2022 was a year many investors would like to forget. A lot of things happened in 2022 and we would like to reflect on the year that we just completed.
Happy New Year! We hope you all had a great 2024. This is our favorite newsletter of the year to write, a combination of looking back on 2024 and ahead to 2025. The first thing we always do is go back and read our newsletter from last year and see what we said then and what happened during the year. We encourage you to do the same, all our past newsletters are on our website at www.paragoncap.com/quarterly-market-insights.
This year we decided to skip having a theme and graphic at the top of the page, but last January it was FOMO (Fear Of Missing Out) and discussing the incredible year in 2023 that the magnificent 7 had. Those seven companies led the Nasdaq to a return in 2023 of 44%, the S&P 500 26%, while both the Dow Jones Industrial Average and Russell 2000 were up 16%. We discussed 2023 as the “year of AI and ChatGPT” and that would continue to be a theme in 2024. We wrote that interest rates and inflation were expected to be lower in 2024. We were concerned about ongoing conflicts in Russia/Ukraine, Israel/Iran and China. The country needed to pass a budget, and we were headed into an election year. We recommended our clients continue to invest in structured products, private credit and, if appropriate, private equity.
Economists and the market expected the Fed to cut interest rates six times in 2024 (usually a rate cut is 25 basis points, or a quarter of a percent), however, we never thought that would happen and wrote many times to our clients that we thought there would be fewer cuts. In fact, there were only 3 (but one cut was for 50 basis points) for a total of 100 basis points, or 1%. When the Federal Reserve cuts interest rates, it applies to the short-term rates that banks can borrow from the Federal Reserve. The longer 10-year Treasury that affects things like mortgage rates are determined by the market and how many investors are buying or selling (or demand) for those investments.
While 2023 focused on technology stocks, 2024 also had health care stocks in the news. Prescriptions for weight-loss drugs like Ozempic more than doubled. We also saw crypto currencies, specifically Bitcoin, in the news as it reached the $100,000 level and commodities such as gold had a good year as well.
The election in November was not only anticlimactic, it represented a huge boost to the markets as President-elect Trump won by a margin large enough to avoid recounts or controversy. The hopes of an extension to tax cuts, lower corporate tax rates and less regulation caused a post-election rally. It was short-lived, however, as the S&P 500 fell 2.95% in one day on Dec. 18, when the Federal Reserve cut rates by 25 basis points but forecasted fewer cuts in 2025. It was the biggest one-day drop for the S&P 500 on a scheduled Fed meeting day since 1994, when the Fed began announcing its rate decisions on the day of their meetings. The Dow Jones Industrial Average fell 2.6% that day, which was the 10th straight day of declines. This 10-day losing streak was the first double-digit streak for the Dow since an 11-day streak ended over 50 years ago in October, 1974.
The results are in
While the markets and the Magnificent Seven did not match 2023’s returns, it was an amazing year for the markets and even better when you look at the 2 years combined. It was the first time the S&P 500 gained over 20% in back-to-back years since 1997-1998. In 2024, the Nasdaq was up over 28%, the S&P 500 over 23%, the Dow Jones Industrial Average 12% and the Russell 2000 9.9%. Gold was up 28% and oil finished the year at almost $72.
The 10-yr Treasury yield traded in roughly a 100 basis point range in 2024 as market participants reacted to changing views on the economy, inflation, budget deficits, and potential impacts from the election. The 10-yr Treasury finished the year at 4.573%.
Inflation was a major investment concern in 2024, as the Federal Reserve has a stated target of 2%. The Consumer Price Index (CPI) sits at 2.7% as of the end of November (December’s numbers will be announced in January). While 2.7% is down considerably from 9.1% of June 2022, it is still above the Fed’s target and will influence how many rate cuts are made in 2025.
The last economic indicator worth looking back on is unemployment. We have seen unemployment tick up but remain historically low 4.2%.
