WESCAP Q4 2024 Quarterly Commentary: A Challenging Quarter for Investments Amid Rising Interest Rates
Portfolio results for the last quarter of 2024 were weak with most investment categories posting negative returns. A rise in long term U.S. interest rates had a detrimental effect on most fixed income and equity assets.
Inflation has moderated, but not at the pace expected a few months ago. The November election results boosted concerns about accelerating U.S. government budget deficits, possible new trade tariffs, and higher inflation. These factors contributed to a rise in longer term borrowing rates. The 10-year Treasury bond ended the year with a 4.58% yield, up 0.77% from the end of the third quarter 2024. This carried through to mortgage rates, car loan rates, and many business loans. These higher rates caused intermediate and long-term bond prices to fall. Real estate and real estate securities also fell and most stocks experienced declines as well. The Federal Reserve’s interest rate cut of 1% only partially alleviated the negative impact of higher long-term interest rates.
The Bloomberg US Treasury 20+ Year bond total return index declined 9.4% in the fourth quarter, which contributed to an 8.0% one-year decline. Real estate stocks (Nareit REIT index) dropped 8.2% over the fourth quarter. The “average” stock (S&P 500 equal-weighted index) declined 1.9% over the last quarter. Small cap U.S. stocks (Russell 2000) posted a positive 0.3% return over the quarter, mostly due to the very large post-election November gain, though they did lose 8.3% in December due to the issues mentioned earlier. The Morningstar Global Allocation category (U.S. and foreign stocks and bonds) lost 3.1% over the quarter, as non-dollar assets generally did worse due to weaker international growth prospects and weakening currencies.
The S&P 500 cap-weighted index posted a positive 2.4% for the quarter. The largest 10 companies have a stock value that is just under 40% of the entire group of 500 stocks in this index. These mega-cap companies (Apple, Nvidia, Meta, Google, Amazon, etc.) significantly out-performed the average stock and thus carried this index to a modest quarterly gain.
Despite a weak fourth quarter, 2024 overall delivered positive returns. Inflation trended down and corporate and household earnings showed enough strength to calm recession fears, allowing most assets to provide modestly positive 2024 returns.
We continue to prefer U.S. dollar assets, and favor short-term/adjustable rate fixed income over longer term bonds. However, the rise in longer term bond yields presents a few more opportunities to extend maturities and earn a higher interest rate.
Nevertheless, pending domestic policy uncertainty and continued geopolitical risk tend to suggest not becoming overly aggressive on the investment front in the near term.