Bob’s Journal for 1/2

A Look Back and a Glimpse Forward

I start 2025 with a review of some key events in 2024.

This is done partly to remind us how much happened during the year.

I also review the past year because it can remind us not to overreact to current events. Too often, investors and markets have strong reactions to events, because investors believe the events will have long-term significance.

Often, the market moves are overreactions. Subsequently, all or most of the initial market moves are reversed. A good example is the market reactions to the recent U.S. elections, which I discussed last week.

What’s really remarkable is how little the markets reacted to developments in the U.S. elections as they unfolded.

A sitting president who had secured renomination was forced out of the contest by other party leaders because of a noticeable decline in his cognitive abilities. Yet, he remained in the presidency.

During the year, the candidate who ultimately won was convicted of multiple felonies, lost a civil suit, and had other criminal and civil cases pending. He also survived two assassination attempts.

Stock and bond markets didn’t react much to those events.

Global conflicts also were significant in 2024, yet they also had little effect on the global economy and markets.

The Russia-Ukraine war continued and expanded. Ukraine invaded and took control of part of Russia. It also launched missiles and other military actions deep in Russia.

Russia expanded its position in Ukraine and occasionally made threats to use nuclear weapons.

The war between Israel and Hamas also expanded. Israel took strong actions against Hezbollah, Iran and others while continuing its efforts against Hamas.

The Syrian government was ousted by rebels. Israel and Turkey each took the opportunity to occupy parts of Syria.

Governments of several developed nations also were in turmoil. Leaders or ruling parties were ousted or in trouble in France, Germany, Japan, South Korea, and other countries. The political situation in most of those countries was uncertain as the year ended.

If told a year ago that any of those global events would happen in 2024, I suspect most people would have predicted a worldwide recession and bear market.

Yet, in the face of all those events a major trend in 2024 was continued global economic growth and strong investment markets, especially in the United States.

In the United States, major stock indexes continued to set record highs throughout the year. Plus, 2024 is one of the few years in which the S&P 500 traded above its 200-day moving average for the entire year, according to Bespoke Investment Group.

Most markets outside the United States didn’t do as well, but they generally had positive returns.

Gold also had a strong year, setting a number of record highs before a decline late in the year.

Gold might have been a beneficiary of the global conflicts. Central banks around the world, especially in Asia, increased their gold holdings as they sought to make their reserves less dependent on the U.S. dollar.

Bitcoin was another big winner in the markets, especially in the last half of the year.

The digital currency was aided by SEC approval of ETFs that buy Bitcoin at spot prices and hold it. The SEC initially declined to approve the ETFs but was forced to approve them after it lost a series of court cases.

The election results also propelled the price of Bitcoin, because of widespread belief government policies would be more favorable toward digital assets.

The growth of artificial intelligence (AI) has been a major support of stock markets since OpenAI released its ChatGPT app a little more than two years ago.

Companies have poured money into AI-related investments, whether they are developers or likely users of the technology. The rapid improvements in AI during the year exceeded most expectations, increasing optimism about its effects on productivity and growth.

Investors remained optimistic about technology in general, despite a major software problem during the summer.

In July 2024, a faulty update to a security package from CrowdStrike that’s included in Microsoft’s Windows software caused many systems to fail. A number of airlines and banks had to either shut down or use manual systems until the error was fixed.

The major stock indexes tumbled in mid-July because of the incident but headed upward again beginning in early August.

The Federal Reserve also was a major support for most investments.

Investors mistakenly believed for most of 2022, 2023 and 2024 that the Fed would reduce interest rates rapidly and ease monetary policy.

But the inflation that began during the pandemic lingered, though many analysts believed the inflation was transitory and due to short-term supply problems.

The Fed finally reduced rates in September 2024 after becoming concerned about some weak economic data, especially in the labor market. Its actions increased growth and improved stock market returns.

But the Fed’s actions had the opposite effect on longer-term bonds. They had been rallying, but they became one of the year’s major investment losers after the Fed cut rates.

Bonds markets remain concerned about inflation, because the Fed reduced rates before inflation hit its 2% target and inflation remains sticky. Bond investors also are concerned about the perpetual federal budget deficits in the United States.

The long-term treasury bond ETF (TLT) lost more than 7% for 2024 and close to 10% in the last three months of the year.

While stocks, bitcoin, gold and some other investments set record highs, safe investments also did well.

Assets in money market funds reached record levels.

Through mid-December, assets in money market funds increased by $800 billion in 2024, which brought their rise since the end of 2022 to almost $2 trillion, according to the Investment Company Institute.

Total assets in money market funds are approaching $7 trillion. The previous high was just below $4 trillion early in the financial crisis.

A recent article in The Wall Street Journal wrote the surge in money market funds probably isn’t a sign of “cash on the sidelines” waiting for an opportunity to invest in stocks.

Instead, cash allocations by investors are at their lowest levels since 2001, according to a Bank of America survey. The surge in money market fund assets apparently is due to investors moving cash from low-yielding bank accounts to higher-yielding money market funds.

The year ended with a positive announcement. Life expectancy in the United States increased in 2023 after several years of declines, according to the Centers for Disease Control.

Life expectancy increased by 0.9 years to 78.4, and the overall mortality rate adjusted for age declined by 6%.

Death rates declined in all age groups. Average life expectancy for a 65-year-old today is another 19.5 years, up from 18.9 years in 2022.

Life expectancy still is lower than before the pandemic, but it is back on the upswing. As I’ve said many times, many people need to develop retirement plans that assume above-average life spans.

In 2024, we should have learned the futility of investing based on predictions. If we’d known ahead of time many of the things that would happen during the year, most of us would have repositioned our portfolios in ways that would have turned out to be detrimental to our returns.

The year also taught us, again, not to adjust our portfolios and retirement plans based on the latest news or rumors. Market reactions to current events often are transitory.

Have balance and diversification so you don’t depend on a particular economic or investment environment. Arrange your retirement finances with a long-term perspective. Always have a margin of safety and flexibility.

There are some issues and questions on my mind as we enter 2025, and I expect the answers will influence the economy and markets.

Will economic growth in China bounce back, or will slower growth from the country continue to be a drag on global growth?

How extensive will the tariff and trade wars be? Will it ultimately benefit the U.S. economy or lead to slower growth and higher inflation?

Will growth in productivity and immigration continue to be higher than expected, increasing economic growth while holding down inflation?

And, of course, will U.S. stocks continue to outperform the rest of the world and justify current valuations? Will the bull market spread beyond the large technology growth companies?

I’ll monitor these and a few other issues during the year. In the meantime, I wish all of you a happy and healthy New Year.