Winter 2024 Market Update

A robust fourth quarter crowned an exceptional 2024 for equities, with the S&P 500 surging 25%, including dividends, and setting a remarkable 57 new all-time highs. This was the second year in a row of stock returns greater than 25%, the best back-to-back S&P 500 performance since 1997 and 1998. Despite fears of a bumpy market due to election uncertainty, the S&P 500 finished 2024 with the lowest level of realized volatility in the last five years.

Bonds eked out a positive return, but lagged stocks by a large margin. The Bloomberg Barclays Aggregate Bond Index gained 1.3%. ?

It was another year of American exceptionalism, with U.S. stocks outperforming developed international markets by more than 20 percentage points. Emerging markets fared a little better, gaining 7.5% in 2024, but still trailed U.S. stocks.

The American economy has grown at a faster clip than international peers – largely thanks to mega-cap tech companies – so some outperformance is certainly justified with the benefit of hindsight. But as U.S. stocks have soared, the valuation difference between American and foreign stocks has significantly widened. U.S. equities continue to trade at elevated price-to-earnings (P/E) ratios (a measure of how expensive stocks are relative to their earnings), nearing the top of their historical range, while international markets remain attractively valued at or below their 25-year averages.

Source: JP Morgan

High valuations don’t mean that U.S. outperformance can’t continue, but the bar is clearly set high. Lofty expectations mean U.S. stocks will need to perform at a high level just to justify current prices. Meanwhile, poor sentiment around international stocks means any outperformance relative to low expectations could spark a rally that may close some of the valuation gap with the U.S.

Broken Crystal Balls

“History is driven by surprising events, but forecasting is driven by obvious ones” – Morgan Housel

This year provided another great example of why Wall Street predictions are like Twinkies – fun to consume, but devoid of any nutritional value. Wall Street’s 2024 predictions proved far off target, with no major firm forecasting within 10% of the S&P 500’s year-end close of 5,882. And it didn’t take long for the market to prove the analysts wrong – the S&P 500 surpassed the average 2024 forecast by the end of January, and strategists were forced to increase their estimates throughout the year as the market left their predictions further and further behind.

It’s faint praise, but at least equity strategists correctly predicted that stocks would go up rather than down. Unfortunately for their clients, the big Wall Street firms were even worse at predicting interest rates and bond returns. Fixed income strategists tracked by Bloomberg expected the 10-year Treasury yield would decline to 3.8% as the Federal Reserve began to cut interest rates. Instead, the 10-year yield went higher, finishing the year at 4.6%. Bond returns suffered as a result (bond prices decline when interest rates increase).

The wide miss by strategists in 2024 wasn’t an isolated occurrence, reflecting a broader challenge in accurately predicting market outcomes. It was the fourth time in five years that all forecasts were too pessimistic. And then, of course, there are years like 2008 and 2022, when markets declined by 20% or more. Did any Wall Street firms have the foresight to see those crashes coming? Nope. In both years when the market crashed, Wall Street’s average expectation was positive market returns.

Why beat up on the strategists, you might ask? After all, as the Nobel laurate in physics Niels Bohr said, “Prediction is very difficult, especially if it’s about the future.” The power of expectation can be a significant emotional driver, which is why it’s so important to understand that short-term market forecasts are no better than guesses.

If you are expecting the market to return between 5% and 15% – around the average range of Wall Street forecasts just about every year – and the market is down 15% in June, it’s human nature to start worrying. Even worse, Wall Street firms may start lowering their forecasts to chase the market lower. They’ll need a narrative for why they are doing that, and pretty soon you’ll be hearing on CNBC about how things are going to get even worse. Before long, you may be tempted to sell your stocks to avoid further pain.

Of course, this plays into Wall Street’s interests. The more transactions you make, the more opportunities it has to make money. But panic selling is a strategy that rarely works out.

Instead of getting distracted by the noise from Wall Street, we encourage you to focus on timeless concepts like the following:

Volatility: An Inherent Feature of Investing

“There are only two types of people: those who can’t market time, and those who don’t know they can’t market time.” – Terry Smith

Countless studies have shown that investors react emotionally to both market declines and rallies. For example, Morningstar’s ”Mind the Gap” study found that the average investor in investment funds consistently earns lower returns than the fund itself. How can that be true? The answer is in the timing of purchases and sales.

The 2022 study found that the average dollar in the fund underperformed by 1.7% over a 10-year period. Less than 2% a year may not seem like a lot, but over a decade that underperformance meant the average investor lost one-fifth of their total return to poor timing decisions.

Source: Morningstar, Full Sail Capital

Perhaps unsurprisingly, Morningstar found that investors suffered the largest performance gap in the most volatile asset categories. The temptation to add risk when markets are soaring or bail out when they swoon is too great for many investors to resist, much to their detriment. At Full Sail Capital, our advisors work closely with clients to craft personalized financial plans that incorporate disciplined asset allocation strategies. This ensures portfolios remain aligned with long-term goals, even during volatile periods.

Instead of reacting to market movements, investors would be better served by understanding that volatility is the norm rather than the exception. In fact, while many people know the long-term stock market return is around 10% annualized, few realize that it is rare for any given year to have a return in the high-single or low-double digits. In statistical terms, returns are not normally distributed. Big up years like 2023 and 2024, and large declines like 2022 are the norm rather than the exception.

We have no idea whether 2025 will end up sitting on the left, middle, or right side of the return chart. But doing our job right means building portfolios that aren’t dependent on guessing right about a one-year market return. Which brings us to…

Time Horizon

“Our favorite holding period is forever” – Warren Buffett

One problem with Wall Street’s one-year forecasting game is that 12 months is an absurdly short holding period for a volatile asset class like stocks. After all, the stock market’s return over any given day is little better than a coin flip, with negative returns around 46% of the time. Over a one-year period, investors have about a 25% chance of losing money, and therefore, history tells us to expect red numbers about once every four years in the stock market.

Source: The Capital Group

The real power of stock market investing happens when you stretch out your time horizon. Over a five-year period, returns have been positive nearly 90% of the time and over a decade you made money 94% of the time. Since 1930, investors have never had a negative return over any rolling 20.5-year period in the S&P 500.

As the next chart shows, investors have experienced a wide spectrum of outcomes over a one-year period, ranging from nearly down 60% to up almost 100%. Over time, though, the range of outcomes narrows dramatically as the holding period increases.

One comment we frequently hear from investors is “I get it that stocks go up over decades, but I’m going to retire next year so my time horizon is much shorter.” That perspective is understandable but misses the fact that most investors will need their portfolios to support them for decades after their retirement. Stocks have an excellent track record of outperforming inflation over time, and for that reason, it makes sense for them to be a part of a retired investor’s portfolio.

But it’s certainly fair for someone who is approaching or in retirement to want to avoid the periodic 30% or greater declines, especially in portfolios that contain 100% stocks. And that leads us to our last point, which is that:

Diversification works

"The only investors who shouldn't diversify are those who are right 100% of the time" - Sir John Templeton

As we’ve established, Wall Street firms with thousands of credentialed investment professionals who spend millions on research to predict short-term returns are not always right. In fact, they’re about as successful as monkeys throwing darts. Since we can never be sure good (or bad) performance will continue, one way to hedge against a sudden market decline (or increase) is to spread out portfolio exposure across different asset classes.

Within stocks, first and foremost diversification means eschewing stock picking in favor of diversified vehicles like exchange traded funds (ETFs) that own a broader basket of stocks. This approach ensures that we have at least some exposure to effectively all stocks in the market. Research from Prof. Hendrik Bessembinder of Arizona State University shows that a tiny percentage of stocks – 4% over the past 90 years or so – are responsible for 100% of stock market wealth creation that is above the rate of Treasury bills. A stock picking approach that fails to own one of these small number of “super stocks” like Amazon (responsible for one-third of the cumulative wealth generated by the entire U.S. stock market from 1926 to 2017) is destined to underperform the market.

Even in 2024, more than 60% of the stocks that make up the index gained less than the S&P 500’s total return of 25%. Around one-third of S&P 500 stocks had a negative return. Four stocks, including Moderna, Walgreens, and Intel declined more than 50%. The numbers don’t lie – stock pickers are playing a game that is nearly impossible to win over time.

Diversification also means owning small and mid-cap U.S. companies, as well as foreign companies in addition to the large cap exposure provided through the S&P 500. While these asset classes have underperformed the S&P 500 over the past few years, there have been many periods of sustained outperformance, and it is impossible to guess when the next cycle may begin.

For clients with shorter time horizons or liquidity needs, diversification means adding bonds to the portfolio. Bonds generally have a lower expected rate of return than stocks, but have the benefit of being less volatile, and can help hedge the portfolio against stock market volatility.

Source: Voya

Given market trends, including lending moving from traditional banks to private sources and companies staying private much longer in their life cycles, we also believe that there is an increasing need to diversify beyond publicly traded stocks and bonds. For qualifying clients, we believe asset classes like private credit, private equity, and real assets like private real estate and infrastructure can help improve a portfolio’s risk and return characteristics.

At Full Sail Capital, our goal is to marry these timeless investment principles with a modern investment approach to create durable investment portfolios for our clients. As we enter 2025, we are excited to help you navigate emerging opportunities in a changing market landscape, leveraging our expertise to create resilient portfolios tailored to your unique goals.

Full Sail Capital is an SEC registered investment advisor located in Oklahoma City, composed of financial advisors registered under the SEC as fiduciaries. More information is available at fullsailcapital.com.

Full Sail Capital, LLC is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information, please visit adviserinfo.sec.gov and search for our firm name