Q4 2024: PFM Quarterly Commentary
Entering a new year often evokes a profound sense of renewal accompanied by the promise of fresh starts, as the turn of the calendar symbolizes an opportunity to shed the burdens of the past. This moment is traditionally filled with optimism, when individuals and institutions alike are encouraged to cast off old habits, regrets, and challenges, embracing the potential for change and new beginnings. However, as we step into this new year together, the sense of déjà vu in the investment markets is palpable. The same themes, patterns, and difficulties that marked the closing of the previous year persist, seemingly with no end in sight. High inflation continues to erode purchasing power, a small number of companies disproportionately drive stock market returns, and the Federal Reserve appears to be in a reactive rather than proactive stance, struggling to navigate its policies through a landscape of lagged economic data. These issues have been recurrent topics in our quarterly letter, highlighting the irony in bringing up the notion of new beginnings.
The trajectory of asset prices throughout the final quarter of 2024 was heavily dictated by the actions of the Federal Reserve. Readers will recall that the third quarter concluded with our Central Bank implementing a significant 50 basis point cut to interest rates, thus ending what has been characterized as the most aggressive monetary tightening cycle in forty years. This move was met with scrutiny because such a substantial cut is typically reserved for emergency situations, not for times marked by low unemployment, persistently high inflation, robust GDP growth, and stock prices at all-time highs. Many questioned the wisdom of this unusual policy action, speculating whether it was misguided, potentially politically motivated, or perhaps a preemptive strike against an economic downturn only the Fed could foresee. Fed Chair Jerome Powell’s lack of a clear defense for this decision at the time led to a noticeable negative reaction in the markets.
Let’s fast forward to the November and December Federal Reserve meetings, where the Fed opted for two additional rate cuts, each by 25 basis points. Much like the September rate cut, these decisions were met with market declines, contrary to the usual market uplift seen when monetary policy is loosened. This unusual market reaction was most starkly observed in the bond market, where the yield on the U.S. 10-year Treasury bond rose from 3.65% the day before the first cut in mid-September to 4.63% by late December after the Fed’s third rate cut.[i] Such a response to rate reductions is highly unusual and unprecedented since the Federal Reserve was established in 1913, signaling a clear market disagreement with the Fed’s strategy.
Clearly, markets were at odds with the Fed’s actions and it is easy to see why. Since the Fed began cutting rates in September, key economic indicators have moved in directions contrary to what one might expect preceding additional rate reductions. The job market has remained strong, with unemployment hovering at a historically low 4.2%. Meanwhile, consumer inflation has risen to 2.7%, producer inflation has increased to 2.0% from September’s reading of -0.8%, and the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) index, has hit an eight-month high.[ii]
Digging deeper, the Fed also released an updated Summary of Economic Projections (SEP). The SEP is updated quarterly and reflects individual Federal Reserve members’ forecasts of key metrics such as GDP growth, employment, inflation, and expectations of the path of interest rates. The Fed’s latest SEP furthered the thesis of dissonance between policy and economic reality. Surprisingly, the most recent SEP was hawkish, with projections indicating that inflation would not only persist above the 2.0% target but would actually increase to 2.5% in 2025 before potentially reaching the 2.0% target in 2026, a full year later than previously forecast. Moreover, the median projection for the Federal Funds Rate in 2025 was revised upward to 3.9% from 3.4%, suggesting half the rate cuts previously signaled by the Fed itself.[iii]
One need not be an economist to question the coherence of the Fed’s strategy and messaging. With inflation by all measures increasing and the job market not deteriorating, why continue to cut rates? In the press conference following December’s rate cut, Fed Chair Powell’s defense of the policy was less than convincing. He often cited data that seemed to ignore the recent reacceleration in inflation, repeatedly claiming that the “story” of why inflation moderated and will continue to do so remained intact. Investors, however, were looking for more than narratives, suggesting the economy wasn’t producing the data to substantiate Powell’s claims. Even Jonathan Ferro, a Bloomberg TV host and often a Fed proponent, remarked immediately after the press conference that it “wasn’t the Fed’s finest hour.” He couldn’t have said it any better.
