Can the 2024 Market Rally Continue for Another Year?

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John Morton

Senior Wealth Manager

Summary

2024 was a successful year for investors, despite the slate of uncertainties at the onset and throughout. The US stock market, led by our biggest companies and concentrated in the technology sector, powered forward to a 25% gain (S&P 500 Index). With a strong US economy and stellar corporate earnings, many investors head into 2025 with optimism for continued strong returns within large cap US stocks. Other investments, including US small cap stocks, international stocks, and bonds, contributed to investor returns in 2024, just to a lesser extent. The high expectations for the S&P 500 going forward might prove difficult to achieve, however, so investors should maintain their strategic allocations and remain diversified.

The dominant investment themes for 2024 include the US election, inflation and interest rates, and the Artificial Intelligence surge (not bubble, yet).

 

 

US Election

 

A recap of 2024 would be inadequate without mentioning the US presidential election. As a backdrop: the US economy has had a very successful four years coming off of pandemic lows, boosted by government stimulus, private sector investment, a strong US dollar, and – perhaps most importantly –robust consumer spending and healthy household finances. All of this has translated into record corporate profits and a booming stock market.

 

That might seem at odds with voters, who expressed discontent with economic issues. The easiest explanation is that 1) the daily finances of lower- and middle-class voters got hit hardest by stifling inflation and an affordable housing crisis and 2) the stock market is not the economy. While US economic growth has been strong over the last 4 years, earnings growth has been even better, and stock price gains even better still.

 

This backdrop is important, because it is the economy and stock market that President Trump has inherited. The Wall Street Journal recently compared how “expensive” US stocks were at the start of various presidencies. The measurement here is the cyclically adjusted price/earnings ratio, which is a good metric for stock market valuations because it smooths out a decade’s worth of data and adjusts for inflation. As evidenced in the chart below, US stocks are expensive.

The best way to think about this might be: rather than a bar chart showing Shiller P/E ratios, imagine it’s a bar chart showing a “hurdle” that the US stock market has to jump over. For an athlete, a lower hurdle on the track means a better chance of clearing the hurdle without a faceplant and, hopefully, clocking in at faster times. Lower hurdles are easier for athletes and the stock market alike. The path to strong investor returns becomes easier when stock prices are cheaper.


A high hurdle, like the one facing the US stock market today, means that while it isn’t impossible to have strong returns over the next 1-, 4-, or even 10-year period, the difficulty level to achieve those returns is higher and, thus, less likely. If you’ve read the recent 10-year forecast of US stock market returns produced by the biggest banks and investment managers, annualized real returns predictions were frequently in single digits. At Boardwalk, we don’t put much weight into these predictions – but the consensus of a “high hurdle” for the S&P 500 over the next decade seems reasonable for many reasons.


President Trump wields a lot of power, especially with a Republican sweep in Congress. For investors, this will certainly have an impact because Trump’s priorities are more likely to become law and be implemented. From the perspective of US corporations, the market is anticipating both opportunities and risks:


  • Potentially beneficial policies: fewer regulations, improving business and consumer sentiment, and tax cuts for households and companies

  • Potentially risky policies: Immigration reform, tax cuts, and tariffs might prove to be inflationary – increasing costs and driving up interest rates

I’ll note that tax cuts are included in both bullet points because while cuts would leave more money in the pockets of households and businesses, that might just become extra spending cash, pushing up prices of goods and services (boosting inflation). 


Inflation and Interest Rates


Inflationary government policies have complicated the “inflation battle” that the Federal Reserve (the Fed) has been engaged in for the last 3 years. Prior to this fall, inflation had been descending, and policymakers had lowered the high end of the Fed Funds Rate range from 5.5% to the current 4.75%. At December’s FOMC meeting, policymakers cut the Fed Funds Rate by another 0.25% but signaled a reluctance to trim rates further unless there is continued evidence that inflation remains subdued. Here’s a chart showing how economists have changed their expectations for inflation since October.

Here’s how inflation and interest rates have changed this year:


  • At the beginning of 2024, inflation (price increases) in January were measured at a 3.1% annualized clip.

    • Short-term (Fed Funds) rates started at ~5.5% and the 10-year Treasury yield stood at ~3.9%

  • In December 2024, inflation measured 2.9% (annualized).

