Stellar Gains, Missed Predictions and Market Surprises
Since this is my first blog of the year, I’d like to wish readers a happy, healthy and prosperous year in 2025. In keeping with tradition, let’s kick off the year with a look at how global capital markets performed in 2024.
The short answer: They did exceptionally well. The last two years marked the first time since 1997-98 that the S&P 500 Index had two consecutive years of returns above 20%. All the stock markets we invest in saw double-digit returns.
(You can find market statistics in the resources section of our Capital Topics website and on our team’s page on the PWL Capital website.)
Pundits got it wrong… again
This sunny result was certainly not what was predicted by pundits at the start of 2024. Many warned of significant market headwinds, citing inflation and geopolitical worries such as the war in Ukraine, the Middle East conflict and Chinese threats over Taiwan. It didn’t help that the U.S. was headed into a highly divisive presidential campaign.
But as readers of this blog will know, it’s nothing new that pundits were wrong. On the economic front, central banks proved successful in taming inflation while also managing to avoid triggering recessions.
Decent returns for bonds
In fixed-income markets, Canadian bonds experienced decent returns as the Bank of Canada lowered its benchmark rate and bond prices rose. (Bond prices rise when bond yields go down.)
Canadian short-term bonds were up 5.7% for the year, while the total bond market, which holds longer-dated maturities, was up by 4.23%.
The Canadian short-term bond index currently yields 3.3%, while the total bond market yields around 3.7%.
Banner year for equities
Equities saw a banner year in 2024. In Canada, the S&P/TSX Composite Index shot up an impressive 21.65% and hit multiple new record highs. It was a broad-based performance, too; 10 of the 11 sectors saw gains. As in 2023, information technology led the way with a spectacular 45.1% return.
Unusually, value outperformed growth. Large and mid-cap growth stocks gained 19.9% versus 26.0% for value stocks. Small-cap stocks also outperformed large and mid-cap stocks with a performance of 21.91%.
We highlight value and small-cap stock performance because we tilt toward these asset classes in our clients’ portfolios due to historic data showing their expected higher long-term returns.
Stellar U.S. equity gains
U.S. equities also saw stellar gains. The total U.S. market soared 23.81% in U.S. dollars. It did even better in Canadian dollars—up 34.31%—because our currency lost ground against the greenback.
The growth vs. value story was reversed south of the border. Large and mid-cap growth stocks were up a remarkable 44.67% last year, while value stocks generated a still very respectable 24.07% (both in Canadian dollars).
In 2024, the big story in the U.S. was the surge of momentum in artificial intelligence stocks. Communication services and technology were the top-performing sectors, led mostly by the so-called “Magnificent Seven” stocks.
Mega-gains for “Mag 7”
The “Mag 7” are the seven largest U.S. stocks by market capitalization: Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook), Microsoft, NVIDIA and Tesla.
These mega-companies skyrocketed on average 60.5% last year. The top gainer was NVIDIA (up 171%), while the worst was Microsoft (12%).
The market cap weight of the “Mag Seven” has only continued to grow. They now represent 34% of the S&P 500 Index and close to 19% of the MSCI All Country World Index.
International equities also did well
International developed markets didn’t do as well as North American equities, but still had a good year. Large and mid-cap stocks returned 12.63% in Canadian dollars. International large and mid-cap value stocks outperformed growth, gaining 14.65% compared to 10.7% for growth. Small cap stocks also did well but trailed large and mid-cap stocks with a performance of 10.45%.
Emerging markets did better, with large and mid-cap stocks returning 17.22%. Large and mid-cap growth outperformed value, and small cap stocks trailed large caps.
Lost decade ahead?
The exceptional returns and high mega-cap concentration have raised questions about whether we’ll see below-average equity returns in 2025 and beyond. Some have predicted a “lost decade” ahead.
Ben Carlson, in his blog A Wealth of Common Sense, found that the S&P 500 Index has seen three instances of back-to-back returns above 25% since 1928. It happened in 1935-36, 1954-55 and 1997-98.
The subsequent year’s results were all over the map. In 1937, the index lost 35%, in 1956 it gained 7% and in 1999 it shot up 21%. “Terrible, decent and great. Not helpful,” Carlson concluded.
Stick to the plan with discipline
We may not be able to predict the future, but we can continue following our long-term strategy of diversified investing using broad index funds. After outsized gains in any asset class, it’s also a good idea to take profits and rebalance to stay aligned with your target allocations.
Sticking to your investment strategy with discipline is the best way to weather any coming doldrums and benefit most from market advances.
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Read more commentary and insights on personal finance and investing in our past blog posts, eBooks and podcast on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.