2024 was another strong year for investors, highlighted by the S&P 500's impressive 24% return that few expected at the start of the year. Equity returns were led by large-cap growth stocks, which surged 33%. The market's performance was notably concentrated: besides U.S. large-cap growth, only gold, among major asset classes, managed to outperform the S&P 500, gaining 27%. Even as bitcoin ETFs gained increasing focus, gold's strong performance demonstrated its enduring demand as a risk hedge and store of value. While AI driven tech stocks were exceptional, other equities appreciated as value, small cap, and local currency international stocks also saw double digit returns (which were much lower in U.S. dollar terms).

Cash had another good year, offering risk-free yields above 5% and outperforming most fixed-income investments. U.S. aggregate bonds managed to stay positive with a small gain of 1%, as high starting yields helped offset the impact of rising yields. International bonds, however, faced headwinds from a strengthening U.S. dollar, which appreciated 8% during the year.

2024 Total Return (%)

Source: ETF return data from Bloomberg

Year-end predictions are predictably wrong, so treat them with caution.  2024 didn’t happen as pundits predicted: stock markets did not fall; there was no recession; real estate did not decline; and many of the Federal Reserve rate cuts did not happen (even those forecast with “100% probability”). While surprises are to be expected, markets work hard to include any available information into the prices of securities to keep them in line with risk-discounted future growth expectations. Therefore, many of the sensible predictions are already priced into markets, and little is to be gained, on average, by trading on a market outlook. A notable example was the extensive discussion “locking in” high rates before the Fed began a cycle of rate cuts, yet such investors lost out on average, as intermediate and long-term yields are higher today than they were at the start of 2024.

Actual vs predicted rates at year start: USD SOFR swap curves

Source: Bloomberg Forward Curve Analysis. The chart displays three USD SOFR swap curves: the spot rate as of 1/3/2024, the 1-year forward swap rate as of 1/3/2024, and the spot rate as of 1/3/2025.

The predictions that are more reliable tend to fall into a few common-sense categories: predictable unpredictability, reduction of extremes, and safe forecasts.

·       Outcomes may be probable based on known patterns of variability: one can reasonably expect that volatility will spike at some point this year; or there will be a market decline at some point this year.

·       The future is often less extreme than dramatic predictions, often exaggerated to draw attention to policy changes: high tariffs may not be as severe as initially announced; or inflation may not fall as low (this is akin to the statistical technique of shrinking the impact of outliers, if the extreme proclamations are viewed as data);

·       Some sturdy or safe predictions may materialize as predicted: already popular tax cuts are likely to be extended; U.S. government debt will most likely continue to rise; and a robust economy is unlikely to abruptly fall into recession in the next quarter. However, even very safe predictions can be subject to surprises!

Takeaways:

·       Many past predictions have been unhelpful for investors.

·       Predictions that are the most likely to be realized are also the most priced in to securities.