Cool finish to hot year
E*TRADE from Morgan Stanley
December may have been a bit anticlimactic, but 2024 still turned out to be a banner year for US stocks. The S&P 500 posted its fifth-largest annual return of the past 20 years, the 16th-largest since 1957, and enjoyed back-to-back years with returns above 20% for the first time since the 1990s.
The market hit new record highs early last month before losing momentum. The historically bullish latter half of December suffered a setback as the Federal Reserve cut interest rates—as expected—but also scaled back the number of times it expected to cut rates over the next two years:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation. It is not possible to invest directly in an index.)
December’s sector performance reflected the year’s. Communications services was the strongest S&P 500 sector last month and for 2024 overall, while materials posted a double-digit percentage loss in December and was the only sector to lose ground last year.
Bonds also slumped in December. Bond yields, which move in the opposite direction of prices, soared for most of December. After closing at a seventh-month low of 4.15% on December 6, the benchmark 10-year Treasury yield ended December near its highest levels of the past six months, up 40 basis points at 4.57%.
US stocks led global markets by a wide margin last year. The S&P 500 outgained the MSCI Emerging Markets Index by more than 15 percentage points in 2024, and led the MSCI Developed Markets Index by more than 19 percentage points:
Data source: Power E*TRADE and FactSet. (For illustrative purposes. Not a recommendation. It is not possible to invest directly in an index.) Note: crude oil, gold, and U.S. Dollar Index data reflect spot-market prices. BPS (basis point) = 0.01%. MSCI Index of Developed Markets and MSCI Emerging Markets Index represent “total-return” performance (index change including dividend reinvestment).
Inflation stickiness and policy uncertainty may have contributed to the Fed’s hawkish pivot. Last month’s CPI, PPI, and PCE Price Index readings suggested inflation was moderating, but the Fed appeared to have already taken the upside surprises in prior months to heart. Morgan Stanley & Co. strategists currently expect only two rate cuts in 2025 (in March and June), but also think the Fed may cut more than twice in 2026, based on expectations that higher tariffs and immigration restrictions from the Trump administration could slow the economy.1
Uncertainties about tariffs, immigration, and deregulation notwithstanding, Morgan Stanley & Co. strategists have a constructive baseline case for US stocks in the New Year. While they expect the new White House administration to make quick announcements about these key policy issues, they also think its initiatives may be more moderate than many people expect. That could translate into “more benign macro conditions” that provide a favorable growth backdrop for risk assets, especially stocks.2
Improved margins on domestic travel and ‘premiumization’ could keep airlines flying high in 2025.
Insight of the month: More blue sky for airlines in 2025? After falling to their lowest levels of the year in August, airlines rebounded to hit multi-year highs in December. Morgan Stanley & Co. analysts think the group may be able to gain additional altitude this year, in part because of improved margins on domestic travel and a focus on enhancing revenue streams via “premiumization.”3
January market history. Since 1957, the SPX had a positive January return 59% of the time (40 of 68 years), which was the fifth-highest winning percentage of any month from 1957-1990, but the fourth-lowest from 1991-2024. Only 10 of the past 20 Januaries had positive returns. Finally, January was more likely to be a negative month after a down December: Half of the SPX’s 18 other negative Decembers since 1957 were followed by negative Januaries. By comparison, only 18 of the 49 positive Decembers (37%) were followed by negative Januaries.4
Key December dates: FOMC minutes (1/8), Employment Report (1/10), PPI (1/14), CPI (1/15), retail sales (1/16), Fed interest rate decision (1/29), GDP (1/30), PCE Price Index (1/31).
1 MorganStanley.com. Fed Signals Inflation Fight Isn’t Over. 12/19/24.
2 MorganStanley.com. The Many Potential Policy Paths of Trump’s Second Term. 12/23/24.
3 Why the Airline Industry Could Take Off in 2025. 12/16/24.
4 Figures reflect S&P 500 (SPX) monthly closing prices, 1957–2023. Supporting document available upon request.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.