A look ahead
We will share with you our thoughts on major themes to watch and issues that could and most likely will affect the markets this year.
• The trajectory of inflation and interest rates will remain top of mind for investors this year. The rate of inflation is down significantly from the peak but has recently leveled out at levels above the Federal Reserve’s target as discussed above. The rate of inflation will most likely need to come down for the Federal Reserve to lower the Federal Funds rate from here.
• We try to avoid discussing politics in our newsletters, but when we do, it directly relates to how it will affect market returns. At this point in the year, we do not know which policies President-elect Trump discussed during his campaign will be implemented so it is premature to know how they will affect the market. The biggest policy changes we will be watching concern the implementation and size of tariff’s, immigration, regulation and international relations.
o Tariffs would create inflation as cost of goods imported into the United States would be more expensive and those costs tend to get passed on to the consumer.
o Immigration can create a shortage of workers in high demand areas such as agriculture, manufacturing and home building/remodeling amongst others.
o The administration has expressed a desire to have a more hands-off approach to mergers and acquisitions than the prior administration. Increased mergers and acquisitions coupled with potential of lower financing rates could create a favorable environment for equity and private equity markets.
o During the election campaign, President Elect Trump promised to end the Russia/Ukraine war as well as the Israel/Iran conflict. Relations with not only China, but Mexico, Canada and Europe will be carefully monitored and affect the markets in 2025.
• Despite a Republican sweep in the November elections, the Republican majorities in the Senate and House are slim which will require a significant degree of cooperation amongst members of the party. At this time, there appears to be a significant difference in opinion amongst the members of the Republican party on topics such as immigration and government debt levels which could mute or prevent much legislation from passing in Washington.
• Budgets and debt ceilings will be the first major issue of 2025. The Debt ceiling will need to raised by mid-January. Due to the differing views in the Republican Party, this will require bipartisan support.
• Bitcoin and other cryptocurrencies will continue to be an asset class to watch in 2025. Bitcoin finished the year at $93,524 after topping $100,000. We have seen not only individual investors buying Bitcoin, as ETF’s and individual companies like MicroStrategy own 386,700 coins (or $31.6 billion).
• Artificial Intelligence (AI) will remain a topic of conversation for markets in 2025. The beneficiaries of AI and the “AI trade” should continue to expand beyond the semiconductor industry.
Our final concern is the markets themselves. Low interest rates, low inflation and low unemployment along with potential low corporate tax rates and lower regulation would be positive for stocks and the markets in 2025. The biggest red flag at this point, which we do not think will be an issue in at least the first half the year, is simply valuation. The stock market is expensive. If you look at the market compared to both developed and emerging markets, or just compared to itself historically, it is high priced and has historically signaled a correction.
Recap
Both 2023 and 2024 were fantastic years for the market and the economy. As we start 2025, we have a change in administration and lots of questions to answer. Valuations are high but economic conditions are favorable. Last year we mentioned we were recommending structured products to our clients. We had a very active year in new structured note issuance for our clients in 2024. In our history, we have structured just shy of $1 billion dollars in structured products for the benefit of our clients. We created notes with 11 different banks around the world. We continued to add to private credit and private equity. With interest rates under 5%, our income notes and private credit opportunities are providing over double the income of traditional fixed income. We continue to see benefits in our equity-related structured note recommendations which offer downside protection and upside participation. We continue to invest in traditional stocks and bonds, but we believe it is important to explore all opportunities to help our clients achieve their investment goals.
How to stay informed
Our website and YouTube channel offer a wealth of information. You can find our videos through our website at: https://www.paragoncap.com/quarterly-market-insights
or on our YouTube channel at https://youtube.com/@paragoncap. If you subscribe to our YouTube channel by hitting the “subscribe” button, you will be notified when new videos are posted.
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Paragon Capital Management, LLC
9200 Indian Creek Parkway, STE 600
Overland Park, Kansas 66210
Phone: 913-451-2254
Toll Free: 1-800-508-4605
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