January 24, 2025
2024 was another remarkable year for stocks. It was the second year in a row for the S&P 500 to return +20%. This is a fantastic streak. Entering the year, some economists predicted that we would be in a recession in the middle of 2024. As we all know, that did not happen. The gross domestic product (GDP) was up 3.1% for the third quarter in 2024 while the current unemployment rate is at 4.1% – two signs of a strong economy. The stock market touched all-time highs, but then backed away from those highs to close out the year.
What worked and what did not work as well for our portfolios in 2024? Remember, in a diversified portfolio you will have some funds that outperform and some that underperform. If everything went up over 20% in 2024, I would have to figure that all of our securities owned the same artificial intelligence (AI) names. That would mean a lot of our eggs are in one basket and that could set us up for catastrophe should those stocks implode. Depending upon the size of your portfolio, the securities you hold might differ slightly from the securities mentioned below.
Fixed Income: In a typical year, an investor would hope for a 3% return from his/her money market and shortterm bonds. This year wasn’t typical: The Schwab Value Advantage Money Market was up 5.12% in 2024. Our PIMCO Short-Term Institutional was up 6.41% (6.15% for the A share class). Our Vanguard Short-term Investment Grade was up 5.06%. These are strong returns for our short-term bonds. Our intermediate bonds did not do as well as the short-term bonds, but they all beat the underlying Bloomberg Aggregate Bond Index which returned 1.66%. For example, Dodge & Cox Income was up 2.26%, PIMCO Income Institutional was up 5.42% (5.0% for the A share class) and Vanguard Core Bond was up 1.88%. Good managers should beat the index if you give them a long enough time horizon. If you expand out all three intermediate bond funds handily beat their index over a three-, five- and ten-year time periods. We expect this outperformance to continue over these longer durations.
Large-Cap Domestic Equities: AI stocks continued to dominate in 2024. Our Schwab Total Stock Market Index fund (SWTSX), which contains all seven magnificent seven stocks in their top 10 holdings, was up 23.85% while Berkshire Hathaway – a security we added to at the beginning of the year – trumped the total stock market with a 27.09% return. Some analysts believe the stocks outside of the magnificent seven in the S&P 500 are undervalued and ready for a run of their own – time will tell on that point. Our other defensive large-cap stock funds, Primecap Odyssey Growth and Vanguard Dividend Growth were up a disappointing 9% and 13%, respectively. With our defensive names, I am always hoping that they participate in 75% of the upside and 50% of the downside of their respective benchmarks. That doesn’t always work out and it certainly did not work out last year as some of our managed funds did not stay within the 75% of the upside mark. That said, we were very pleased with the outsized influence Berkshire and SWTSX had on our positive equity returns in 2024.
Mid and Small-Cap Equities: The large-cap AI stocks continued their domination of the mid and smaller company stocks in 2024. The Vanguard S&P Mid-Cap 400 Index (IVOO) was up 13.77% while the Vanguard
S&P Small-Cap 600 Index (VIOO) was up 8.48%. The Vanguard Tax-Managed Small Cap, which many of you own, is managed by a team that closely tracks the VIOO index but manages it for tax efficiency. That fund was up 8.61% in 2024. The P/E ratios for our small-cap stocks are around 15, which makes them relatively cheap when you compare them to the P/E of 22 that is currently tagged on the S&P 500. I imagine that President Trump’s “America First” agenda might help mid and small company stocks as consumers turn to US manufactured goods instead of overseas goods that may have tariffs attached. We will have to wait and see.
Foreign Equities: Our foreign equities continue to take the backseat to the US equities that are clearly in the driver’s seat. Take for instance Dodge & Cox International fund (DODFX). They returned a positive 3.8% in
2024. DODFX also has an 11.23 P/E ratio which is half of the S&P 500 P/E of around 22. First Eagle Overseas did better with a 6.42% 2024 return while the P/E ratio is 11.94. Vanguard Global Wellington was up 6.35% in 2024 and has a 13.53 P/E. Our international holdings have the lowest allocation percentages we have ever had. The “America First” Trump agenda does not bode well for this sector. That said, a lower relative P/E ratio means these stocks are cheap. In the name of diversification, I think it is important to have a position in overseas investments. We continue to wait for the catalyst that will at some point spark the overseas resurgence. I would not advise you to hold your breath until that occurs. It could be a while.
Outlook: “From 1926 to 2023, the average return of the S&P 500 under a Republican sweep of the White House and Congress was 14.5%, while the annual return of the index under a unified Democratic government was 14.0%, according to Retirement Researcher.” – Barron’s 12/19/2024. As you just read, history suggests that there is a very small difference in S&P 500 returns regardless of who holds power in Washington. I would ask that you hang on to that quote as we enter a new era in the US government. Looking forward, our biggest concern is the potential for inflation. Much of what President Trump is proposing is inflationary: tax cuts, deportation of illegal immigrants and tariffs. The Federal Reserve would need to keep interest rates higher for longer to fight these potential inflationary forces. Higher rates means less home building and fewer homes being bought and sold. Stocks should help protect us should we enter another inflationary environment. CJ and I may add a little to your short-term bonds in the near future as the Fed may have to increase rates again. As I am sure you are aware, it is nearly impossible to predict short-term returns. Ed Yardeni – an analyst we follow – predicts that the S&P 500 (currently around 6,100) will be at 7,000 by the end of this year, 8,000 by the end of 2026 and 10,000 when 2030 rolls around. He believes, despite Trump’s agenda, the inflation outlook will be low or modest and the economy will prove to be resilient. There will also be a productivity growth “boom” in the coming years. AI will be leading the charge. The higher productivity will allow corporations to increase their earnings, which investors love to see.
This is one of the more bullish cases we have heard. Time will tell! CJ and I are grateful for your continued support of AIAI. Best wishes in 2025!
Some thoughts as we begin the new year:
You can expect to receive your 1099-Composite and Year-End Summary by mid-February from Schwab.
Please let us know if you would like us to forward the 1099-Composite and Year-End Summary to your
accountant.
With the new year upon us, this is an excellent time to review your IRA and retirement account beneficiaries
to make sure they are up to date. Contact us if you would like us to send you the names Charles Schwab has
on file.
You should consider contributing to your Roth IRA if you are able. You have until April 15th to contribute a
maximum of $7,000 (plus $1,000 catch-up contribution for those over age 50) for tax year 2024. The same
limits apply to 2025. Also, consider making Roth 401(k) contributions to your retirement account instead of
tax-deferred contributions. It will cost more now, but your contributions will grow tax-free. It is a great way
to put more dollars in Roth accounts.
For those who can afford to maximize their 401(k) contributions in 2025, please note that the maximum you
can contribute is now $23,500. For those over the age of 50, the catch-up contribution is $7,500. Age 60-63
catch-up contribution is $11,250. Thus, one could contribute $31,000 in 2025 if they are over 50 and have the
means to do so. If you are aged 60-63, you could contribute a whopping $34,750. Please contact us if you need
any help with selecting the underlying investments within your retirement account.
Emergency fund: If you don’t have one, I would recommend that you start one. Shoot for 3-6 months of living
expenses. You can start this money market account at your bank or credit union. I prefer the money market
over certificates of deposit (CD) because the funds are readily available should you need cash for an
emergency car repair, for example. If you are dissatisfied with the money market rates at your bank, ask us
about Schwab money market rates – we find that they are very competitive.