December 2024 Market Lookback
By: Mario Ismailanji · January 03, 2025 · Reading Time: 5 minutes
The usual strong ending to the investing year didn’t materialize this holiday season, as the S&P 500 fell 3% in the final two weeks of the month, one of its worst end-of-year performances since 1928 when records began. Still, stocks had a total return 25% for all of 2024, the second year in a row of stellar performance. Strong consumer spending, a solid labor market, and stubborn inflation data pushed the Federal Reserve to signal fewer interest rate cuts next year than markets were expecting going into the central bank’s December meeting. That drove Treasury yields higher, with the rise in yields concentrated in longer-term maturities.
Macro
• The Fed lowered the fed funds rate by 25 basis points to a target range of 4.25%-4.50%.
• In their quarterly Summary of Economic Projections, Fed officials raised their inflation expectations and signaled fewer interest rate cuts.
• The unemployment rate ticked up from 4.1% to 4.2% in November, above expectations.
• Housing starts fell 1.8% versus expectations for an increase of 2.6% in November.
• Q3 GDP growth was revised up from 2.8% to 3.1%, with both consumer spending and net exports contributing.
• The Conference Board’s consumer confidence index surprised to the downside at 104.7 versus the estimate of 113.2, driven primarily by a decline in the future component.
• The Japanese Yen finished the month at its weakest level since before the Bank of Japan hiked its interest rate target at the end of July.
Equities
• Large-cap growth stocks were the only size & style category to end the month with positive returns.
• The Magnificent Seven stocks finished the month up 6.3%, significantly outpacing the rest of the market.
• Forward 12-month earnings expectations rose 1% in December, while the 12-month P/E ratio contracted by over 3%.
• Emerging market stocks ended the month roughly flat despite U.S. dollar appreciation, buoyed in part by the increase in oil prices.
Fixed Income
• The 2y10y Treasury yield spread rose to 32.5 basis points in December, the highest level since May 2022, signaling that long-term growth and inflation may be structurally higher.
• After bottoming as low as 82.4 on December 11, the MOVE Index (i.e. interest rate volatility) rose to 98.8.
• High yield spreads rose to 287 basis points, their widest levels since mid-October.
• 10-year Chinese bond yields fell 35 basis points to 1.67%, setting a new record low.
The Santa Claus Rally Skipped Town
And just like that, another volatile year in markets came to a close. It was a great one for stock investors, as the S&P 500 ended the year up more than 23%. And just like in 2023, outperformance was concentrated in companies that were either larger and/or rapidly growing: Large-cap growth stocks rose over 33%, while small-cap value stocks gained a comparatively low 8%.
Investors may be starting off the new year with a slightly sour taste in their mouth, however. While the final two weeks of December typically see some of the best returns of the year, the traditional “Santa Claus rally” was notably absent last year. Compared with the average return of +2%, stock indexes fell 3% during the final two-week period, which ranks in the 94th percentile of worst returns going back to 1928.
Exactly why markets struggled to maintain momentum from earlier in the year is not fully clear. While conventional wisdom suggests that the increased dominance of passive investing can push the market higher during periods of lower trading volumes (like the holiday season when many people are out of the office), that wasn’t the case this time. Portfolio rebalancing, end of year tax-driven moves, and other non-fundamental factors could have had an effect, but it’s hard to pin it on any one thing.
Cut, But Make It Hawkish
The Federal Reserve’s December meeting marked a pivotal shift in monetary policy, with the fallout possibly contributing to Santa not coming to town. While the decision to lower the benchmark rate wasn’t a surprise, the central bank’s quarterly projections certainly were. Against investor expectations for three rate cuts in 2025, 14 of 19 Fed officials expected only two rate cuts or less next year – fewer than what the market was pricing in.
Fewer rate cuts and higher inflation expectations might be enough to explain why stocks trended lower to finish the year, but a look at Treasury yields tells us something deeper. 2-year yields are basically where they were the day of the Fed meeting, yet 10-year yields are 15 basis points higher. This suggests investors are digesting structurally higher interest rates, which translate into higher discount rates and pressure stocks.
Remember: Stock prices can be thought of as the present value of future cash flows. If future cash flows remain the same while the interest rate you use to discount them rises, that usually means a lower stock price. The fact that S&P 500 earnings estimates were steady while valuations contracted is supportive of this argument, but as we’ve seen market dynamics can shift rapidly. Any further changes to interest rate expectations are likely to play a critical role in market direction from her.
Performance data quoted represents past performance. Past performance does not guarantee future results. Market returns will fluctuate, and current performance may be lower or higher than the standardized performance data quoted.