    • Short-term rates ended the year at ~4.5% and the 10-year Treasury yielded ~4.6%

As you can see, these inflation rates are significantly below the 9.1% high from June 2022. But because of inflationary risks and a strong economy, the Fed has effectively taken on a “wait and see” approach to short-term interest rate levels.


There is a big distinction between short-term rates controlled by the Fed and long-term rates, largely determined by market forces. While short-term rates have fallen ~1%, the 10-Year Treasury yield has risen by ~0.7%. Higher long-term rates can be attributed to the market’s higher forecast of economic growth and inflation over the next 10 years. Part of the higher forecast for growth comes because of the surge in AI-related investments by big-tech firms and potential for productivity gains after further implementation within corporate America.


Artificial Intelligence


A continuation of 2023’s theme would be the dominance of the “Magnificent Seven” technology companies, their pursuit of generative AI, and implications for investors. As we wrote this summer, seven companies – Microsoft, Nvidia, Amazon, Meta, Alphabet, Tesla, and Apple – have done three things (among many more).


  1. Make a lot of money.

    1. These companies have produced the lion’s share of US earnings and US earnings growth over the last two years. The expectation is that the growth will continue. Earnings for Q4 will be known in the coming weeks but the market is expecting the Magnificent 7 to report earnings growth of 21.7% for Q4 (the other 493 companies are expected to grow earnings by 9.7%).

  2. Invest a lot of money.

    1. Last year, Goldman Sachs estimated that 22% of all US research and development dollars were put towards AI. Cumulatively (to date and over the next few years), the Magnificent Seven, along with other tech companies, utilities, etc. will invest about $1 trillion in capital expenditures alone for AI (in addition to indirect investments and costs too). That’s a big bet.

  3. Become much more valuable.

    1. These companies have increased in value by trillions of dollars over the last few years. As of December 31, 2024, the Magnificent Seven make up 34% of the S&P 500 Index and 55% of the Nasdaq Composite Index.

In 2024, US equity performance was dominated by the Magnificent Seven. The chart below highlights the return of the Magnificent Seven (up 60.5%) compared to the other 493 companies in the S&P 500 Index (which were collectively up 12.8%). In the chart, the weighting of each company (size relative to the index) is represented by the size of the bubbles below. If you added up the weightings of the seven tech stocks in light green, it would amount to 34% of the S&P 500 Index, which is the largest weighting in stock market history for seven companies.

Given the massive 2024 return difference, some people might wonder at this point: why would investors own anything other than the Magnificent Seven? Our answer: Just like with the illustration above (about the stock market that Trump has inherited), the Magnificent Seven have some very large hurdles to clear. Below is a chart put out by the advisors at Ritholtz Wealth Management and, while it focuses on Nvidia, the point stands: the expectations are very high for these companies.

Failing to clear the “expectation hurdles” facing the Magnificent Seven could prove costly for all investors because they make up one third of the S&P 500 Index.

 

As an aside: We’ll also note that achieving these high expectations is not entirely in Nvidia’s control. While this quarterly commentary was written ahead of January 27th (yesterday), I do have to add an update to mention that Nvidia made news yesterday by losing $600B in market capitalization (down ~17%), the biggest one-day loss ever by a publicly traded company. The selloff wasn’t caused by missing earnings expectations (the “high bar” in the chart above) but rather a new AI model developed rather inexpensively in China by DeepSeek. The news caused an immediate repricing of Nvidia’s shares because of fears that the AI revolution might not need as many Nvidia chips as previously assumed.

 

How Should Investors Approach 2025?

 

It has been a great year for investors in US large cap stocks – and, rightly so, we should celebrate that. Heading into 2025, we think it makes sense to keep being invested in the Magnificent Seven and US stocks as a whole, despite the high hurdles ahead. We are also making sure that our clients are globally diversified and balancing their equity exposure with bonds, according to each client’s preferences and goals.

 

Investing based on recent performance is like driving (forward) while looking into the rearview mirror. It’s a scary way to drive and a dubious way to invest. Investment results are often cyclical, with leaders and laggards trading turns. There are countless examples we could provide where investors have done themselves a disservice by chasing returns, such as piling into internet stocks during the Tech Bubble, investing in leveraged real estate properties in the 2000s, or buying high flying, unprofitable US companies after the pandemic surge. All of these examples ended badly for investors who chased returns.

 

With 2025 off to a solid start, there is room for both optimism and skepticism that the bull market for US stocks can continue at the robust pace of the last two years. Our aim is to keep you on a path to achieving your goals regardless of what 2025 has in store. At Boardwalk, we are recommending that our clients maintain their strategic allocations and rebalance when necessary to follow the investing mantra “buy low and sell high.”

