Commentary from the Investment Committee of Coral Gables Trust
Q4 2024 – Better Breadth Ahead?
Despite headwinds of elevated interest rates, rising unemployment, turmoil in the Middle East, and the ongoing Russia/Ukraine war, the economy proved resilient. Corporate profits rose and the once anticipated recession never materialized. It was an extraordinary year for the economy and markets as inflation ticked lower and the insatiable appetite for Artificial Intelligence fueled markets higher. As such, the S&P 500 posted a spectacular year with a +25.00% return, notching 57 record closes and experiencing its best consecutive years since 1997 and 1998. The Dow Jones Average advanced +14.99% and for the first time surpassed 45,000. The technology-heavy NASDAQ led the pack with a +29.60% return as Artificial Intelligence stocks like Nvidia and Apple hit record highs. While the stock market’s return this year has been nothing short of spectacular, there is no secret that this stellar performance is largely attributed to a handful of technology stocks. The Magnificent Seven consisting of Apple, Microsoft, Amazon, Alphabet, Meta, Tesla and Nvidia returned 48% on their own compared to only 10% for the remaining 493 stocks and accounted for an astonishing 55% of the index’s gains. Additionally, the top 10 holdings of the S&P 500 have swelled to 39% of the index leaving the index less diversified than ever. It is welcoming to see the market slowly broaden away from these high-flying technology names and into sectors and companies with more compelling valuations. The chart below illustrates the extreme narrowness of the market as Magnificent Seven’s earnings have more than doubled in the past two years, while the Equal Weight S&P 500 has stayed stagnant.
Sources: Bloomberg, NewEdge Wealth
While Artificial Intelligence will continue to be a focal point, earnings growth for the Magnificent Seven is expected to normalize and conversations are becoming more balanced with return-on-investment concerns weighed against their impressive profits and cash flow generation. Investors are eagerly awaiting fourth quarter corporate earnings for insights and guidance for the new year. Analysts are forecasting a 14.70% increase in corporate profits in 2025. We see the current expectations of double-digit earnings growth as ambitious but believe that a mid-to-high single digit growth level is achievable and would be a positive backdrop for stocks.
Economic Developments: Full Steam Ahead
The strength of the U.S. labor market continues to fuel the economic expansion and showcase the resilience of the economy in the face of high interest rates. The December employment situation unexpectedly picked up with the addition of 256,000 jobs, which was significantly ahead of economists’ forecasts (155,000) and marks an increase from the 227,000 positions added in November. The U.S. added more than 2 million jobs in 2024, more than double the number expected by economists heading into the year. Furthermore, the unemployment rate was also better than expected at 4.10% compared to the expected 4.20%.
With the U.S. economy expected to grow by a healthy 2.70% in 2024, it remains the envy of its global peers and begins the new year on a solid footing. We believe that the biggest risk to the economic outlook comes from new federal policies, which are likely to be a mix of immigration, tariffs, tax and regulatory policy that could potentially raise inflation. However, the new administration has inherited a robust economic backdrop and President Trump will have every desire to keep the economy and stock market humming. With the underlying fundamentals of the American consumer well intact, the U.S economy is forecasted to slow slightly to a solid growth of 2.00% in 2025.
Federal Reserve: Slower Pace of Interest Rate Cuts
At December’s Federal Reserve meeting, the committee lowered the policy rate by 0.25% or 25 bps to a range of 4.25% to 4.50% and shifted interest rate expectations higher. The updated Summary of Economic Projections removed 50 basis points of rate cuts for 2025, leaving just 50 basis points of rate cuts expected in the next 12 months. Chair Jerome Powell’s hawkish comments on the uncertainty around the impact of President Donald Trump’s tariff, tax and other proposals; as well as the committee’s cautiousness about further reduction surprised the market. The new administration’s pro-growth policies and inflationary pressures could cause the Federal Reserve to cut policy rates less than expected. Alternatively, any deterioration in economic growth or labor market could bring the Federal Reserve to cut policy more than expected. As such, the Federal Reserve will proceed cautiously, and future rate cuts are likely to be slower and shallower than previously expected. The chart shows the path of the federal funds rate since 2022, along with Federal Reserve projections and the market-implied path for the rate for 2025.
