While the major U.S. stock market indices finished in positive territory in Q4 2024, there was a marked performance gap with growth stocks handily outperforming value-oriented equities. Continued tech sector leadership, increased investor risk appetite, declining interest rates, and expectations of additional rate cuts1 all served as key catalysts for growth stock outperformance in the quarter. Perhaps the best example of this performance divergence is the tech-heavy Nasdaq-100 Index,2 which led the way in Q4 2024, appreciating by 4.7% compared to a 0.5% gain in the more value-oriented Dow Jones Industrial Average.3
Q4 2024 also exhibited a strong performance gap both within the domestic large cap stock universe and between large cap and small/mid-cap (“SMID”) U.S. listed stocks. For an example of the former trend, consider that after broadening in Q3 2024, market breadth narrowed materially in Q4 2024 as the market-cap weighted S&P 500 Index4 increased by 2.1% compared to a 2.3% decline in the S&P 500 Equal Weight Index.5 With regard to the large-cap/SMID performance gap, consider that the SMID-focused Russell 2000 Index6 was flat in Q4 2024, lagging the performance of the mega cap dominated Nasdaq-100 Index and the market-cap weighted S&P 500 Index by a considerable margin.
After keeping pace with U.S. stocks in Q3 2024 for the first time in several quarters, international stocks significantly underperformed their U.S. counterparts in Q4 2024. The MSCI World ex USA Index7 fell by 7.7% in Q4 2024. In developed economies, Eurozone stocks continued to be hampered by high natural gas prices stemming from the ongoing conflict in Ukraine and weak manufacturing data in key economies such as Germany, raising concerns about a broader economic downturn. The euro also depreciated by over 5% versus the U.S. dollar, making European stocks relatively less attractive to foreign investors. In Japan, equities were pressured by tighter monetary policy and a stronger yen.
Emerging market equity performance was only modestly better than that of developed markets, with the MSCI Emerging Markets Index8 declining by 8.2% in the quarter. Chinese stock market performance was negatively impacted by slowing economic growth, property market woes, and the potential tariff threat posed by the incoming Trump presidential administration in the U.S. While Taiwanese stocks posted modest declines, political instability and a weakening won led to the considerable relative underperformance of South Korean equities.
After initiating the monetary easing process with a 50-basis point cut on 9/18/24, the Federal Open Market Committee (“the Fed”), opted to cut the federal funds rate by 25 basis points on 11/7/24 and followed that up with another 25-basis point cut on 12/18/24. Underlying these rate cut decisions were signs of moderating inflation and a potential softening of the labor market. Despite these cuts to the very short end of the yield curve, 10-year U.S. Treasury yields headed in the opposite direction, likely due to resilient economic growth, fears about sticky inflation in the services and housing sectors, and concerns about increased deficit spending under a new U.S. presidential administration.
10-year U.S. Treasury yields were on the rise from the beginning of the quarter until 11/22/24, where a temporary peak of 4.41% was reached. The 10-year U.S. Treasury yield experienced a brief period of decline, bottoming out at 4.15% on 12/6/24 before rising significantly to close out the year at 4.57%. The marked increase in Treasury yields resulted in the Bloomberg Aggregate Bond Index9 falling by 3.1% in Q4 2024. The biggest losses came from long duration bonds, which tend to be more sensitive to changes in interest rates and interest rate expectations. As a case in point, the iShares 20+ Year Treasury Bond ETF (TLT)10 declined by 11% in Q4 2024 compared to a 1.4% drop in the iShares 1-3 Year Treasury Bond ETF (SHY).11
On the commodity front, the price of Brent Oil spiked by 7.9% from 10/1/24 to 10/9/24, primarily due to escalating geopolitical tensions in the Middle East and concerns about potential supply disruptions. However, Brent Oil prices declined over the remainder of October as geopolitical tensions eased and increased U.S. production applied downward pressure. Prices remained range bound from 11/1/24 to 12/18/24, where Brent Oil prices increased by 2.4% to close out the year on a high note. After taking these movements into account, the price of Brent Oil over the entire quarter increased 4%.
We look forward to 2025 and are hopeful that the Federal Reserve’s signaling of a more conservative approach to rate cuts in the new year12 will continue to buttress solid real GDP growth and a healthy labor market without triggering new inflation fears.
