As we enter the final stretch of 2024, it’s time to take stock of what’s been, by any measure, a fantastic year for the U.S. stock market. We’re looking at roughly 25% gains year-to-date, with the last quarter showing some moderation at 4.4% growth. The second half of 2024 contributed about 9.6% to the annual returns, clearly indicating that most of our gains came in during those first six months when we were dealing with election uncertainty, economic questions, and the market’s reaction to inflation and anticipated interest rate cuts.
The Fed’s Latest Move – A Hawkish Rate Cut
This past week has been challenging for the market, particularly following Wednesday’s Federal Reserve announcement. The Fed came out with what I’d call one of the most hawkish rate cuts you’ll ever see. Yes, they cut 25 basis points, but they also delivered some sobering news: inflation is stickier than anticipated, and the economy is actually in pretty good shape. Instead of the four or five rate cuts markets were pricing in for next year, we might be looking at just two.
Now, let’s be clear – this isn’t set in stone. The Fed’s stance is data-dependent and could change. But the current economic indicators are actually quite positive: consumer spending is up, small business and consumer optimism has improved, and the jobs market remains healthy. In fact, the only thing keeping wage inflation somewhat in check has been record legal immigration, which has helped ease pressure in certain occupations.
Market Dynamics and Bitcoin Drama
Something else interesting came out of the Fed meeting – Powell effectively shot down any notion of Bitcoin becoming a reserve asset. This caused some selling in cryptocurrencies that spilled over into stocks, though we’ve seen some recovery in the following days. The market had baked in expectations for a steady stream of rate cuts going into 2025, and now that narrative is being challenged.
The Tariff Wild Card
There’s another factor we need to consider – the potential for aggressive tariffs. If implemented as proposed, these would be the broadest-based tariffs we’ve seen in a very long time. The implications could be significant: increased geopolitical tensions, higher inflation, and potentially dramatic slowdowns in global economic activity and trade. Just last night, there were comments about potential tariffs on Europe related to oil and gas purchases. This could spark a trade war that might fuel inflation while simultaneously causing economic weakness.
Technical Analysis and Historical Context
From a technical perspective, stocks remain in a strong uptrend, though selling has dominated this week. The first real test of trend support would come around 575. What’s particularly interesting – and potentially concerning – is the current market setup: stocks are above their 200-day moving average in an uptrend, while bonds are below theirs and falling further. This divergence needs to resolve one way or another – either bonds go up, or stocks come down.
Historically, we’ve seen this pattern before the great financial crisis, before the dot-com bubble burst, and just before the 25% decline in late 2021. However, it’s worth noting that we’ve also seen favorable resolutions, particularly in 1983-84. The key difference? Back then, the P/E ratio was 12 and rates were falling. Today, we’re looking at a trailing P/E of 30 and a CAPE ratio of 37.
Portfolio Updates
Looking at our portfolio holdings:
KKR continues to be an economic powerhouse with fantastic fundamentals. They’re well-positioned for 2025, particularly in private equity and private credit markets. Their recent market outlook, authored by Henry McVeigh and team, provides valuable insights from a boots-on-the-ground perspective rather than theoretical economics.
Accelerate Energy is having one of the better weeks in our portfolio, despite the Biden administration’s recent comments about LNG environmental concerns. Oscar Health is starting to stabilize and build a base for recovery, while Zeta Holdings continues to face bear attacks despite solid fundamentals and significant market expansion.
Position Sizing and Strategy
A word on position sizing – keep individual positions to 2-3% maximum of your portfolio. We’re building toward a 30-35 stock portfolio over time, but we’re currently at just 12 stocks, indicating our cautious stance in the current market environment. If we see a 25-30% market selloff while our holdings maintain strong fundamentals, we might consider increasing position sizes, but we’re not there yet.
Looking Ahead
As we head into the Christmas to New Year’s period, typically a quiet time for markets, we’ll maintain our cautious stance. We’re not adding any new positions this week, though that could change if we see more aggressive selling next week. The key is to react to what actually happens rather than trying to predict the market’s next move.
Remember, various market indicators suggest we might not have a great decade ahead, but as someone recently told me, “These indicators don’t tell you when you’re going to get thrown out of the window of a building – they just tell you how high the building is when they finally come along and toss you.”
Stay vigilant, maintain appropriate position sizing, and we’ll continue to monitor the situation closely as we move into 2025.