January 2, 2025
Dear Clients:
Happy New Year!
After a robust 2023 stocks had another strong year in 2024.
In the displayed charts, the following exchange-traded fund data has been used as a proxy for index performance. “U.S. Bonds” by iShares Core U.S. Aggregate Bond ETF (Ticker: AGG). “U.S. Stocks” by
SPDR S&P 500 ETF (Ticker: SPY). “Foreign Stocks” by iShares MSCI EAFE ETF (Ticker: EFA). Source: Yahoo! Finance, FocusPoint Solutions calculations.
As is our tradition for this time of year, we will take a couple of pages to give you a blow-by-blow of the major asset classes in portfolios; what they have done, what we anticipate going forward, and how we have approached each. Whether you are a long-time client or a recent addition to our extended client family, we hope you will find this helpful.
Bonds
Bonds had a lackluster year with interest rate variability, driven by changing economic outlooks and expectations of Federal Reserve future actions, contributing. The yield on the 10-year Treasury note started the year at 3.88% and ended at 4.58% and rates vacillated throughout. Bond markets started the year perhaps a bit more optimistic than was warranted (with the benefit of hindsight) concerning slowing inflation and thus the actions of the Fed regarding interest rates cuts going forward. With inflation not dropping as rapidly as some thought, bonds prices edged lower, pushing yields higher.
Corporate bonds, with their higher yields, did a bit better than Treasuries and, as has been the case for the last few years, lower quality bonds outperformed higher quality, again due to their higher yields. The standout position in portfolio corporate bond holdings was once again floating rate bonds with their higher yields and less sensitivity to interest rate changes.
International bonds had a generally negative performance due to the rising dollar as those bonds are largely not denominated in dollars and so lost ground due to the currency exchange rates.
Stocks
In the U.S., growth stocks continued to dominate relative to value stocks as the high-flying group based in technology and communications (e.g., the ‘magnificent seven’) benefited from strong underlying revenue fundamentals and positive sentiment surrounding the future productivity-enhancing potential of artificial intelligence (AI).
This was one of those years where diversification away from large US growth stocks was not very helpful! Nonetheless we can feel good about the exposure we had to this asset class, realizing that weightings to small, medium and value stocks will prove their worth over time.
Foreign stocks underperformed U.S. stocks in 2024, partially due to the headwind posed by the stronger U.S. dollar for domestic investors, but also due to a mixed bag of economic conditions abroad coupled with post-election policy uncertainty (such as tariffs). Emerging markets ended up slightly outperforming developed markets during the year, with strength in a variety of countries, including China, India, and Taiwan.
Real Estate
Real estate investment trust securities (REITs) ended the year with modest gains. This part of portfolios has quite a bit of scope and invests in lots of different categories of real estate holdings. While industrial and self-storage sectors showed declines numerous other categories, such as data centers, malls, residential holdings and even office buildings showed robust gains.
As an asset class real estate, similar to value stocks, has attractive valuations which should bode well for the future.
Commodities
It was a good year for diversified commodity holdings with portfolio holdings up nicely at year end. Precious metals stole the show, agricultural commodities on average moved up and energy had more of a sideways movement. We include this commodity exposure in portfolios as it tends to be non-correlated with other asset classes over time and helps to hedge against inflation
Outlook
After two good years it is tempting to think that 2025 may be less robust. It is true that valuations, the price an investor pays for a dollar of earnings, are quite a bit above average for growth stocks like the “magnificent seven”. That said, other parts of the US stock market have valuations that are much more in line with the average of the last 30 years or so.
As always, the longer- and medium-term outlook for stocks depends on the direction of the economy. After the election, markets were cheered by the prospect of lower taxation and the possibility of less regulation, both of which have the potential to boost corporate profits. Since then, it almost seems that folks realize that the devil is in the details and that modestly elevated inflation may be stickier than we might have thought a few months previous.
We do think the economy, absent geo-political shocks or other unanticipated surprises, is poised to do well in 2025. The index of leading indicators is in the positive, unemployment is low, inflation is moderate, and corporate profits are projected to grow at a reasonable pace going forward.
While we all would have liked to have the entirety of our portfolio in those highest-flying companies over 2024 it is comforting to realize that our entire portfolio won’t rise and fall with the prospects of the tech sector or a handful of companies. Having broadly diversified portfolios, with sensible allocations to size classes and style weightings makes the most sense over the long term. As is consistent with our investment philosophy we have weighted your portfolio toward the most attractive components of each asset class based on valuation. This has proven to be a successful strategy over time, though sometimes frustrating as markets chase momentum, making expensive holdings even more expensive.
We wish the very best for you and your family in 2025, and we want to thank you for your trust in us and for your business.
It’s an honor to serve you.
Best regards,
Jeff Christian CFP, CRPC
The views and opinions expressed are for informational and educational purposes only as of the date of writing and may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal, investment, or tax advice. The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. All investments carry a certain degree of risk, and there is no assurance that an investment will provide positive performance over any period of time. The information and data contained herein were obtained from sources we believe to be reliable, but it has not been independently verified.
Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
Past performance is no guarantee of future results.
Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes.
Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc. Member FINRA/SIPC. Armor Financial Group and Silver Oak Securities, Inc. are separate entities.