{"id":237513,"date":"2025-01-02T16:51:56","date_gmt":"2025-01-02T21:51:56","guid":{"rendered":"https:\/\/aptuscapitaladvisors.com\/?p=237513"},"modified":"2025-01-03T11:06:26","modified_gmt":"2025-01-03T16:06:26","slug":"aptus-q4-2024-newsletter","status":"publish","type":"post","link":"https:\/\/aptuscapitaladvisors.com\/aptus-q4-2024-newsletter\/","title":{"rendered":"Aptus Q4 2024 Newsletter"},"content":{"rendered":"
\"\"Bears Sound Smart; Bulls Continue to Make Money<\/strong><\/h5>\n

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It was D\u00e9j\u00e0 vu for the markets in 2024, as the S&P 500 returned 25.0%, officially entering into the third year of the current bull market rally. In fact, this was the first time since 1998 and 1999 that the S&P 500 produced back-to-back years of greater than 20% total returns. The superlative for \u201cback-to-back years\u201d above 20% for NASDAQ only dates to 2020 and 2021.<\/p>\n

The rally in stocks in 2023 was mostly driven by hope of market friendly events: the end of rate hikes and start of rate cuts, the economy slowing to a soft, not hard, landing, AI profit explosions and positive geopolitical resolutions. The rally this year has been driven by the partial realization of those hopes: growth did slow but didn\u2019t contract (soft landing), the Fed did aggressively cut interest rates, AI demand and excitement didn\u2019t waver, and geopolitical crises didn\u2019t get worse (although they didn\u2019t get better).<\/p>\n

As we enter 2025, the question for markets is whether the positive events realized in 2024 can last.<\/p>\n

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Does the soft landing stay in place, or does it deteriorate?<\/em><\/p>\n

Does the Fed keep cutting rates or do they pause?<\/em><\/p>\n

Does inflation fall to 2% or rebound?<\/em><\/p>\n

Do pro-growth policy hopes get realized?<\/em><\/p>\n

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Yet, International didn\u2019t experience that D\u00e9j\u00e0 vu, as they continue to not be invited to the party. U.S. stocks outperformed the rest of the world by over 20% in 2024. This outperformance really kicked into gear in the last quarter of the year. European stocks trailed U.S. stocks by their largest margin in the 25 years since MSCI started tracking data. The lack of current and projected growth, alongside International lacking the narrative-du-jour \u2013artificial intelligence \u2013 led to continued underperformance. The MSCI EAFE has not had back-to-back returns of over 20% since 2003 & 2004. \"\"<\/p>\n

The strength in the domestic market isn\u2019t something that should scare investors, as patience continues to be a more fruitful investing characteristic than being clever, i.e., trying to time the market. Large gains tend to happen more often than you think. In fact, since 1950, the S&P 500 has had more years with a return greater than 20% (22) than overall down years (21).<\/p>\n

When dissecting returns from our Yield + Growth Framework<\/em>, the majority of returns since 2020 have come from earnings growth \u2013 contributing ~63% of total return, while yield and valuation expansion have only contributed 15% and 22%, respectively.\u00a0 This landscape for returns is healthy \u2013 as the economy grows and businesses become more efficient, as does the market, i.e. it\u2019s not completely funded by hopes and dreams through valuation growth.<\/p>\n

For the time being, it looks like the prospects for continued monetary accommodation, relatively easy fiscal policy, and regulatory easing should continue to keep animal spirits alive for both investors and dealmakers.<\/p>\n

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\"\"<\/p>\n

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The Fixed Income Fireside Chat<\/strong>: Why are Bonds Struggling with the Fed Cutting?<\/h5>\n

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Simply said, this has been a very unusual rate-cutting cycle. Bucking the trend of history, interest rates have been rising since Jerome Powell and the Federal Reserve started their rate hiking cutting cycle in September. Since this meeting, the Fed has loosened policy by 100 basis points (i.e., 4 cuts), while the 10YR U.S. Treasury has almost had a like-minded move in the opposite direction \u2013 rates have increased ~90 basis points during this period.<\/p>\n

The only other time that rates have witnessed a movement like this was in 1981 \u2013 a pivotal year in the bond history book, as then Fed Chairman, Paul Volcker, had to take unprecedented actions to attack unanchored inflation. We don\u2019t want to make a direct comparison to this period of time, as inflation remains very much anchored over the long run, but we do want to understand why this period is an outlier.<\/p>\n

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The outlier comes from the long end of the yield curve, as it has altered from the typical playbook of rate cuts, which has historically seen lower long-term yields, why?<\/em><\/p>\n