Fourth Quarter Newsletter

Responsible Guidance:  Fourth Quarter 2024 Newsletter, January 2025

Anchoring: Relying too heavily on an initial piece of information

Maybe you have heard...

In 2024, the S&P 500 index was up 25%.  The index consists of roughly 500 of the largest publicly traded companies in the United States (U.S.).  Each company’s representation in the index is based on its market capitalization.  The larger the company’s market value, the larger the impact it has on the value of the index.  At the time of this writing, the ten largest companies (think Apple, NVIDIA, Microsoft, Amazon, Meta, etc.) are so big, their performance represents about 38% of the index. So, though the S&P 500 is thought of as a well-diversified index, its best representation is of large cap stocks in the United States and is heavily influenced by the top ten largest companies.

With the S&P 500 doing so well, you may think other indexes have been keeping up, but unfortunately that was not the case in 2024.  We will cover most of the other indexes listed below and their performances throughout our letter but thought a chart previewing the details would be helpful.  As you can see, performances of other indexes ranged from 7.50% to -5.32%. 

We share this information to set expectations.  A diversified portfolio that has exposure to these distinct types of assets should neither perform as poorly as the worst performing (down 5.32%) nor as well as the top performing (up 25.02%).

Over time, we do believe that the leaders in performance will rotate, so it is important to be diversified.  We want to make sure, if you are a diversified investor, you do not “anchor” to the S&P 500 performance this year as you evaluate your investments in Your Personal Economy^SM, the aspects of your financial life that are unique to you.

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification. Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries. There are popular benchmark indexes that provide perspectives about the performance of global investments.

For equities, we monitor the MSCI ACWI All Cap Index. This index represents stock investments across 23 developed and 24 emerging markets. The index was down 1.24% in the fourth quarter, dropping performance to 16.29% for the year.  Performances in equities outside the U.S were weaker than domestic stocks and were a drag on overall performance.  Concerns about future economic growth in foreign countries have resurfaced and geopolitical risks remain. The negative performance in the fourth quarter ended the positive streak for the previous four quarters.

For fixed income, or bonds, we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies. The index was down 5.44% for the fourth quarter driving 2024 performance into negative territory, down 2.82%. 

U.S. Economy

The U.S. economy continues to grow, as the Federal Reserve continued to lower rates throughout the fourth quarter.  The employment situation continues to be a concern, as the unemployment rate remains above 4%.  Recent inflation data has been somewhat mixed.   

The Bureau of Economic Analysis (BEA) announced in its final estimate for the third quarter of 2024 that real Gross Domestic Product (GDP) increased at an annual rate of 3.1%.  This was in line with second-quarter growth.  The continued growth was driven by increases in consumer spending, exports, nonresidential fixed investment, and federal government spending (the full press release can be found at https://www.bea.gov).  This was the ninth straight quarter of positive economic growth.

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the fourth quarter of 2024) using an approach like the BEA. On January 9, 2025, the estimate for fourth quarter GDP from the Federal Reserve Bank of Atlanta was positive 2.7%. Note that this estimate updates regularly and is subject to change. The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow.

Job growth continues, but the unemployment rate remains above where it started the year. According to the Bureau of Labor Statistics (BLS), the U.S. gained 256,000 jobs for the month of December, and the unemployment rate remained above 4%, at 4.1%.  BLS indicated job growth was notable in health care, government, and social assistance (full press release can be found at: https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, continued to perform positively, up 2.41% in the fourth quarter, finishing the year up 25.02%.  It was the best performing index of those we cover in the newsletter for both the fourth quarter and all of 2024.  Communication Services, Financials and Technology were some of the top performing sectors in 2024.

For technical analysts and trend followers, the index was close to the 50-day moving average in  early November but stayed above. Then in mid-December the index rotated around the trend line, ending the year below.  The index remained above the 200-day moving average for the entire quarter.  

Dividing index components into growth and value, growth-focused stocks continued to outperform in 2024.  Value last outperformed on a calendar year basis in 2022, when most equity indexes were struggling.

International Stocks

International-developed-country stocks (such as those in the European Union), measured by the MSCI EAFE index, were lower by 8.11%, losing the gains achieved in the third quarter, but remained positive for 2024, up 3.82%.  Non-developed, or emerging country stocks, measured by the MSCI EM index, were down 8.01% in the fourth quarter, hampering 2024 performance to 7.50%.    

International stocks struggled in the final quarter of the year resulting in performances significantly lower than U.S-based stocks.  The last time international stocks outperformed U.S stocks on a calendar year basis was 2022, and then 2017 prior to that.

