasizing exposure to flexible, shorter-duration and credit-oriented fixed-income investment allocations, which we think will generate better returns relative to their risk. As always, we are weighing a range of shorter-term risk scenarios against each asset’s medium- and longer-term return potential and portfolio diversification benefits assuming different macro environments (inflation/disinflation, growth/stagnation).

While our economic outlook is generally positive, there are plenty of risks. For starters, current valuation levels—particularly for large-cap growth stocks—suggest that there is less room for upside, and there is more downside risk if expectations are not met. A related consideration is the high level of concentration in the S&P’s top-weighted stocks, which could magnify volatility if any of these companies disappoint.

Outside of stretched valuations and market concentration, there are the usual suspects that could cause market volatility, including inflation, monetary policy, and uncertainty surrounding Trump’s fiscal and global trade policy. Investors should be prepared to weather occasional storms in 2025.

Looking at fixed income, the U.S. bond market is stuck between the Fed’s plans to cut interest rates (to some degree) and the risk of higher inflation and increasing federal deficits. As was the case in 2024, we think 2025 will be another bumpy ride for bonds. While we have focused on shorter-term, high-yielding bonds over those with more interest-rate risk, that could start to change if volatility creates compelling opportunities. In any event, higher current yields will result in better bond returns over the long run.

Closing Thoughts

As we enter 2025 there are promising signs of growth and resilience in the economy, and we are also acutely aware of the potential risks that could undercut market stability. The U.S. economy will likely downshift into a slower gear. We do not believe this slower growth, in and of itself, will cause a recession, but it does leave the economy more vulnerable to shocks, including from significant policy changes from the new administration. Furthermore, the past two years of strong returns leaves valuations elevated. Our focus will continue to be on identifying opportunities to improve long-term returns while being vigilant of the risks we are taking. By staying disciplined and opportunistic, we aim to navigate the complexities of the market and position our investments for long-term success. As always, we appreciate your trust and wish you and yours a wonderful new year.

 The full commentary is available here: Year-End 2024 Investment Commentary

Important Disclosure
This newsletter is limited to the dissemination of general information pertaining to Litman Gregory Wealth Management, LLC (“LGWM”), including information about LGWM’s investment advisory services, investment philosophy, and general economic market conditions. This communication contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be construed as legal or tax advice, and you should consult with a qualified attorney or tax professional before taking any action. Information presented herein is subject to change without notice. Past performance is no guarantee of future results, and there is no guarantee that the views and opinions expressed in this newsletter will come to pass. Individual client needs, asset allocations, and investment strategies differ based on a variety of factors.
LGWM is an SEC registered investment adviser with its principal place of business in the state of California. For information pertaining to the registration status of LGWM, please contact us at compliance@lgam.com or refer to the investment adviser public disclosure web site (www.adviserinfo.sec.gov). For additional information about LGWM, including fees and services, send for our disclosure brochure as set forth on Form ADV by contacting compliance@lgam.com.
Index Disclosure
Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.
The Standard & Poor’s 500 Composite Stock Price Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. Stocks in the Index are chosen for market size, liquidity, and industry group representation.
Russell 2000 Index measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
Russell 1000 Growth Index measures the performance of the of the large- cap growth segment of the Russell 3000 Index. Russell 1000 Value Index measures the performance of the of the large- cap value segment of the Russell 3000 Index.
The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries* around the world, excluding the US and Canada. With 799 constituents, the index covers approximately 85% of the free float- adjusted market capitalization in each country.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia,
Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.
Additional Important Disclosures
Forward-Looking Statements:
Forward-looking statements are based on current expectations and assumptions about future events and economic conditions, which are inherently uncertain and subject to change. Actual results may differ materially from those anticipated, and there is no guarantee that strategies discussed will achieve their intended objectives.
Asset Allocation and Strategy Risks:
Asset allocation and diversification strategies do not ensure a profit or guarantee against loss. Portfolio positioning reflects views at a specific point in time and may not represent future outcomes. Shifts in market conditions or investment strategies may materially impact portfolio performance.
Fixed-Income Investment Risks:
Investments in credit-sensitive fixed-income securities involve risks, including credit/default risk and interest rate risk. High-yield (“junk”) bonds carry a higher risk of default and greater price volatility. Changes in interest rates may impact the value of fixed-income investments.
Use of Hypotheticals:
Hypothetical scenarios and examples provided are for illustrative purposes only and are based on assumptions that may not come to fruition. These scenarios do not reflect actual investment outcomes and should not be relied upon as a guarantee of future performance.
Conflicts of Interest:
The firm’s investment strategies may involve inherent conflicts of interest, including allocations to strategies or products that generate additional compensation for the firm or its affiliates. The firm mitigates these conflicts through policies and procedures disclosed in its Form ADV Part 2A.