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FORTH QUARTER 2024

Fourth Quarter Review: Investor optimism around the U.S. elections in November faded into year-end and the equity indices ultimately provided mixed returns for the quarter. The Standard and Poor’s 500 gained 2.4% thanks to the largest companies in the Index. Excluding the seven largest stocks (the Mag7) the S&P 500 declined 0.5%. The Russell 2000 Small Cap benchmark returned 0.2% and the MSCI World ex-US International Index declined 7.5% in U.S. dollar terms. Gold fell 0.4% and the Bloomberg Commodity Index slipped 0.5%. The Bloomberg Bond Index retreated 3.1% as rates rose across the yield curve despite Federal Reserve rate cuts. Our most important review of the fourth quarter is the exciting news that Andrew and Rachel Roberge welcomed their first child, Roman, into the world on October 14th. Mother and baby are doing great, and Andrew shows up every morning well rested!

The Year in Review: For 2024, the largest technology-related companies in the United States again dominated market returns and propelled the S&P 500 Index to a gain of 25.0%. Away from the influence of these mega cap companies that dominated the cap-weighted index, returns remained very positive but not nearly as outstanding. For example, the S&P 500 Equal Weight Index, which owns the same 500 companies, returned 12.8% or almost exactly one-half of the return of its cap-weighted brother. The Russell 2000 Index small cap benchmark gained 11.4% and international markets, as captured by the MSCI World ex-U.S. Index gained 5.5% as returns were negatively impacted by the strengthening U.S. dollar. Away from the equity markets, gold was highly competitive and rallied 27.2%, the Bloomberg Commodity Index rose 5.4% and the Bloomberg Bond returned 1.3%. The booming technology sector has elevated the S&P 500 2024 performance into some interesting historical parallels. The Index has now posted the first back-to-back 20%+ returns since 1998-1999. Outperformance versus the Russell 2000 was the greatest since 1998. With the growth component of the Index returning 35.8% and the value component returning 12.3% for the year, the two-year growth over value out-performance surpassed 1998-1999 to become the largest in history (Bloomberg).

Positioning and Strategy: Our diversified portfolios have been well positioned with a long-standing overweight to large cap U.S. equities versus other categories and conservative positioning in fixed income relative to the Bloomberg Aggregate Bond Index, which has lost 7% over the past three years. Absolute returns have been very solid, but portfolio diversification has diluted returns versus the highly concentrated S&P 500 which has five companies comprising 30% of the Index and 26 companies covering 50%. You may recall that the year 2000 brought a brutal technology bust and multi-year run of outperformance by other sectors and styles such as large and small value. Today’s relative valuations would argue that conditions are ripe for the same rotation, however, the tech bust of 2000 is likely not an apt comparison. Today’s highly valued companies are riding a wave of artificial intelligence advances and hype, but they are highly profitable and generating massive amounts of free cash flow. Current broad market valuations portend poor longer-term returns based upon historical data. The current market momentum, 57 days with new highs on the S&P 500 last year, is unsustainable, and the best case would be for the relative performance to cool through a rotation rather than a sharp correction that takes the speculative fervor out of the market. Small-caps and mid-caps appear inexpensive on a relative basis, and it is our view they should benefit from what could be increased merger and acquisition activity in a more lenient anti-trust regulatory environment. Therefore, we are investing new funds into those categories as well as emerging markets, and quality companies that have a moat or long-term competitive stability. Intermediate, high-quality bonds are now investable for clients who require liquidity and are receiving regular portfolio distributions. Our mantra remains diversification, quality, and a margin of safety.

The Setup for 2025: The economy continues to appear to be on solid footing. The incoming administration’s fiscal policies, particularly around tariffs, may capture more attention than monetary policy and the Federal Reserve. Starting in September, the Federal Reserve reduced their overnight Fed Funds target by 1% through three rate cuts to the range of 4.25% – 4.50%. However, longer term interest rates have risen by over 1% since the Fed started easing, indicating the markets’ concerns about the Fed’s policy. The Fed is on hold. Corporate earnings will thus need to keep the market elevated, and investors will need to be reassured that the hundreds of billions of dollars in A.I. capital investment is being put to productive use.