Q4 2024 Market Insights

By Rob Johnson and Jim Shellenberger, CFA, CFP®

Every quarter, we’ll highlight and explain a few of the key events that happened leading up to the quarter, as well as some takeaways and insight into the impact these events may have going forward. If there are any topics that you’d like us to touch on in the future, please reach out and let us know.

2024 in Review

Growth Outperforms Value

In US equity markets, growth oriented large-cap stocks outperformed value oriented large-cap stocks by nearly double¹, with similar outperformance of growth versus value in both mid-cap and small-cap markets.

There were a few factors that may have led to this disparity, including declining interest rates and continued strength in the tech sector, which tends to include more growth styled companies.

Why did this happen? The evidence is pretty obvious when you realize that the top market-weighted stocks in the S&P 500® in 2024 were all growth stocks that outperformed their overall index: Nvidia (+171.2%), Meta (+65.42%), Tesla (62.52%), Amazon (+44.39%), Alphabet (+35.51%), and Apple (+30.07%) all beat the underlying index², while also making up more than 25% of the index’s holdings at the end of 2024. Most of these companies rode the artificial intelligence (AI) wave, either benefitting directly from, or as a compliment to, the momentum of AI and its lofty expectations going forward. We also had a market that was expecting interest rate cuts, which led markets to assume easier investment (i.e. cheaper money), more hiring, and business expansion.

Inflation Trends

Inflation in 2024 showed signs of stabilizing compared to the peaks of prior years. The Federal Reserve’s monetary policy adjustments (i.e. rate cuts) helped bring inflation closer to its 2% target, although it remained slightly elevated throughout the year, finishing at 2.7% for the 12 months ending in November³.

Core inflation, which excludes food and energy prices, stayed higher than headline inflation (including food and energy) for most of the year, driven by sustained price increases in other key sectors; certain categories like housing, services, and healthcare continued to experience above-average inflation⁴, reflecting uneven progress in managing cost pressures.

What does this really mean, and why is everything still so expensive? One of the more popular topics for market commentators and economists to talk about is inflation. It makes sense, because most people understand that inflation means things are getting more expensive than they used to be. Inflation data can be a good indicator of the health of our economy; we take prices from a specific point in the past, compare them to prices for the same goods today, and the difference is inflation (or deflation). When we read headlines like, “inflation reduced to 2.7% year-over-year,” people seem to celebrate. But what this really means is that goods are still getting more expensive, they’re just getting more expensive at a slower rate. This is the definition of disinflation. A common misconception is that slower inflation means my grocery bill should go down, when in fact, only deflation would have that effect on prices. It’s easy to think of the benefits of cheaper goods and services, but that price deflation is a major indicator of an economy in despair.

Weight Disparity of US Large Cap in S&P 500®

The market-weighted S&P 500® index remained historically top-heavy; on 12/31/24, the top 10 companies included in State Street’s SPY (S&P 500®) ETF made up over 35% of the index⁵, and the top 25 companies made up over 50%⁵.

The market has remained historically narrow, with only 28% of S&P 500® index members outperforming the overall index⁶; this statistic highlights the top-heavy nature of the index and may indicate a somewhat “propped up” index.

Why is this important? The S&P 500® is one of the most widely discussed index today, and its success is often pointed to when trying to exemplify market strength. It’s important to remember that as a “market-cap weighted” index, it is more heavily impacted by the volatility of its largest members. While some S&P 500® investors consider themselves well-diversified, they may not realize how narrow their exposure truly is and how impactful the drawdown of only a handful of companies can be to their portfolio’s overall performance.

Economic Indicators: Labor Market

The monthly jobs reports, one of the Federal Reserve’s most closely watched economic indicators, were strong in 2024; jobs gained over the 12-month period totaled 2.2 million⁷, outpacing the average addition of 1.9 million for the decade prior.

The strength of these numbers makes it less likely that the Federal Reserve will consistently cut interest rates in the near term, which can impact markets; the anticipation of rate cuts typically leads to higher company valuations and earnings projections due to the looser monetary policy.

How does this information impact the economy? It’s important to remember that the Federal Reserve has two main goals (called the dual mandate): maximize employment and stabilize prices. One of the best data sources they use is the monthly jobs report which shows how many new jobs were added to the US economy over the past month. When those numbers are above average, it shows us that businesses are hiring (i.e. expanding) and is an indicator of a healthy economy. While it’s easy to think that the highest possible numbers in these reports are a good thing, the Fed targets what they call a “goldilocks” economy, where it’s not too hot, and it’s not too cold. Balance, and therefore, less uncertainty, has historically led to less volatility in markets.

