By Kostya Etus, CFA®, Chief Investment Officer, Dynamic Investment Management
A Great Year, Despite the Noise
It’s been quite a year! We started 2024 with expectations for a recession, high inflation and mounting geopolitical tensions. We are ending it with a great economy, a presidential election and interest rate cuts. And somehow, through all this noise, the market almost hit a 30% return last week (as measured by the S&P 500)!
There was a bit of a pullback mid-week after the Federal Reserve (Fed) made their interest rate cut announcement as well as updated their projections for the future. But then there was a rebound to end the week on a strong note with favorable inflation data. Here are the key details of the Fed announcement and inflation results:
- Interest Rates. As expected, the Fed lowered interest rates overnight by 0.25% to a target range of 4.25% to 4.50%. This marks a full percentage decrease since cuts started in September and brings us to a level we haven’t seen since December 2022. The bad news is they cut projections for interest rate cuts in 2025 to only two 0.25% cuts versus their previous expectations of four cuts. Their reasoning is sound in that they are concerned about a resurgence in inflation and the economy remains strong.
- The Fed’s projections for inflation pushed higher, estimating 2.8% for this year on core inflation, above their 2% goal. Luckily, we know that the Fed is heavily data-dependent and we received favorable inflation data a couple days after their meeting. Core Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, was reported by the U.S. Bureau of Economic Analysis at 2.8% for November, below estimates and staying put from last month. As mentioned, this news was very well received by the markets as it indicates a potential future change in opinion from the Fed in terms of rate cuts.
- The Economy. The silver lining for potentially less cuts is that we may avoid a recession! The Fed is expecting 2.5% growth in gross domestic product (GDP) for this year, well above previous estimates. Additionally, they lowered their expected unemployment rate to 4.2%. Again, this reinforces that the economy is on stable footing going into the new year.
In summary, despite the immediate negative market reaction to the Fed projections, it appears we have stabilized, and cooler headwinds prevailed. With only a handful of market days left in the year, we are still on track for back-to-back annual returns of more than 20%!
Is the U.S. Always No. 1?
While 2024 was a great year for the U.S. market, international markets have struggled. But is that a reason to abandon international allocations in your portfolio? The question we really need to answer is: Does the U.S. always produce the best returns around the globe? To help answer this question we look at data from Dimensional Fund Advisors (DFA) which shows the top performing developed markets annually over the past 20 years. Here are the key observations:
- Abundant Opportunities. The graph below represents 22 different developed markets; it doesn’t include important emerging markets like China and India. Given plenty investment opportunities outside of home borders, it would not benefit portfolios to exclude these investments.
- Predicting Markets is Hard. There is randomness in the markets and it is very tough to predict which country will be the winner in any given year. Perhaps one of the worst predictors of future returns is what has happened in the past. A great example of this is the performance of New Zealand between 2016 and 2021. Each year in that period it is either one of the best performers, or the worst.
- Diversification Wins. As you can see, the U.S. is rarely the top performer; it is often in the lower half of the group. Given we cannot predict the winners, and there are ample opportunities around the globe, perhaps it may be best to invest in the whole lot. Additionally, you will notice that over the full period, all countries have positive returns. This is the essence of what we do: We strategically build globally diversified and balanced portfolios focused on the long-term.
Stay diversified, my friends.
Top Performing Countries Each Year
Annual Returns for Developed Markets Ranked 2004-2023
Sources: Dimensional Fund Advisors. Past performance is not a guarantee of future results. In USD. MSCI country indices (net dividends) for each country listed. Does not include Israel, which MSCI classified as an emerging market prior to May 2010. MSCI data © MSCI 2024, all rights reserved. https://www.dimensional.com/us-en/insights/which-country-will-outperform-heres-why-it-shouldnt-matter
As always, we recommend staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.
Important Disclosures
This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives. This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance or avoid loss. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way. Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. For additional information, please refer to FD Wealth’s Form ADV Part 2A Brochure publicly available on the SEC’s website (www.adviserinfo.sec.gov) or by contacting us at info@fdwealth.net.