Post-Election Stock Rally Fades and Bond Yields Rise to End 2024
HIGHLIGHTS:
- Stocks: It was a weak close in December to end the year, but overall, 2024 was a great year for stock market returns. Small caps and value stocks in particular struggled in December in what turned out to be another year when large-cap growth dominated.
- Bonds: Yields were volatile in 2024, and that theme continued in December. The 10-year U.S. Treasury yield ended November at 4.18% and it rose to 4.58% by year’s end. Overall, it was a rather muted and volatile year for bond returns.
- U.S. Economy: The U.S. saw stronger growth than anticipated in 2024. The final reading of Q4 GDP jumped to 3.1%. The labor market was solid at a 4.2% unemployment rate and consumers remained resilient.
- Federal Reserve: The Fed cut rates in December bringing the Fed Funds target rate down a full 1.0% since September. However, 2025 looks to be a much slower rate cut environment with only 2 quarter-point cuts expected by December 2025. (Per CME Fed-Watch tool as of 12/30/24.)
EQUITY MARKETS
The “Santa Claus” rally failed to materialize this year, and stocks slumped to close out 2024. Large-cap growth was a bright spot with modest gains for the month, and they showed clear leadership (once again) for the entire year. Overall, it was a year of solid returns and new all-time highs for the major stock market indices in 2024 following a year of strong returns in 2023. See Table 1 for December 2024, Q4 2024, and calendar year 2024 results.
Table 1
| Index | Dec-24 | YTD | 2024 |
| S&P 500 | -2.38% | 2.41% | 25.02% |
| S&P 500 Equal Weight | -6.26% | -1.87% | 13.01% |
| DJIA | -5.13% | 0.93% | 14.99% |
| Russell 3000 | -3.06% | 2.63% | 23.81% |
| NASDAQ Comp. | 0.55% | 6.35% | 29.57% |
| Russell 2000 | -8.26% | 0.33% | 11.54% |
| MSCI ACWI ex U.S. | -1.94% | -7.60% | 5.53% |
| MSCI Emerging Mkts Net | -0.14% | -8.01% | 7.50% |
The stock market rally paused in December to close out a strong year. Furthermore, the broadening of the market, which was seen in the third quarter, faded to end the year as well. Small caps had led the post-election charge, boosted to a degree by the potential for less regulation and higher tariff expectations, which may benefit smaller, domestic-focused companies. Much of those gains were given back in December as that rally faded and large-cap growth resumed its market leadership. The difference in returns between the market-cap and equal-weighted S&P 500 indices exemplifies this return to large-cap growth leadership. International stocks continued to slump post-election (likely due in part to the same tariff talk and the strengthening dollar) as both developed and emerging market equities declined. International stocks underperformed U.S. stocks in 2024.
Fixed Income
The rise in rates that started in the fourth quarter continued in December with a final and sharp move higher. The 10-year U.S. Treasury yield rose 50 basis points from 4.18% at the end of November to 4.58% by the end of the year. This increase in rates put pressure on bond returns in what was a tough final month and quarter for bonds. For the full year, the 10-year U.S. Treasury yield increased 70 basis points from 3.88%. See Table 2 for fixed income index returns for December 2024, Q4 2024, and calendar year 2024.
Table 2
| Index | Dec-24 | Q4 2024 | 2024 |
| Bloomberg U.S. Agg | -1.64% | -3.06% | 1.25% |
| Bloomberg U.S. Credit | -1.89% | -3.04% | 2.03% |
| Bloomberg U.S. High Yld | -0.43% | 0.17% | 8.19% |
| Bloomberg Muni | -1.46% | -1.22% | 1.05% |
| Bloomberg 30-year U.S. TSY | -6.08% | -9.38% | -8.09% |
| Bloomberg U.S. TSY | -1.54% | -3.14% | 0.58% |
Modest and volatile returns were the themes for the bond market in 2024 outside of high-yield bonds. The more rate sensitive sectors (like 30-year U.S. Treasuries) struggled the most in a month, quarter and year when rates increased. High-yield bonds have been steadier this year as they often follow what is happening with stocks, and they have clearly been the leaders in 2024 for the bond market. (Our tactical fixed income strategy has been allocated to high-yield bonds since early November 2023 and we continue to maintain that exposure as of this writing.) At the start of the year, we said we thought the 10-year U.S. Treasury yield would be in a range between 3.25% and 4.5% in 2024 and we closed the year just above the top end of that range. We believe Fed rate cuts will push interest rates lower, with the most dramatic move being in shorter maturities and longer-term bonds might be more range-bound and volatile moving into 2025.
