Fourth Quarter Commentary
In the fourth quarter of 2024, U.S. equity performance remained positive and concentrated, particularly in large caps with the cap weighted indices outperforming their equal weighted counterparts. The performance was largely driven by two factors: the election’s positive impact on investor sentiment and the “Magnificent 7”, which posted gains of over 15% on the quarter and more than 60% for the year. Relative to large cap equities which posted gains of 2.41% for the quarter, their small and mid-cap counterparts lagged, posting positive returns of 0.33% and 0.62%, respectively.
Both international developed and emerging markets equities struggled on the back of a strong U.S. dollar and the exceptional performance of U.S. technology stocks. The MSCI EAFE index posted a negative return of (8.11%) for the quarter, while the MSCI EM index lost (8.01%).
In the fourth quarter, the Federal Reserve cut interest rates twice by 25 basis points (bps), bringing the target federal funds range to 4.25%–4.50% as risks to employment and inflation appeared balanced. At the December FOMC meeting, Chair Powell noted that economic activity continued to expand at a solid pace, inflation remained elevated, labor market conditions had generally eased, and unemployment remained relatively low. At the Fed’s December FOMC meeting, inflation expectations were revised upward, while the unemployment rate forecast was adjusted lower compared to the September FOMC meeting. Due to higher inflation expectations, the Federal Reserve indicated fewer rate cuts are anticipated in 2025.
During the quarter, the yield curve normalized relative to the prior quarter, with front-end rates declining and long-term rates rising, reflecting the Fed’s rate cuts and higher inflation expectations. Investment-grade (IG) and high-yield (HY) credit spreads tightened over the quarter, remaining well below their long-term median levels.
Indicators used to measure U.S. economic activity, such as the ISM Manufacturing and Non-Manufacturing indexes, continued to show mixed signals of contractionary and expansionary activity, respectively, further complicating the inflation and interest rate outlook for the Fed.
To view the third quarter reports, click on the links below: