Like 2023, in 2024 markets participants were treated to another 20%+ year for the S&P500. The focus remained on the AI beneficiaries and a concentrated rally that drove the market to 57 all-time highs (through December 6^th, 2024). Volatility remained muted with only an 8.5% drawdown during the year, and volatility only modestly increased when a candidate in the US election was hot-swapped in the late summer. Rather than a Santa Clause rally, this year’s yearend action anticipates sweeping policy changes from the ‘new’ Trump administration and a more hawkish tone from the Fed during the last FOMC meeting of the year.

While we don’t make forecasts or try to predict short-term market gyrations, we have compiled a small collection of charts and observations to help put this market in context.

What happens after back-to-back 20%+ gains?

Just about anything. The chart below highlights all the years with back-to-back 20%+ returns for the S&P 500 since 1928. The worst result was in 1937 (-35%) due to a severe recession and monetary shocks. The best result was in 1997 (+33%), the third of five consecutive years with 20%+ returns. The average return after a pair of 20%+ years is 7%, and the market is higher a year later 67% of the time.

What’s Consensus

Weekends between US Thanksgiving and New Years allow us to pour over the plethora of Year Ahead Reports published by both the buyside and sellside. The primary purpose of this exercise is to reflect on the previous year and to understand if a clear consensus is emerging, like in late 2022 when the reports focused on the magnitude of the 2023 recession (which never materialized) - a clear consensus tends to be a contrarian indicator! The themes consistently present as we approach 2025 are US exceptionalism, a strong US dollar, investor complacency, and the impact of tariffs and other US policies. Finally, while they aren’t explicitly drawing attention to the call, most of the US bulge bracket brokerages are forecasting earnings to grow faster than their price targets, which implies they expect to see S&P 500 multiples compress over the next year.

Closer to home, after general enquiries about the macroeconomic or geopolitical environment, the most common questions we are fielding from clients are:

1. Should we increase our exposure to the US, US growth stocks, or bitcoin?
2. What do you think of BCE? Have you seen its dividend yield?
3. What do you think of TD Bank? Have you seen its dividend yield?

To be clear, the above is not a solicitation for the purchase or sale of any security, including US stocks, BCE or TD Bank.

What about Investor Sentiment

While sentiment was starting to look complacent in November, I had to rewrite this section after US Fed Chair Jerome Powell put markets on notice about further interest rate cuts during the December 18^th FOMC meeting. Sentiment has shifted away from extremes to the middle, where markets tend to muddle higher.

There is Cash on the Sidelines

To quote my former colleague David Suzuki, “It is often said that the nearly $7tn in money market assets represents cash poised to “come off the sidelines” and send markets higher. … To start, money market funds are just part of the story. Total household cash levels are nearly three times larger, at approximately $18.4tn. For perspective, this surpasses the annual revenues of the combined S&P 500 and nearly matches the federal government’s spending over the past three years”. There is still a lot of cash on the sidelines.

Volatility has been Muted since October 2022

The largest drawdown from a market high in 2023 and 2024 was 10.3% and 8.5%, respectively. The chart below helps put the lack of volatility the market has experienced over the last two years in context. This level of volatility, or lack of volatility, is unusual. Investors should expect multiple 5%+ pullbacks and at least one 10%+ pullback each year. Since 1928, the average and median intra-year pullbacks for the S&P 500 have been 16% and 13%, respectively.

Trump 1.0 vs Trump 2.0

When Trump was elected in 2016, the stock market, the US Dollar, oil, and yields rallied on the potential for sweeping policy changes that would drive the US economic activity. Yields, the USD, and oil then paused in 2017 as participants digested the impact of policy changes versus the already-priced expectations. The situation culminated in a negative return for markets in 2018 (caused by the Taper Tantrum and concerns about potential trade wars) before earnings drove the market higher in 2019. Could we see similar patterns in 2024+?

Source: ISI Evercore

Inflation

Unanticipated inflation, like what we lived through in 2022, is difficult for households, companies, and the broader economy. We need to adjust prices and expectations which takes time. We’re much better at dealing with anticipated or expected levels of inflation. We should plan accordingly with the faster twitch Truflation measure, which is again trending higher (chart below).

We also went back and forth about including the following chart from PIMCO. In the end, we decided it was important to highlight that stocks and bonds have a negative correlation, meaning they can be used to reduce the volatility of a portfolio when inflation is less than 3% (based on CPI, which moves much slower than Trueflation; above).

Market Breadth Improving

Narrow markets tend to give way to markets with better breadth. 2025 could be where we see market breadth improve as the S&P 493 earnings growth catches up to the Magnificent Seven.

Our Biggest Concern

Over the last two years, we have often commented that we could not tell if it was 1995 or 1999 for the securities that benefit from AI. Staying with that theme, it feels like one of the risks we need to look out for today is if it is 1997 or 1999.

Note: For those reading carefully, take a moment to scroll back to the first chart in this post and look at the returns in 1997, 1998, and 1999, after the S&P 500 was 20%+ per year in 1995 and 1996. For those less interested in a treasure hunt, the returns in 1997, 1998, and 1999 were more than 20%, but things got messy in 2000-02.

What’s an investor to do?

The key for investors is often to stay invested. There are always reasons to sell, but you won’t find many investors happy about selling in 2018 or 2020 or 2022. In 2023 and 2024, the key was (again) to stay invested.  

The chart below illustrates that longer time horizons increase the probability of a positive return for the S&P 500.

Wading through a sea of conflicting data points is common in investing. Thus investors may benefit from saving and investing consistently across market cycles. This process could potentially allow an investor to buy more securities when the market is inexpensive and fewer securities when the market is expensive. Most importantly, an investor can avoid the need to make ‘hero’ calls based on market timing.

Some investors may find value in using a barbell strategy where high-quality companies exposed to secular themes provide exposure to equity markets. The other side of the barbell is cash, actively managed fixed income and alternative investments that potentially reduce volatility and provide ballast for portfolios. For investors in the distribution phase of their lives, the focus expands to optimize the tax efficiency of distributions.

Please get in touch with me for a more detailed discussion.

Delli (delli@cibc.com)