Tudor January 2025 Commentary

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Market Snapshot and Insights


January 2025

Markets in 2024

The Big Question Should Always Be: Is it Sustainable?


After two years of double-digit gains, investors are financially flush and chock full of confidence. Household net worth is up substantially and at record levels. Not a small number: $160 trillion. (Source: St. Louis Fed)


Most asset classes did well in 2024, even as most performance horsepower was concentrated in a small segment of of the investment universe: large growth stocks. As we note below, investors have been piling into the same popular stocks trumpeted daily in the media.


Back to Back Gains: It's interesting to note that 2023 and 2024 produced a level of double digit gains not experienced since 1997 and 1998.(1) The last two years produced recovery gains from 2022 COVID/interest rate shock declines experienced just twenty-four months ago and apparently quickly forgotten.


The Final Month and Quarter of the Year


December Market: We would note that post-election euphoria gains largely evaporated in December. With valuations high relative to earnings, the short-term pullback undid some speculation. The Dow had a challenging December: down 5.3% while the tech heavy S&P 500 declined by 2.5%.(1) We have further commentary below noting the huge performance variances among the Dow, S&P 500 and several other indices.


2024 4th Quarter: Most market gains in 2024 occurred in the first three quarters of the year. By September, we would argue that it made sense to raise cash from selected overvalued securities. Our title above asks the question: Is it sustainable? The pace of gains made early in the year were not.


Maybe difficult to fathom, but even with a frenzy of market activity in the final quarter of 2024, the S&P 500 was up a small 1.9% in the fourth quarter, and the Dow up a mere .5%.(1) There was no need to rush into markets in that 2024 final quarter as markets digested early 2024 gains. We would also suggest that the popular large tech segment that has driven the S&P 500 and NASDAQ this past year is ripe for disruption in 2025.


What Were the Standouts in 2024?


Something Missing: 2024 was one of the few years in market history that didn't experience a bona fide correction (10% or more decline).(1) On the surface, the absence of market pullbacks might seem ideal. But markets without correction or pullback for a period of time have consequence. They sow seeds of speculation. The pain of corrections is a remedy for speculation. No corrections = greater speculation.


Something Crowded: Higher performance in 2024 was contingent on owning a tiny slice of the market. As we've noted, investors in 2024 crowded into the same securities/same sectors. Think technology, artificial intelligence, crypto, etc. There were concentrated bets on just a handful of companies. The Magnificent Seven companies dominated 35% of the S&P 500's composition as of midyear 2024.(3)


Something Concerning: The level of concentration in the few securities just noted suggests that many investors' portfolios are unbalanced. For reference, the concentration of the top seven companies in the S&P 500 in the tech boom (dotcom bubble) of the early 2000's (remembered by those with long investment experience) was 22% of the index. This compares to the 35% concentration in the index currently. Those with long memories (or those with google close at hand) will note that the consequence of this bubble-like period was problematic in the years 2000, 2001 and 2002. The tech-heavy NASDAQ saw three years of double-digit declines resulting in a cumulative 75% loss in that index.(4)


Bank Savers Falling Behind


Markets Historically Have Always Far Surpassed Bank Returns. The "Safety" of Bank Returns Often Creates a False Sense of Financial Safety. This Has Been More Pronounced in Recent History.



From 2007 to 2024, each $100,000 in bank savings fell behind S&P 500 returns by:


$392,560


Source: First Trust , Markets in Perspective May 2024, * Before taxes: savings taxed at a higher rate


Household Net Worth has Exploded Since 2020




Household Net Worth up a Remarkable 50% Over Five Years


Since 2020, consumers/households are feeling the glow of household asset growth. Think home valuations, 401(k)'s, IRA's and non-retirement investment accounts. The St. Louis Fed survey through the 3rd quarter of 2024 suggests that household net worth reached an astounding $160 trillion.


Home prices and stocks did the heavy lifting to increase net worth by 50% over this short five year period.


Source: St. Louis Fed Household Survey, 3rd Quarter 2024

Range of Outcomes in 2024

Notably Wide Performance of Market Segments in 2024

This, Too, is Unsustainable


Market index outcomes were exceptionally wide in 2024. Good quality securities lagged far behind racy tech names. We would suggest that this trend is unsustainable. Note the wide range of outcomes in 2024:

S&P 500

Dow Jones 30

U.S. Small Stocks

World Stocks

Bonds

25.02%

14.99%

11.01%

3.29%

1.82%

Source for return information: S&P Dow Jones Indices and (1) below


Changing risk lanes/chasing performance is almost always detrimental. Vanguard tracks investor risk appetite and there are indications that investors increased their risk levels in 2023/2024.(4) Investors chasing returns have a history of suffering in declines when popular sectors implode.

86% of the Time


Markets Don't Provide CD-Like Returns


From 1926-2023, S&P 500 Annual Returns Fell Outside the 0-10% Range

86% of the Time.(3)


We often hear the common notion that markets have historically provided 10% long-term average returns, but markets don't work like CD's. It might be difficult to grasp, but most market returns fall outside the range of 0-10% annual returns. Nearly 9 out of 10 years, returns fall outside that single digit range.


It sets up reasonable expectations if investors recognize that the bell curve of annual market returns is significantly wide.

Why Markets Rise Over Time


Dow in the Year 1900: 66

Dow in the Year 2000: 11,497

Growth Multiple: 175 Times


Productivity Gains


Average Worker's Output 1900: $12,700

Average Worker's Output 2000: $76,000


Productivity Increase:

6 Times


Source: Buffett: 2016 Letter, World Bank

Consider This...

“Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.”

― Morgan Housel, The Psychology of Money

Dow Industrial Index


March 23, 2020 - 18,214 (2020 low)


December 31, 2024 - 42,544 (1)


134% Gain

You Know Someone That Can Benefit

from Good Advice

Enjoy the week...

Grant S. Donaldson, MS, CPA



(1) yahoofinance.com, S&P500 historical data, Barrons, Morningstar.com, Vanguard benchmark returns

(2) Information available upon request

(3) https://www.visualcapitalist.com/sp/charted-magnificent-7-market-cap-as-a-share-of-the-sp-500

(4) https://www.oaktreecapital.com/insights/memo/on-bubble-watch

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