Bonds

U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index (gauges performance of investment-grade intermediate bonds), was down 3.06% in the fourth quarter, as bonds with intermediate maturities moved in the opposite direction of shorter-term bonds impacted by the Federal Reserve interest rate cuts.  When interest rates move lower, bond prices go up, possibly resulting in gains for existing bond holders, however the opposite occurs when rates go higher.  The index finished 2024 up 1.25%. 

The 10-year U.S. Treasury bond yield finished 2024 at 4.58%, much higher than where it began the year at 3.88%.  Though the Fed continued cutting rates in the fourth quarter, intermediate-term and longer-term rates moved higher.   

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion, and fixed-income investors are compensated for taking longer-term risks. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty, and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

At the end of 2024, the 2-year rate was 4.25% (and 10-year 4.58% per above) keeping the curve slightly positive, at 33 basis points (a basis point represents 1/100 of 1%). As a reference, the yield curve was inverted from the third quarter of 2022 to the third quarter of 2024.  You may recall the Fed started raising rates in March 2022 to fight inflation and then began cutting rates in September 2024 with inflation reducing.

The yield curve slowly adjusted during the year from inverted to its slightly steepened position.    If the economy continues to grow and if inflation continues to slow, the curve could be indicating continued growth opportunities for the economy with long-term rates possibly remaining higher than short-term rates.

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, was the worst performing index in the fourth quarter of those we cover.  The index was down 8.15%, causing performance for the year to come in at 4.92%.  We say that performance rotates, and this is certainly an example as Real Estate was the best performing index, in the third quarter, up 16.79% for that time period. 

According to Freddie Mac (FM), the average 30-year residential home mortgage rate increased  to 6.93% (as of 1/09/2025). During the past 52 weeks, the rate has been between 6.08% and 7.22%.

Natural Resources

The Bloomberg Commodity Index was relatively flat in the fourth quarter, down less than 1%.  In 2024 the index was up by over 5% as the costs of commodities and raw materials increased. Precious metals, cattle, and oil had a solid year.  Distractors from positive performance included natural gas, soybeans, and corn. 

Baron Client Strategies

Planning for multiple outcomes with Your Personal Economy^SM is critical to helping our clients answer the simple question "Am I going to be OK?".

As clients know, we are Registered Investment Advisors (fiduciaries) and we operate as fee-only advisors, so we do not receive a commission for making investment transactions. A big reason your Baron team makes trades is to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy. Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions. We use this same approach with our own personal money.

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments.  Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have experienced any changes to your financial position or are considering changing financial goals and objectives, please let us know.

Your Personal Economy^sm

Concluding Comments  

As investors evaluate new opportunities and challenges, you may also be evaluating all things that impact you with a dollar sign involved.  Remember we are here for you and happy to offer direct advice or work with your other professionals (such as accountants and attorneys) to provide you with the options that can help work towards financial success.

Baron Updates

Our thoughts are with those affected by the wildfires in Southern California.  We hope you and your loved ones are safe! If you are experiencing any financial planning difficulties,  please reach out to your Baron Team for guidance.  As always, we continue our support for our local food banks, and at this time we included the Los Angeles Regional Food Bank -   https://www.lafoodbank.org/.

As we start the new year, continue to look for upcoming educational posts on our website blog with our annual financial checklist and some new financial planning numbers. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing..

The start of the new year is also a good time to update your beneficiaries, if needed, on your estate documents or accounts.  Please contact us if you need our assistance with any updates, including updating your trusted contact form with a new trusted contact. A protective measure we use for our Baron clients, particularly important as they get older, is the Trusted Contact form that is kept on file at Schwab and at Baron. If you have not completed this form by assigning a trusted contact, let us know. The more recent Schwab account applications include this form.

Remember that you can also visit our website to gain access to your client portal. Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

We are humbled to announce that Advisors Anthony Benante (in Sarasota) and Victor Cannillo (in New Jersey) are once again recognized as Five Star Wealth Managers. You can read more about this award and its criteria on our website.

In addition, we are proud to announce that Anthony Benante recently earned the CERTIFIED FINANCIAL PLANNERTM (CFP®) certification!  As you know, Tony is also a Chartered Financial Analyst® Charterholder (CFA®) and Baron’s lead adviser on the investment committee, as well as the main contributor to this newsletter. Congratulations, Tony!

We look forward to hosting our Client Appreciation Spring Training Baseball game event in Sarasota, Florida on March 20, 2025.  Please join us!

We wish you all a happy, healthy, and prosperous New Year!
Click here to view our New Year’s video message.

Warmest Regards,

Baron Financial Group, LLC
www.baron-financial.com

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 14, 2025 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.