Perhaps the Fed was reacting to the re-emergence of a concerning market trend we noted earlier in 2024: the concentration of market gains attributable to just a few mega-cap tech stocks. This concentration masked broader market weaknesses, reminiscent of the tech bubble in the late 1990s and early 2000s. From July to December, there was a brief reversal where these tech giants underperformed compared to other sectors like utilities, financials, and consumer staples. However, by December, the pattern had reasserted itself, with the group now known as the “Elite Eight” (which includes the original members of the “Magnificent Seven” plus chip maker, Broadcom, the newest member of the $1 trillion market cap club) significantly skewing the S&P 500’s performance. Together, these eight companies now command a 34% weighting in the nation’s premier stock index, considerably shaping its overall returns. In December, while the S&P 500 returned -2.37%, these eight companies contributed a 1.77% positive return, meaning the rest of the index collectively lost -4.14%, with 445 companies in negative territory. For the fourth quarter, the story was similar, with the S&P 500 gaining 2.42%, but the Elite Eight accounting for 3.56% of total return, leaving the rest of the issues with a cumulative loss of -1.14%.[iv] Evidently, the S&P 500 isn’t necessarily a reliable indicator of the overall health of large U.S. corporations, given that the performance of the index is disproportionately influenced by just eight companies.
This concentration has blurred the true state of market health, leading to underlying volatility that might not immediately be apparent to the average investor. While the S&P 500 showed gains of 2.39% for the fourth quarter, only four out of eleven sectors (consumer discretionary, communication services, financials, and technology) managed positive returns, with the others experiencing losses ranging from -2.41% to -12.42%. This weakness was not confined to U.S. stocks; it extended to developed international equities, real estate, emerging market stocks, and precious metals, all of which saw sharp declines of -7.42%, -6.12%, -5.57%, -3.08%, respectively.[v]
Expanding our analysis beyond traditional risk assets, the interest rate-sensitive fixed income markets have witnessed even more pronounced volatility during the fourth quarter. As interest rates surged, bond prices—which inversely correlate with interest rates—plunged. The primary benchmark for U.S. fixed income, the Bloomberg U.S. Aggregate Bond Index, recorded a significant quarterly total return of -3.06%. Its global counterpart, the Bloomberg Global Aggregate Bond Index, performed even worse, posting a -5.10% total return for the quarter, exacerbated by a strong U.S. dollar rally. For perspective, these drops represent unusually steep declines for bonds over such a brief timeframe.[vi]
Bonds have been mired in a prolonged bear market, now approaching its fifth year. To illustrate, the Bloomberg U.S. Aggregate Bond Index has delivered a cumulative total return of -1.62% from the start of 2020 through the end of 2024, a historically rare performance.[vii] Relative to the S&P 500, this index has fallen to depths similar to those seen at the peak of the tech bubble, reaching new lows. Although the bond market’s bear phase might seem endless, history tells us that no trend persists indefinitely, and often, the darkest moments precede the dawn of recovery.
The confusing actions by the Federal Reserve, combined with the distorting effect of a few dominant companies, have crafted a narrative that doesn’t seem supported by analysis of underlying fundamentals or broader market action. As we navigate this new year, our challenge will be to look beyond the headlines and understand the wider implications of ever-changing monetary policy and market dynamics. Fortunately, we’re up to the task.
In truth, no one knows what the future holds, and while it’s easy to get preoccupied by trends many consider immutable, we remain open minded to change by letting the data inform our opinions. We hope you will be, too.
Thank you for being a client in 2024 and we wish you a happy and prosperous new year.
As always, if you have any questions or concerns, please do not hesitate to let us know.
Regards,
Peak Financial Management
Disclosures:
The views expressed represent the opinions of Peak Financial Management as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.
[i] Bloomberg L.P. 2025
[ii] Bloomberg L.P. 2025
[iii] The Federal Reserve, “Summary of Economic Projections”, December 18, 2024. https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20241218.pdf
[iv] Bloomberg L.P. 2025
[v] Bloomberg L.P. 2025
[vi] Bloomberg L.P. 2025
[vii] Bloomberg L.P. 2025