All Eyes on Washington

As we closed the year for 2024, we again experienced disparate returns from different asset classes. The nature of this market performance put into context the returns that were generated by broadly diversified investment strategies.

Once more the Mag 7 (Magnificent 7) made significant contributions to the S&P 500’s overall return.  In 2023, 63% of the S&P 500 total return was generated by this small cohort.  These same stocks contributed to 55% of the index’s return last year.  Interestingly and somewhat ironically, many of these Mag 7 names are the “hyperscalers” that drove up the stock prices of their fellow brethren. Massive technology (Artificial Intelligence) investments made by Amazon, Apple, Alphabet (Google), Meta (Facebook), Tesla and Microsoft, helped drive the stratospheric returns generated by Nvidia (now a fellow Mag 7 stock).

What is clear is that the absence of exposure to these prominent (large/mega-cap) growth names generally lead to under-performance.

The question now is where do we go from here? Will we experience the third consecutive year of 20% growth for the S&P 500? Or have we pulled forward future returns and are now lined up for lower returns going forward?

To a large extent, only time and Washington will tell.

This month, Donald J. Trump will be sworn into office and will start to place his “personal touches” on a variety of different policies. Overall, the markets have rallied post-election. The prospect of deregulation, a more benign tax policy, and less government oversight and restrictions (i.e. anti-Trust) have stock prices trending higher.

Countering this more “pro-business” backdrop are tariffs. The question remains, will tariffs be strategic and specific or will they be more universal and all-encompassing? No one really knows yet. But the talk or threat of tariffs has been impacting the markets – the bond market in particular.

Very quietly, the 10 Year Treasury’s yield has moved from roughly 3.7% to close to 4.7% at year end. This is almost a full percentage increase since September, which implies that the bond market expects interest rates to remain higher for longer. Tariffs are taxes and are inflationary in nature. Increases in the costs of foreign products will be passed on to the consumer. And although the consumer has remained resilient, spending patterns can be altered as costs for typical goods and services are driven higher. Thus, the question remains, does the notion of higher prices (driven up by tariffs) change FED action and policy this year? This is a factor that BaldwinClarke will be watching closely.

Overall, despite recent performance being driven by a relatively small number of stocks, we remain steadfast in our belief of being broadly diversified.

The one constant for the markets over the years has been the “rotation” of leadership. Simply said, markets cycle. Growth stocks have clearly been in favor, while large-cap value stocks have experienced lower returns. Although the timing of cyclical changes is virtually impossible to predict, we do anticipate a broadening of market returns. Value stocks, in time, will cycle into favor and current leadership will change. Importantly, we remain well-positioned for these eventualities.

Diversification matters.