Hey everyone, I wanted to write a note looking back on market results for 2024 and how they impacted the Model Hedge Fund Portfolio. In the next post I will review analyst predictions for 2025, but first I wanted to give a recap of what happened in 2024 and explore a few of the underlying causes.
Here is a summary of the 2024 benchmark returns and some of the relevant economic indicators:
| Indicator | 2024 Returns/Results |
|---|---|
| S&P 500 | 28.1% |
| Bonds (10-year Treasuries) | -0.9% |
| Target Date 2045 Fund (Fidelity FFFGX) | 15.1% |
| Model Hedge Fund Portfolio | 26.0% |
| U.S. GDP Growth U.S. Inflation | 2.7% 2.4% |
This is the second year in a row for the U.S. stock market to finish with annual returns above 25%. The S&P 500 outperformed both its historical average and analyst predictions for the year. Here is a summary of what analysts had predicted for 2024 at the beginning of the year:
The highlighted bars in the center show the most commonly predicted scenario, and the bars to the left and right reflect some pessimistic and optimistic results that a few analysts predicted. As you can see, the performance for the year ended up being at the far end of the most optimistic scenarios for GDP growth and inflation control. The Fed, having the advantage of high quality data sources and historical perspective on previous inflation-fighting cycles, did their best to secure a soft landing and achieved the luckiest possible result. Inflation is not yet down to the target of 2%, but we somehow made it through the most difficult part of the inflation-fighting cycle while achieving above average GDP growth.
As a result, the stock market achieved far beyond the 4.6% expected returns. Analysts had predicted a 45% chance of recession due to the restrictive monetary environment set by the Fed to combat inflation, and not only did the U.S. avoid recession but it also exceeded GDP growth expectations by nearly double. In addition to broad economic growth, equity valuations increased due to expectations for future productivity with artificial intelligence. Equity valuations for the S&P 500 now stand at a 29.7 P/E ratio, up from 24.6 at the the start of the year. With a little over half of equity returns coming from earnings growth and the rest from valuation expansion, the stock market finished the year with 28% returns.
As for bonds, the fact that inflation was reduced to 2.4% should have resulted in high returns, but it was offset by uncertainty about future fiscal and monetary policy. Proposed tariffs are expected to have an inflationary effect; that combined with anticipated deficit spending caused the market to reprice bonds to account for increased inflation risk. Then in December the Fed announced that it only expects two rate cuts instead of four in 2025. These factors combined to have bonds end the year with slight negative returns.
Diversified Investments
Target date funds performed above their historical average in 2024, as you would expect with such a strong equity market. Target date funds with a 20-year duration (targeting 2045) returned around 15% this year. The reason they returned less than the S&P 500 was not because they had a high allocation to bonds, but rather because their equity allocation is divided between U.S. stocks and International stocks. The typical 2045 target date fund had the following asset allocation this year: 60% U.S. stocks, 30% International stocks, and 10% bonds. International stocks only returned 4% this year, dragging down target date funds much more than the bond portion. If you had a target date fund with 90% U.S. stocks and 10% bonds, you would have gotten a 25% return this year.
The Model Hedge Fund Portfolio that I described in May finished the year with 26% percent returns. This makes 2024 the 4th year since 1998 that the portfolio has trailed the S&P 500. (The other years were 1999, 2018, and 2022.) This is desirable performance, considering that the portfolio still returns 26% in one of the few years that it doesn’t beat the S&P 500.
Here is an updated version of the 25-year chart from the original post: (Click on the chart for an interactive version.)
The key things to take away from all this is that even in a year with surprising results, the performance can be understood. The returns of any given asset can be broken down and attributed to a set of underlying causes. Even though it is impossible to predict the returns over any given year, the market pays a premium to investors that keep money invested over these periods of unpredictability. All that is left to do is choose a target volatility for a given time horizon and stay the course.