Michael Reinking:
Hello, I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and this is Market Storylines. Every week we are here to keep you up to date on key trends and events driving global markets. Now, happy New Year and hopefully you enjoyed some time with friends and family over the last couple of weeks. Now we are recording on the first trading day of 2025, so in a slightly different format, we're going to go over the storylines of 2024 and what to be on the lookout in the year ahead. So let's get to it.
Now, 2024 is officially in the books, and by all accounts, it was a strong year with the S&P 500 up over 20% for the second consecutive year, the first time this has happened since the 1990s. Now by historic standards, it was a year of reasonably muted volatility. Until the summer, the S&P 500 had its longest streak without a 2% decline since the start of the great financial crisis back in 2007, lasting 356 trading sessions. The VIX hovered in the mid to low teens for much of the year, though there were a couple of bouts of volatility, including the one in August when we kicked off this podcast as there was an unwind of crowded positioning around the globe with many pointing to the yen carry trade at the epicenter of that episode.
Now that being said, the max drawdown in the S&P 500 was about 8.5%, which is slightly less than the median annual decline since the mid 1980s. Now during the year, the US economy continued to outperform expectations driven by a mix of resilient consumer spending, AI related capital investment, and growing fiscal deficits. Now, hiring cooled throughout the year and the unemployment rate did move up to 4.2%, but still remains low by historic standards.
Now, after a scare in Q1, inflation continued to moderate in 2024, though the last mile is proving to be difficult. Now, after holding policy rates steady for a little more than a year, the Federal Reserve began its much anticipated policy shift by cutting 50 basis points in September, followed by two additional 25 basis point cuts in November and December, bringing the total to 1%. However, at the last meeting Chair Powell signaled that the pace of cuts going forward would slow as the economy continues to outperform expectations, inflation remains sticky and given the uncertainty related to the impact of Washington policy with the incoming administration.
Now speaking of the election, there was concern that this would be a volatility inducing event, but a pre-election pullback never really came to fruition. The decisive victory by President-elect Trump removed that overhang and led to a broad-based rally during November. For the second consecutive year though, mega cap tech stocks were the best performing with the NYSE FANG+ Index up 50%, but there was broader participation the year with some violent rotational activity.
Now, small and mid-cap stocks and cyclical sectors, which were perceived beneficiaries of potential policy changes, led to the upside post-election. However, some of that optimism unwound during the month of December as interest rates rose despite Fed cuts and a messy stopgap funding, bill negotiation reminded investors of the slim margins in Congress, which will make it difficult to push forward the Trump agenda heading into 2025.
For the month of December the S&P mid and small cap indices were both down over 7%, wiping out the post-election gains. Both indices ended the year solidly higher, but did underperform the benchmark S&P 500 by over 10%. Now, the December weakness has tempered some of the post-election euphoria as we begin the new year. There are big questions heading into 2025 with reasons for optimism and caution. US economy remains resilient, but global growth has been slowing. Central bank policy is diverging around the world, which is adding to the US dollar strength of potential headwind for corporate earnings. Investors are familiar with President-elect Trump's agenda, but there are questions about how this will be and what will ultimately become policy. Tariffs and protectionist policies are potentially inflationary and open the door to retaliation. Immigration policy and DOGE could also weigh on growth. While growing fiscal deficits and concerns about bond vigilantes will also make further tax cuts difficult to push through.
Now, within equity markets following two years of gains, valuations are stretched. AI will remain a key theme but will continue to take on new forms as investors look for a payoff from the recent investment. The earnings growth gap between the Mag Seven and the rest of the S&P 500 is expected to narrow. Now, this is once again feeding the hope that this will be the year of the great rotation with previous episodes proving to be fleeting.
Broadly, earnings are expected to inflect higher, which should help equities grow into lofty evaluations, but clearing that bar could be challenging. The sell side is pretty uniformly bullish, a different dynamic than we've seen coming into the last two years, but are calling for gains of up high single digits, which is in line with historical averages. However, when you look back historically, since 1950 there have only been six years where the S&P 500 ended the year up between 5 and 10%.
I'd expect some more volatility in 2025 with investors reacting to Washington policy, geopolitical uncertainty, potential growth in inflation scares and lingering questions around AI. And these are just some of the questions we are here to help you navigate in the year ahead.
With that, on behalf of the NYSE, I'd like to wish you a happy New Year, and once again, thank you for spending some time with us today. Remember, you can watch Market Storylines on TV.NYSE.com or our YouTube channel, or you can listen every Friday on the Inside the ICE House feed. Thanks for joining me. I'm Michael Reinking. I'll talk to you again soon.
Speaker 2:
That's our conversation for this week. Remember to rate, review, and subscribe wherever you listen and follow us on X at ICE House Podcast. From the New York Stock Exchange, we'll talk to you again next week inside the ICE house. Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties express or implied as to the accuracy or completeness of the information, and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.