We maintain our long-standing position favoring credit versus pure rate exposure in this interest rate environment and that served us well in 2024. We also believe the role bonds play in a portfolio, to provide stable cash flow and to help offset the volatility of stocks in the long run, has not changed, despite recent elevated volatility. Furthermore, we believe that bond yields remain attractive, and we are seeing some of the strongest bond yields in years, especially with the recent increase in rates. In our opinion, having an active bond management approach makes sense in these volatile times.
Economic Data Highlights and Outlook
Jobs: The U.S. economy showed ongoing strength to close out 2024 based on data released in December. The always important job market report for November showed a solid bounce back in payroll gains compared to the strike and hurricane interrupted additions in October. In November, payrolls increased by 227,000, ahead of the expected 220,000 reading. However, the unemployment rate did tick higher to 4.2% from the expected and prior month’s level of 4.1%.
Overall, the job market remains healthy with a low unemployment rate and plentiful job openings. Consumer spending accounts for about 70% of the U.S. economy, so monitoring job market data is critical as it has a direct impact on consumer spending activity. One data point we are monitoring is job openings compared to the unemployment level – there are still more jobs available than people seeking jobs, but this ratio has narrowed over the last couple of years. Chart 1 shows the number of unemployed compared to the number of job openings in the U.S.
Chart 1
Inflation: Inflation data was mixed in November. The producer price index (PPI) showed a higher annual increase on a headline and core basis than expected. The headline reading was higher than the prior month’s annual increase and the core reading matched the prior month’s annual gain. The consumer price index (CPI) was in line with expectations on a headline and core basis with the headline reading modestly higher with its annual gain in November compared to October. Finally, the annual gains for the personal consumption expenditures (PCE) price index, both headline and core (the preferred inflation measure of the Fed), showed lower annual gains in November than expected. The core reading matched the prior month’s annual gain while the headline reading was modestly higher for the year through November than it was through October. (For specific data, please refer to the end of this report.)
Overall, we believe inflation continues to make progress toward the Fed’s ultimate stated goal of 2% for the core PCE price index reading. We expect this path to be bumpy, but believe the trend continues to show progress being made on the inflation front. Fed Chairman Powell has said he will continue to lead the Fed until his term expires in May 2026, so he will continue to be in charge of monetary policy decisions at the Fed over the next year and a half. Currently, the market is pricing in only 2 rate cuts in 2025. While some inflation concerns linger as we change to a new administration, slower and fewer rate cuts should ease some of that fear. Chart 2 shows the core and headline PCE price index readings. Remember, the core PCE price reading is the inflation rate that the Fed targets.
Chart 2
GDP: Although backward-looking, there was a nice surprise on the GDP growth front with the final reading of Q3 GDP released in December. Expectations were calling for the same reading of 2.8% annualized GDP growth for the third and final reading as the second reading had reported. However, there was a solid increase in the final reading to a 3.1% annualized growth rate during the third quarter. Overall, GDP growth has been somewhat stronger than we expected in 2024 with the last 2 quarters right around the 3% annualized growth level. The Atlanta Fed GDP Now estimate for fourth quarter growth stands at 3.1% (as of 12/24/24), indicating a potentially solid end to the year. We continue to believe that the U.S. economy will move toward its long-term growth potential of just above 2% as we move forward, but 2024 GDP growth looks like it might be slightly better than this expectation. Chart 3 shows GDP readings since the first quarter of 2021.
Chart 3
Other Economic Data Points: The ISM indices were mixed in November. The ISM Manufacturing Index was better than expected at 48.4 compared to expectations of 47.5, but it remains below the expansion/contraction line of 50. The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, dropped to 52.1 compared to expectations of 55.7. Clearly, this was a disappointing reading, but it still remains in the growth zone above 50.
Housing continues to face the headwind of higher mortgage rates. For November, it was a bit of a mixed bag for housing data. Housing starts and new home sales were both lower than expected, but preliminary building permits and existing home sales were both stronger than anticipated. There is still a lack of inventory in the U.S. when it comes to housing, but higher mortgage rates will likely be a negative headwind for most home purchasers as it adds to their housing costs moving into 2025.
Retail sales (ex. auto and gas) at a 0.2% monthly gain in November were behind expectations of 0.4% growth. The preliminary University of Michigan Sentiment reading for December improved to 74.0 compared to the prior reading of 71.8 and expectations of 73.2. In a nice surprise, the Conference Board’s Leading Index broke an 8-month losing streak by increasing 0.3% when it was expected to decline by -0.1%. Clearly, one month is not a trend, but it was good to see this reading show a positive monthly gain even though it has not been a good predictor of the U.S. economy in recent years.