Sources: Federal Reserve, CME FedWatch
Fixed Income Markets: Patience Pays
It was a year of caution as the bond market was caught between the Federal Reserve’s plan to cut interest rates and the risks of higher inflation and debt levels in 2025. The rise in yields that started in the fourth quarter continued in December with a final and sharp move higher. The recent moves in both the short and long ends of the curve are notable. The 2024 low in the 10-year Treasury yield coincided with the first rate cut from the Federal Reserve in September. Since then, while the policy rate is now 100 basis points below the peak, the yield in the 10-yr Treasury has risen by more than 100 basis points. This increase in longer-term yields is unusual in a rate-cutting cycle and reflects a new outlook. For much of the year, the soft-landing scenario of moderate growth and declining inflation amid low unemployment drove bond yields lower, but upward revisions to growth estimates and concerns about higher budget deficits could keep rates elevated in 2025.
Despite the selloff in the fourth quarter, the Bloomberg Barclays Aggregate Bond index remained positive with a 2024 return of +1.25%. However, foreign bonds did not fare as well and produced a -5.32% return for 2024. While bonds have been volatile for several quarters, yields are attractive, and the recent increase provides an opportunity for long-term savers. Furthermore, credit spreads for investment grade and high yield corporate bonds have continued to narrow and are close to historic levels of tightness. The probability of a recession remains low, and corporate balance sheets appear to be relatively healthy. Default rates should remain low given positive tailwinds from pro-growth policies. Investors should still focus on quality and favor investment-grade corporate bonds, municipal bonds and treasuries. Given the high level of uncertainty around policy, we recommend positioning portfolio duration at or lower than benchmark. A slightly shorter duration stance will reduce the portfolio’s overall sensitivity to interest rate changes while capturing competitive coupon income. Despite our caution, we recognize that periods of high volatility and rising yields can provide an opportunity for investors looking to capture more income over the long term. We will be closely monitoring and determining how we can best capitalize on these opportunities. The chart below illustrates how most of the return bondholders experience is from coupon return over the long-term.
Source: Bloomberg
Thoughts on Asset Allocation
While 2025 will bring its own twists and turns in market narrative, there are plenty of reasons to remain optimistic as we enter the new year. Optimism stems largely from the current economic conditions, sentiment surrounding an incoming administration deemed to be more “business friendly,” and a Federal Reserve that wants to gradually ease policy alongside a backdrop of a healthy labor market and consumer. While valuations have risen and policy uncertainty is elevated, this should not preclude corporate profits from rising and fueling future gains. However, with the market appearing priced to perfection, even minor setbacks could lead to volatility. This is particularly important when it comes to the top 10 and Magnificent Seven stocks in the S&P 500. Despite the initial discomfort, market corrections are healthy and help to realign stock prices with their intrinsic values. They act as a reminder of the inherent risks in the market, encouraging investors to review and diversify their portfolios to mitigate potential losses. We continue to advise clients on the need to take a long-term approach to their portfolio that aligns with their financial plan.
Looking forward to 2025, our Trust Investment Committee thoroughly reviewed our positioning for the new year and believes client portfolios should maintain diversification between growth and values styles, complemented with a slight reduction of duration within fixed income allocations. Additionally, the Committee decided to enhance our international and mid-cap allocations with new growth managers with fantastic long-term track records. While we cannot predict what theme will dominate the market in 2025, we remain fully dedicated to mitigating risk through fully diversified portfolios. Listed below is a subset of our equity and fixed-income managers that performed exceptionally well during the year against their benchmarks.
*Returns are from actual portfolio results. Results may vary. Past performance is no guarantee of future returns.
We look forward to speaking with each of you about our investment philosophy and strategies and your portfolio’s performance.
For additional information, please contact Mason Williams, Chief Investment Officer, at 786-497-1214, or Michael Unger, Vice President/Investment Officer, at 786-292-0310.
RESOURCES
Quarterly Report: Q4 2024
Q4 2024 – Better Breadth Ahead?