Today’s Chances for Bad Investing Behavior: High

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Mike Rodenbaugh

Founder

It has long been common knowledge that making emotional investing and money decisions can lead to poor results.  The field of behavioral finance has only more recently begun to document and quantify the impact. 

 A presidential election is always a source of uneasiness for investors.  Add to that our current backdrop of economic and geopolitical uncertainty and you get an environment fraught with opportunities to make decisions based on emotion or the behavioral biases that live within all of us.

 Therefore, I thought this might be a good time to share some of my favorite investing quotes and fun facts, in the hopes that at least one might resonate with you and help you navigate whatever negative or positive thoughts, news, or predictions come your way in the coming days, weeks, and months (and yes, years and decades as well!).

 Maintaining Discipline in the Face of Volatile Markets and Scary Headlines

Humans are hardwired to be bad at this.  Our fight or flight response kicks in during moments of fear, telling us “do something!” when, in fact, doing nothing is very likely the better approach.  This is easier said than done.  A few financial firms have attempted to quantify the impact of bad timing decisions investors make.  Vanguard estimates the “cost” of bad investing behavior at up to 2% of portfolio value per year while Russell Investments estimates the return differential at 2.54% per year.  Morningstar reports two sets of returns for mutual funds: the actual fund return and what they call “investor return.” This is Morningstar’s estimate of what end-investors actually earn based on fund inflow/outflow data.  In aggregate, their most recent measurement is that investor returns lag the actual fund returns by 1.1% per year.

A genius is the man who can do the average thing when everyone else around him is losing his mind.

– Napoleon

Save like a pessimist and invest like an optimist.

– Bill Gates

Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

– Morgan Housel, author of The Psychology of Money

Be fearful when others are greedy, and be greedy when others are fearful.

– Warren Buffett

Tuning out the Noise

This is a difficult task.  We are bombarded with information from the 24-hour news cycle, friends and colleagues, and social media.  Bad news easily catches our attention because we feel the pain of losses more intensely than the pleasure of gains.  Remind yourself that bad news is priced into markets far more quickly than you can react.

The fact that bad news travels ten times faster than good news is what separates investors from market returns.

– Michael Batnick, financial blogger/podcaster

Pessimism just sounds smarter and more plausible than optimism. Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.

– Morgan Housel, author of The Psychology of Money

All of us would be better investors if we just made fewer decisions.

– Daniel Kahneman, author of Thinking, Fast and Slow

Your portfolio is like a bar of soap – the more you handle it, the less of it you’ll have

– Eugene Fama, professor and Nobel laureate in economic sciences

Remember your Time Horizon

Keep in mind that we’re not risking capital in the markets that can’t stay invested for several years, allowing ample time for price recovery.  We know from experience that, at some point, riskier portfolios will suffer losses of 20%, 30%, 40% or more in a year.  It’s not if, but when.  We also know that, despite these losses, riskier portfolios will deliver higher returns over longer periods of time, which is often the only period that is relevant.

Time in the market beats timing the market.

– Ken Fisher, investment manager

Everybody in the world is a long-term investor until the market goes down.

– Peter Lynch, investment manager

We are here to support you in your financial journey in any way we can.  Please reach out if you need any reassurance about your portfolio strategy, maintaining discipline, tuning out the noise, or anything else!

Should Expert Predictions and the Financial Media Guide Your Investment Decisions?

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John Morton

Senior Wealth Manager

Summary
As great of a year 2023 was for investors, it’s even more notable how much better than expected the year turned out. We dig a little deeper into how the past few years have fared compared to expert predictions.
The commentary below proves expert predictions are probably better described as guesses. Basing your investment strategy on what the media says could get you into trouble.

 

2023 was an amazing year for investors, even though no one expected it! Rewinding to one year ago, investors were still in the doldrums after a horrible 2022 that saw both stocks and bonds decline by double digits. On the docket for 2023 was a year full of interest rate hikes, inflation pressures, wars, and – so we all thought – a recession. As a result, many investors were content to accept a (finally!) decent return on cash and just wait out the year. The Wall Street Journal summed it up well: “Almost no one thought 2023 would be a blockbuster year for stocks. They could hardly have been more wrong.”

