First, HAPPY NEW YEAR!
2024 finished with US stocks leading the pack of all major asset classes – just as they did in 2023. The S&P 500 posted a stellar 25% return for the year, nearly matching its 26.3% return in 2023. US mid-cap and small-cap stocks followed right behind the S&P 500, returning 15.3% and 11.5%, respectively, in 2024. In 2023, US mid-cap and small-cap stocks likewise finished right behind the #1 performer S&P 500, returning 17.2% and 16.9%, respectively, for the year.
As was also the case in 2023, the S&P 500’s return in 2024 was driven primarily by just seven stocks, aka the “Magnificent 7” or “Mag 7”. As a group, the Magnificent 7 rose by a whopping 64% in 2024. In past missives, we’ve discussed the increasing concentration of returns within the S&P 500, making it exceedingly difficult to outperform the index by not owning these seven stocks. Although the S&P 500 was up 25% in 2024, the equal-weight S&P 500 rose by just 12.8% for the year. The 12.2% difference in returns between these two indices nearly matches the 12.5% return difference in 2023, as shown in the following table:
Since the inception of the equal-weighted S&P 500 ETF (ticker: RSP) in 2003, this 12.2% return difference ranks second to the 12.5% difference registered in 2023. And importantly, until 2023-2024, there has never been a period where the cap-weighted S&P 500 outperformed the equal-weight S&P 500 by very wide margins two consecutive years. The point being that following the huge 12.5% margin of 2023, it was unlikely for the S&P 500 to post another extreme difference in outperformance vs. the equal-weight S&P 500, but that’s exactly what happened.
Can we expect the same in 2025, that the Magnificent 7 will once again have a stellar year, driving the S&P 500 to another extreme outperformance margin over the equal-weight S&P 500? Will it become three consecutive years??
Post-COVID, to say we’re in uncharted waters or unprecedented times has almost become hackneyed. So of course anything is possible.
That said we would venture to say that a third consecutive year of these seven stocks collectively trouncing all others is very unlikely. At year-end, the Mag 7 stocks amounted to a 34% weight in the S&P 500, one of the highest levels of concentration for the index on record. Historically, such periods of extreme concentration within the S&P 500 have been outliers, with better relative returns eventually coming from the rest of the index members.
What else do we expect for 2025? As I’ve written in past 4Q investment letters:
With the advent of a new year, we can expect to see the usual deluge of market outlooks and annual forecasts from Wall Street strategists. And at this time I always recall more than one such strategist privately confessing that he/she hated putting together these outlooks, admitting it was more or less educated guesswork trying to predict what would happen during the year, but that they were pressured to do so because clients expected it. In fact, a good argument can be made that it’s easier to predict what will happen either next week or in ten years than it is to forecast what will occur in the next twelve months.
With that caveat in mind, we will offer what we anticipate could happen this year. As a reminder, in our December monthly letter, I showed the following chart:
The green line depicts how the S&P 500 has typically performed during a new, non-incumbent president’s first term (dating back to 1936). As you can see, following a rally after the election (which we’ve already experienced), equities tend to then undergo a few months of consolidation before heading south in the June-September period. Of course this may not happen, but history does have a way of repeating….
In addition, this next chart puts into perspective the last two years of 20+% returns for the S&P 500:
The 2023-2024 return for the S&P 500 (as represented by the orange line) has been one of the best two-year returns for the index since 1928, exceeding the top decile by a fairly wide margin. Given the tendency of mean reversion, with outliers in time returning or regressing back to the average, we doubt that the orange line in the chart will continue to soar and exceed the top decile. In fact, since 1928, the S&P 500 gaining more than 20% in three consecutive years has occurred only once, during 1995-1998, when astonishingly the S&P 500 posted better than 20% returns four years in a row. But that’s it! In 97 years, it has only happened once. And after excluding that exceptional time period in the 1990s, the S&P 500 has experienced two consecutive years of above-20% returns just three times – in 1935-1936, 1954-1955 and 2023-2024. In other words, a repeat of 2023 and 2024 is highly unlikely.
Much of what will affect stocks in 2025 will undoubtedly involve interest rate levels. Donald Trump has promised to address immigration problems with mass deportations, institute new tariffs, and renew the 2017 tax cuts that were to expire, potentially further worsening the federal deficit. These proposed policies have been a growing concern of fixed income investors as they’re worried inflation will pick-up again and the Fed will put a halt to cutting rates. In response to these concerns, the 10-year Treasury yield has risen from 3.75% on October 1st to 4.6% by year-end.
What’s perhaps being overlooked is Trump’s policies could result in the economy entering a recession, which would conceivably prompt the Fed to cut rates, thus benefiting bond holders. At this point, we believe it’s premature to act aggressively one way or the other and for now we’ll continue to monitor our many indicators to gain a better sense of how best to navigate what will very likely be a volatile year.
With respect to client portfolios, we remain defensively positioned as we are always being as mindful and vigilant about preserving capital as we are about striving to achieve significant relative performance gains.
If you have any questions, please feel free to call or email.
The entire team at Measured Wealth wishes to thank you for entrusting us to deliver on your financial goals.
Edward Miller, CFA, CMT
Chief Investment Officer
Measured Wealth Private Client Group
Important Disclosures
Historical data is not a guarantee that any of the events described will occur or that any strategy will be successful. Past performance is not indicative of future results.
Returns citied above are from various sources including Bloomberg, Russell Associates, S&P Dow Jones, MSCI Inc., The St. Louis Federal Reserve and Y-Charts, Inc. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investing involves risks, including possible loss of principal. Please consider the investment objectives, risks, charges, and expenses of any security carefully before investing.
In order to provide effective management of your account, it is important that we have current information regarding your financial status and circumstances. Please contact us in writing at 303 Islington Street, Portsmouth, NH 03801 if you have any changes in your financial situation or investment objectives, and whether you wish to impose any reasonable restrictions on the management of the account or reasonably modify existing restrictions.
Measured Wealth Private Client Group, LLC is an investment adviser located in Portsmouth, New Hampshire. Measured Wealth Private Client Group, LLC is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Measured Wealth Private Client Group, LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration.
This publication is provided to clients and prospective clients of Measured Wealth Private Client Group, LLC for general informational and educational purposes only. It does not: (i) consider any person's individual needs, objectives, or circumstances; (ii) contain a recommendation, offer, or solicitation to buy or sell securities, or to enter into an agreement for investment advisory services; or (iii) constitute investment advice on which any person should or may rely. Past performance is no indication of future investment results. This publication is based on information obtained from third parties. While Measured Wealth Private Client Group, LLC seeks information from sources it believes to be reliable, Measured Wealth Private Client Group, LLC has not verified, and cannot guarantee the accuracy, timeliness, or completeness, of the third-party information used in preparing this publication. The third-party information and this publication are provided on an “as is” basis without warranty.
This publication may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “should,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio's operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of Measured Wealth Private Client Group, LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.