Despite headwinds of elevated interest rates, rising unemployment, turmoil in the Middle East, and the ongoing Russia/Ukraine war, the economy proved resilient. Corporate profits rose and the once anticipated recession never materialized. It was an extraordinary year for the economy and markets as inflation ticked lower and the insatiable appetite for Artificial Intelligence fueled markets higher. As such, the S&P 500 posted a spectacular year with a +25.00% return, notching 57 record closes and experiencing its best consecutive years since 1997 and 1998. The Dow Jones Average advanced +14.99% and for the first time surpassed 45,000. The technology-heavy NASDAQ led the pack with a +29.60% return as Artificial Intelligence stocks like Nvidia and Apple hit record highs. While the stock market’s return this year has been nothing short of spectacular, there is no secret that this stellar performance is largely attributed to a handful of technology stocks. The Magnificent Seven consisting of Apple, Microsoft, Amazon, Alphabet, Meta, Tesla and Nvidia returned 48% on their own compared to only 10% for the remaining 493 stocks and accounted for an astonishing 55% of the index’s gains. Additionally, the top 10 holdings of the S&P 500 have swelled to 39% of the index leaving the index less diversified than ever. It is welcoming to see the market slowly broaden away from these high-flying technology names and into sectors and companies with more compelling valuations. The chart below illustrates the extreme narrowness of the market as Magnificent Seven’s earnings have more than doubled in the past two years, while the Equal Weight S&P 500 has stayed stagnant.
Sources: Bloomberg, NewEdge Wealth
While Artificial Intelligence will continue to be a focal point, earnings growth for the Magnificent Seven is expected to normalize and conversations are becoming more balanced with return-on-investment concerns weighed against their impressive profits and cash flow generation. Investors are eagerly awaiting fourth quarter corporate earnings for insights and guidance for the new year. Analysts are forecasting a 14.70% increase in corporate profits in 2025. We see the current expectations of double-digit earnings growth as ambitious but believe that a mid-to-high single digit growth level is achievable and would be a positive backdrop for stocks.
Economic Developments: Full Steam Ahead
The strength of the U.S. labor market continues to fuel the economic expansion and showcase the resilience of the economy in the face of high interest rates. The December employment situation unexpectedly picked up with the addition of 256,000 jobs, which was significantly ahead of economists’ forecasts (155,000) and marks an increase from the 227,000 positions added in November. The U.S. added more than 2 million jobs in 2024, more than double the number expected by economists heading into the year. Furthermore, the unemployment rate was also better than expected at 4.10% compared to the expected 4.20%.
With the U.S. economy expected to grow by a healthy 2.70% in 2024, it remains the envy of its global peers and begins the new year on a solid footing. We believe that the biggest risk to the economic outlook comes from new federal policies, which are likely to be a mix of immigration, tariffs, tax and regulatory policy that could potentially raise inflation. However, the new administration has inherited a robust economic backdrop and President Trump will have every desire to keep the economy and stock market humming. With the underlying fundamentals of the American consumer well intact, the U.S economy is forecasted to slow slightly to a solid growth of 2.00% in 2025.
Federal Reserve: Slower Pace of Interest Rate Cuts
At December’s Federal Reserve meeting, the committee lowered the policy rate by 0.25% or 25 bps to a range of 4.25% to 4.50% and shifted interest rate expectations higher. The updated Summary of Economic Projections removed 50 basis points of rate cuts for 2025, leaving just 50 basis points of rate cuts expected in the next 12 months. Chair Jerome Powell’s hawkish comments on the uncertainty around the impact of President Donald Trump’s tariff, tax and other proposals; as well as the committee’s cautiousness about further reduction surprised the market. The new administration’s pro-growth policies and inflationary pressures could cause the Federal Reserve to cut policy rates less than expected. Alternatively, any deterioration in economic growth or labor market could bring the Federal Reserve to cut policy more than expected. As such, the Federal Reserve will proceed cautiously, and future rate cuts are likely to be slower and shallower than previously expected. The chart shows the path of the federal funds rate since 2022, along with Federal Reserve projections and the market-implied path for the rate for 2025.