Despite what the investment strategists, economists, and media pundits may say, it will be very difficult to correctly predict how the economy and your investments will perform in 2024. Even if someone predicts accurately in one area – say, geopolitical risks or corporate profits or consumer strength – how the market reacts and moves during a year is so complicated that few, if any, can be right enough to make a profit off it on a consistent basis. Because not only does someone have to address data outcomes or event-specific risks, but that investor would also need to predict how human behavior reacts to that myriad of interwoven factors.

The last four years are a great string of examples for this.

2020:

  • What was predicted: Well, we’ll give everyone a “pass” for 2020.
  • What happened: A global pandemic, of course. In investing we call these “black swan” events – world-changing events that no one predicts but inevitably surface occasionally.
  • How markets performed: Despite a historic crash in the spring of 2020, everything did quite well to end the year. The S&P500 return was 18.4% for the calendar year.
  • Verdict: No one predicted the violent crash nor the rapid recovery in 2020.

2021:

  • What was predicted: A continued economic recovery, but still pretty average market returns. On the high end, some predicted double-digit returns but there were just as many experts forecasting a flat stock market.
  • What happened: Despite persistent effects from the virus, the US economy surged back to life as consumers just shifted where they spent money and companies adapted. Inflation was the “consequence” from combining a robust, stimulus-fueled recovery with supply chain issues, but during 2021 it still hadn’t hit full swing yet.
  • How markets performed: The S&P 500 hit 70 new all-time highs on its way to a monster 28.7% gain.
  • Verdict: At this point the pandemic still wasn’t behind us. So, it’s understandable how few anticipated the “V-shaped” economic recovery, and none nailed just how stellar market returns would be.

2022:

  • What was predicted: Maybe it was the rose-colored glasses of 2021 since, despite high valuations and a telegraphed set of Federal Reserve rate hikes to combat inflation, forecasters said markets would be up.
  • What happened: Interest rates surged at the fastest pace in decades and US inflation peaked at 9.1% in June. The economy still managed to grow about 2%, but there was widespread pessimism.
  • How markets performed: The S&P 500 posted its worst year since 2008 (-18.1%) and bonds had their worst year ever (the Bloomberg Barclays Aggregate Index fell over 13%). Areas with the highest valuations and best 2021 returns fell the most in 2022: technology companies, “meme stocks,” cryptocurrencies, etc.
  • Verdict: Another miss!

2023:

  • What was predicted: 85% of economists in a Financial Times poll expected a US recession in 2023 and the IMF said that a third of the global economy would be in recession along with the United States. And it wasn’t just economists and rap artist CardiB…we all figured it would happen in 2023.
  • What happened: Not only did the US avoid a recession, but the global economy managed better than expected on average. Few would have also predicted a banking crisis, a government debt showdown, or Artificial Intelligence mania to fill the year.
  • How markets performed: It was a banner year for stocks (S&P 500 up 26.3%), and everything did well in the 4th quarter rally.
  • Verdict: No doom and gloom. And even for the optimists, investment returns exceeded all forecasts.

It’s clear that relying on future forecasts would have been a dangerous investment strategy over the last four years. Fear and greed, the opposing sides that encompass much of human investing behavior, influenced investors to be overly cautious heading out of the covid crash and 2022 declines but also overly confident after 2021’s rally. Just imagine the difference in portfolio return had you heeded the collective advice of the prognosticators vs. sticking with a disciplined investment strategy!

Poor predictions aren’t just a post-covid phenomenon (2020 onward). A piece by the New York Times looked at a 24-year time period: 2000 through 2023. Rather than just giving a “verdict” as I did above, they measured the difference between the median forecast and actual returns of the S&P 500. For example, in 2022 a median forecasted rise of 3.9% was wrong by a margin of ~24% given the S&P 500’s 18% fall. So, how far “off” is Wall Street each year?

“…the median Wall Street forecast from 2000 through 2023 missed its target by an average 13.8 percentage points annually…”

-Jeff Sommer, “Wall St. loves to Guess, but Nobody Knows What the Market Will Do in 2024”, New York Times

Talk about a wide margin of error! If your advisor, YouTuber, or CNBC host is touting their market prediction abilities, the evidence is clear: they just got lucky and that will be very, very difficult to repeat consistently. Despite ever increasing and timely data, market transparency, and better understanding of investor behavior, reliably forecasting the stock market remains elusive. In that light, a humble and disciplined approach to investing is best.