Fed Decisions and Impact

The Federal Reserve had a busy 2024; after holding the Fed Funds Rate steady at a range of 5.25%-5.50% for the first half of the year, economic indicators led to three cuts (0.50% in September, 0.25% in November, and 0.25% in December) to finish out the year with a range of 4.25%-4.50%⁸.

This gradual loosening of monetary policy has kept recession fears at bay so far; early predictions suggest fewer rate cuts in the year ahead based on the resilience of the overall economy.

What happens now? It’s important to remember that the Federal Reserve is an independent group that is not supposed to be swayed by the federal government or private industry. They work towards their dual mandate (mentioned above) and use data to drive their decisions. That said, we believe they’ll continue to monitor economic indicators (think inflation, job growth, unemployment) and react accordingly. Society got used to historically low interest rates from 2020 to 2022, but right now it’s hard to imagine returning to those lower rates unless the economy shows signs of weakness, and right now things look strong. Time will tell what action, if any, they’ll take in the near term.

International Opportunities Abound

Many asset allocators view international stocks as relatively undervalued compared to large US stocks, based on price-to-earnings (P/E) ratios; P/E ratios measure how much you pay for each $1 of earnings, and just like anything else, buying cheaper can lead to better value over time.

Currently, international stocks appear less expensive relative to large US stock⁹, suggesting they may offer significant growth potential in the long run and highlighting the importance of looking outside US borders for sound investment opportunities.

How could this impact my portfolio? This highlights the importance of diversification, a core principle in investing. As mentioned previously, US large-cap stocks have experienced significant growth and now carry higher P/E ratios, making opportunities abroad more appealing. For example, many people may think that the US large-cap stocks had the best performance worldwide in 2024, but in fact Taiwan (MSCI Taiwan NR USD) outperformed US large stocks (S&P 500® ) by approximately 9%¹⁰. While the S&P 500® often takes center stage in financial discussions, there are countless opportunities globally. Right now, international stocks offer encouraging prospects for a well-diversified portfolio.

Strength of the US Dollar

The Real Broad Dollar Index from the Federal Reserve Economic Data (FRED), which compares the dollar to currencies of the US’s trading partners, shows that the dollar is at its strongest level since data collection began in 2006¹¹.

A strong US dollar usually means a healthy demand for American-made goods and services and is thought to reflect confidence in the US government and financial markets, which makes sense when looking at the price of US stock mentioned previously.

So, what does this mean? In the simplest terms, a strong dollar means that foreign goods are cheaper for Americans. Contrary to what you might hear from political commentators, the US dollar is as strong as it’s been in a long time. The current strength of the US dollar could be used to combat worries about an upcoming US recession by encouraging foreign investment in US markets and lowering the cost for the US to import foreign goods. It could also be a contradictory point that international markets look attractive; instead, it could suggest that people just aren’t ready to invest abroad yet. Ultimately, a well-diversified portfolio can help balance these dynamics, reducing risk and increasing exposure to the right opportunities across asset classes.

Summary

In 2024, growth stocks, particularly in tech, outperformed value stocks due to the AI boom and expectations of interest rate cuts. While inflation stabilized, core inflation remained elevated, and the S&P 500® remained top-heavy, with a few companies driving performance. Despite strong job growth and Fed rate cuts easing recession fears, the economic outlook is still uncertain, highlighting the importance of a diversified portfolio; diversification helps balance risks in a concentrated market, and with international stocks being potentially undervalued, expanding beyond U.S. markets may offer growth potential. A strong U.S. dollar signals confidence in the economy, making it as important as ever to stay invested across asset classes for long-term growth.

Sources

Information provided herein reflects Frontier’s views as of the date of this presentation and can change at any time without notice.

This information has been prepared by Frontier based on data and information provided by internal and external sources. While we believe the information provided by external sources to be reliable, we do not warrant its accuracy or completeness. Nor should their use be construed as an endorsement.

Frontier Asset Management LLC is a Registered Investment Adviser with the Securities and Exchange Commission. The firm’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and are available on our website www.frontierasset.com. They include important disclosures and should be read carefully. 20250116.22222

Q4 | 2024 – Market Insights