December was a mixed month for the investment markets, with investors pulling back from most U.S. equities over concerns of rising interest rates and continued economic uncertainty. For the month, the Dow and S&P 500 lost 5.1% and 2.4%, respectively. The Nasdaq was the lone gainer, rising 0.6%. Despite the year-end sell-off, all three major U.S. stock indices finished the fourth quarter and the year in positive territory. The Nasdaq, led by continued strong performance of the Magnificent Seven, rose 29.57% in 2024. The S&P 500 and Dow climbed 25.02% and 14.99%, respectively. Below is a summary of the markets in December:
Mixed Month for Markets
December was a mixed month for equity markets
Bonds Fall as Federal Reserve (Fed) Updates Guidance
Rising rates caused bond prices to fall at year’s end
Positive Economic Updates
The economic updates released in December showed continued economic growth
Risks to Monitor
Markets face a number of risks both domestically and abroad
Positive Outlook for the New Year
We believe the most likely path forward is for continued market appreciation and economic growth
Despite mixed performance at the end of the year, fundamentals were supportive. Per Bloomberg Intelligence, the average earnings growth rate for the S&P 500 in Q3 was 9.1% - well above analyst estimates of 4.2% and highlights the continued fundamental health of U.S. companies. Over the long run, fundamentals drive market performance, so the continued earnings growth during the quarter was encouraging. Looking forward, analysts expect to see continued earnings growth in the fourth quarter and throughout 2025.
The stock market weakness was echoed by bond markets, which were also down for December. Long-term interest rates rose notably in December as the 10-year Treasury yield rose from 4.17% at the end of November to 4.57% at year-end. The Bloomberg Aggregate Bond Index lost 1.64% for the month and 3.06% for the quarter; however, the index managed to eke out a 1.25% gain for 2024.
The rising interest rates during the month were due in part to updated guidance from the Federal Reserve following the conclusion of the Fed’s December meeting. The Fed lowered short-term interest rates by 25 basis points at this meeting, which was widely expected by investors and economists. What was less expected was the updated economic projections that showed the average Fed member expected to see just two more 25-basis-point rate cuts through the end of 2025, which was less than previously forecasted. This means that the Fed remains cautious about the economy and inflation, and that it will be making decisions on a meeting-by-meeting basis in 2025.
Our Perspective
Despite the volatility to end the year, the economic updates released in December continued to point toward solid economic growth. The November job report showed an encouraging rebound in hiring during the month following a weather-driven slowdown in October.
Consumer sentiment also showed signs of improvement, with the University of Michigan Consumer Sentiment survey improving for the fifth consecutive month in December. Historically, higher levels of consumer confidence have helped support faster spending growth, so this was an encouraging sign for future consumer spending.
Investors will keep a keen eye on the Fed’s upcoming decision regarding rate cuts as we near the next Fed meeting, scheduled for January 28-29, and the December Consumer Price Index (CPI) report, due out January 15. Investors will be looking for inflation to moderate after rising slightly more than expected in November.
Markets fundamentals were impressively resilient throughout 2024, and this momentum is expected to carry over into 2025. Analysts expect to see continued earnings growth throughout the year, supported by a strong job market and rising consumer confidence.
Looking ahead, we believe the most likely path forward for the economy and markets is further growth and appreciation in the upcoming months. With that being said, December’s mixed results are a valuable reminder that we may face short-term setbacks along the way.