At Boardwalk, we help clients pick a portfolio that’s right for them and that they can stick with during rough times – this strategic approach is the proven winner in investing over the long run. Tactical investing (zigging and zagging amongst assets) results in poor investment outcomes on average. Instead of trying to identify how the market is wrong, we seek to harness the enduring relationship between risk and return by emphasizing the risks the market has rewarded consistently and persistently for long-term investors. Then, we go the extra mile to make sure that the things we can control – like tax efficiency, rebalancing, or getting excess cash to work –remain the focus to enhance wealth creation over time.

Our clients share that they enjoy peace of mind knowing their low-cost, diversified portfolio is designed to meet their long-term goals and promote financial security. Without knowing what’s in store for 2024, we hope these truths can provide you with confidence for the years ahead, no matter what they bring.

Headline Concerns vs Market Returns

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John Morton

Senior Wealth Manager
Both stocks and bonds started off 2023 with a continuation of the strong rally that began late last year. Most would not have expected this result after recalling the headlines from this quarter, but it’s not uncommon for markets to climb a wall of worry. Since markets are forward looking, the positive longer-term outlook for assets means that investment prices tend to follow a cycle of reacting to negative news, recovering, and then climbing higher. Despite a pandemic, wars, historic inflation, and recession fears over the last three years, US stocks are still up over 18% per year during that time (as measured by the broad Russell 3000 index). At Boardwalk, we believe that better investing experiences happen by aligning individual goals and risk tolerances to a globally diversified portfolio, and then focusing on long-term financial wellbeing rather than short-term market volatility.

Banking Panic of 2023

Interest rates continued to move higher in early 2023 and the Federal Reserve (Fed) indicated that it was not planning to stop raising rates until price and wage inflation showed meaningful progress toward their targets. Inflation is trending downward, but side-effects of the Fed’s rapid rate increases were put on stark display when Silicon Valley Bank dramatically collapsed on Friday, March 10. This bank and a few others had severe liquidity and risk management issues but, unfortunately, the broader financial sector has also been negatively impacted. In short: the cost of attracting and keeping customer deposits has risen, hurting profitability, and the value of the debt instruments on these companies’ books have fallen.

The stress in the banking sector was promptly addressed by the U.S. Treasury, FDIC, and the Fed. They announced that uninsured depositors of failed banks would be made whole and by providing liquidity to banks via a special lending program. Importantly, these steps have quelled fears of contagion in the financial sector. For diversified investors, 2023’s banking crisis had a minimal impact on portfolios. Silicon Valley Bank represented just 0.04% of the Russell 3000 index at the end of February and the index was still up 7.18% for the quarter. As Nobel Prize laureate economist Harry Markowitz is attributed with saying: “Diversification is the only free lunch” in investing.

Fixed Income Change

Prior to 2022’s historic rise in rates, interest rates were very low for over a decade. It was uncertain when rates would increase, but odds were that rates were more likely to move up than further down. When interest rates rise, the value of bonds falls. For this reason, from its inception, Boardwalk had allocated 40% of fixed income investments to short-term bonds because they lose less value when rates rise. The remaining 60% of clients’ fixed income allocation was dedicated to intermediate term bonds, which earned higher yields in exchange for more risk of value fluctuation.

In 2022, intermediate term bonds were down 13% (Barclays Capital US Aggregate Bond Index) while short term bonds only lost 2.8% (FTSE World Gov. Bond Index 1-3 Years, hedged). Again, this happened because when rates rose, the underlying bonds within these indices lost value. The US 10-year Treasury Note was yielding about 1.5% to end 2021 and crossed above 4% in late 2022. Similarly, the US 2-year Treasury Note paid less than 1% in 2021 and hit a high of 5.03% on March 3, 2023. With the short-term bonds having accomplished their role in dampening the impact of a rise in rates, current intermediate-term yields at much more attractive levels, and considering the now lower likelihood of further rate increases, Boardwalk has made a strategic change to clients’ fixed income allocations. We have shifted half of clients’ short-term bonds into intermediate term bonds to lock in higher interest rates for a longer period of time.

Finally, to end on a bright note: while rising rates do hurt bond prices in the short-term, over a longer period, higher rates are actually beneficial for investors and result in higher long-term returns in a diversified portfolio. The graphic below compares the growth in wealth between a static low interest rate environment (1% interest rates in blue) versus the trajectory of a higher interest rate. The hypothetical investor is far better off in the long run with higher interest rates even with the jarring negative value adjustment that occurs.