Sources: Federal Reserve, CME FedWatch
Fixed Income Markets: Patience Pays
It was a year of caution as the bond market was caught between the Federal Reserve’s plan to cut interest rates and the risks of higher inflation and debt levels in 2025. The rise in yields that started in the fourth quarter continued in December with a final and sharp move higher. The recent moves in both the short and long ends of the curve are notable. The 2024 low in the 10-year Treasury yield coincided with the first rate cut from the Federal Reserve in September. Since then, while the policy rate is now 100 basis points below the peak, the yield in the 10-yr Treasury has risen by more than 100 basis points. This increase in longer-term yields is unusual in a rate-cutting cycle and reflects a new outlook. For much of the year, the soft-landing scenario of moderate growth and declining inflation amid low unemployment drove bond yields lower, but upward revisions to growth estimates and concerns about higher budget deficits could keep rates elevated in 2025.
Despite the selloff in the fourth quarter, the Bloomberg Barclays Aggregate Bond index remained positive with a 2024 return of +1.25%. However, foreign bonds did not fare as well and produced a -5.32% return for 2024. While bonds have been volatile for several quarters, yields are attractive, and the recent increase provides an opportunity for long-term savers. Furthermore, credit spreads for investment grade and high yield corporate bonds have continued to narrow and are close to historic levels of tightness. The probability of a recession remains low, and corporate balance sheets appear to be relatively healthy. Default rates should remain low given positive tailwinds from pro-growth policies. Investors should still focus on quality and favor investment-grade corporate bonds, municipal bonds and treasuries. Given the high level of uncertainty around policy, we recommend positioning portfolio duration at or lower than benchmark. A slightly shorter duration stance will reduce the portfolio’s overall sensitivity to interest rate changes while capturing competitive coupon income. Despite our caution, we recognize that periods of high volatility and rising yields can provide an opportunity for investors looking to capture more income over the long term. We will be closely monitoring and determining how we can best capitalize on these opportunities. The chart below illustrates how most of the return bondholders experience is from coupon return over the long-term.
Source: Bloomberg
Thoughts on Asset Allocation
While 2025 will bring its own twists and turns in market narrative, there are plenty of reasons to remain optimistic as we enter the new year. Optimism stems largely from the current economic conditions, sentiment surrounding an incoming administration deemed to be more “business friendly,” and a Federal Reserve that wants to gradually ease policy alongside a backdrop of a healthy labor market and consumer. While valuations have risen and policy uncertainty is elevated, this should not preclude corporate profits from rising and fueling future gains. However, with the market appearing priced to perfection, even minor setbacks could lead to volatility. This is particularly important when it comes to the top 10 and Magnificent Seven stocks in the S&P 500. Despite the initial discomfort, market corrections are healthy and help to realign stock prices with their intrinsic values. They act as a reminder of the inherent risks in the market, encouraging investors to review and diversify their portfolios to mitigate potential losses. We continue to advise clients on the need to take a long-term approach to their portfolio that aligns with their financial plan.
Looking forward to 2025, our Trust Investment Committee thoroughly reviewed our positioning for the new year and believes client portfolios should maintain diversification between growth and values styles, complemented with a slight reduction of duration within fixed income allocations. Additionally, the Committee decided to enhance our international and mid-cap allocations with new growth managers with fantastic long-term track records. While we cannot predict what theme will dominate the market in 2025, we remain fully dedicated to mitigating risk through fully diversified portfolios. Listed below is a subset of our equity and fixed-income managers that performed exceptionally well during the year against their benchmarks.
*Returns are from actual portfolio results. Results may vary. Past performance is no guarantee of future returns.
We look forward to speaking with each of you about our investment philosophy and strategies and your portfolio’s performance.
For additional information, please contact Mason Williams, Chief Investment Officer, at 786-497-1214, or Michael Unger, Vice President/Investment Officer, at 786-292-0310.
Index of Commentary
Q4 2024
Q3 2024
Q2 2024
Q1 2024
For additional information, please contact:
Mason Williams
Managing Director
Chief Investment Officer
Michael J. Unger, CFP®
Vice President
Investment Officer