The stock market came back down to earth in December after a strong rally following the definitive election results in early November. From a market perspective, there is an overall sense of a more business- and regulation-friendly environment coming with the new administration, but there is also some concern on inflation progress if labor costs go higher due to deportations and prices in general rise if tariffs are enacted. This might help explain a bit of the dichotomy in the market over the last two months with stocks rallying following the election, but bonds struggling as rates moved higher as investors brace for what could be elevated rates for longer. We will monitor what policies are implemented and how the market and economy react to those policies in 2025.
Focusing on the market fundamentals, we are seeing an economy that is growing somewhat stronger than expected, a Fed that is cutting interest rates (albeit likely more slowly than previously thought), a fairly reasonably valued stock market and S&P 500 companies that are expected to grow their earnings by approximately the mid-teens in 2025. We like that fundamental backdrop as we move into 2025. As always, we believe it is imperative for investors to stay focused on their long-term goals and not let short-term swings in the market derail them from their longer-term objectives.
Clark Capital’s Top-Down, Quantitative Strategies
As we head into the New Year, the market is oversold and credit has remained firm, even during the recent selloff in risk assets. Our credit-based risk management models have remained fully risk-on now for over a year.
Clark Capital’s Bottom-Up, Fundamental Strategies
As strong long-term returns are typically derived from low valuation starting points and vice versa, we will continue to seek out what we believe to be undervalued, antifragile companies with improving business momentum while maintaining a core position in what we think are the highest quality, structurally superior companies until their business models are materially threatened.
ECONOMIC DATA
| Event | Period | Estimate | Actual | Prior | Revised |
| ISM Manufacturing | Nov | 47.5 | 48.4 | 46.5 | — |
| ISM Services Index | Nov | 55.7 | 52.1 | 56.0 | — |
| Change in Nonfarm Payrolls | Nov | 220k | 227k | 12k | 36k |
| Unemployment Rate | Nov | 4.1% | 4.2% | 4.1% | — |
| Average Hourly Earnings YoY | Nov | 3.9% | 4.0% | 4.0% | — |
| JOLTS Job Openings | Oct | 7519k | 7744k | 7443k | 7372k |
| PPI Final Demand MoM | Nov | 0.2% | 0.4% | 0.2% | 0.3% |
| PPI Final Demand YoY | Nov | 2.6% | 3.0% | 2.4% | 2.6% |
| PPI Ex Food and Energy MoM | Nov | 0.2% | 0.2% | 0.3% | — |
| PPI Ex Food and Energy YoY | Nov | 3.2% | 3.4% | 3.1% | 3.4% |
| CPI MoM | Nov | 0.3% | 0.3% | 0.2% | — |
| CPI YoY | Nov | 2.7% | 2.7% | 2.6% | — |
| CPI Ex Food and Energy MoM | Nov | 0.3% | 0.3% | 0.3% | — |
| CPI Ex Food and Energy YoY | Nov | 3.3% | 3.3% | 3.3% | — |
| Retail Sales Ex Auto and Gas | Nov | 0.4% | 0.2% | 0.1% | 0.2% |
| Industrial Production MoM | Nov | 0.3% | -0.1% | -0.3% | -0.4% |
| Building Permits | Nov P | 1430k | 1505k | 1416k | 1419k |
| Housing Starts | Nov | 1345k | 1289k | 1311k | 1312k |
| New Home Sales | Nov | 669k | 664k | 610k | 627k |
| Existing Home Sales | Nov | 4.09m | 4.15m | 3.96m | — |
| Leading Index | Nov | -0.1% | 0.3% | -0.4% | — |
| Durable Goods Orders | Nov P | -0.3% | -1.10% | 0.3% | 0.8% |
| GDP Annualized QoQ | 3Q T | 2.8% | 3.1% | 2.8% | — |
| U. of Mich. Sentiment | Dec P | 73.2 | 74.0 | 71.8 | — |
| Personal Income | Nov | 0.4% | 0.3% | 0.6% | 0.7% |
| Personal Spending | Nov | 0.5% | 0.4% | 0.4% | 0.3% |
| S&P CoreLogic CS 20-City YoY NSA | Sept | 4.7% | 4.57% | 5.20% | 5.21% |
Source: Bloomberg: T=Third, P=Preliminary
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