The broad stock market indices were up in the fourth quarter, although it wasn’t a straight line up.  Most stocks rallied strongly in November after Trump was re-elected with small cap stocks leading the way, as they generally have less exposure to international markets and therefore would benefit from tariffs, helping to make domestic production more competitive without suffering from retaliatory tariffs by our trading partners.

Much of those gains were reversed in December as investors came to realize that we may in for “higher for longer” interest rates as markets acknowledged the inflationary effects of Trump’s proposed policies on tariffs (conditional 25% on all goods from Canada and Mexico) and illegal immigrant deportations.  The Federal Reserve confirmed those fears at their December meeting as they indicated they would likely make fewer rate cuts in 2025 than had been previously telegraphed.  Higher rates typically impact smaller companies more as they generally have more debt and specifically more variable debt in the form of bank loans which are sensitive to rate movements.

Clearly certain stocks and sectors benefited from the Republican sweep of the Executive and Legislative branches.  Elon Musk saw huge returns on the value of the companies he leads and in which he has huge ownership stakes like Tesla (while alienating the vast majority of his potential car buying audience?) and SpaceX which has large government contracts which his proximity to the President-Elect may positively influence(?).  Sectors like Healthcare and Consumer Staples were down meaningfully during the quarter with much of the losses coming on the heels of Trump nominating Robert F. Kennedy, Jr. to lead the Department of Health and Human Services.   

The disparities between the performance of growth stocks (“COMP”) versus value stocks (“SVX”) and large capitalization stocks (“SPXTR”) versus mid (“IWR”) and small capitalization (“IWM”) stocks are highlighted in the table below:   

Symbol	Description	Quarter	Year
		Ended 12/31/24	Ended 12/31/24
COMP	Nasdaq Composite	6.36%	29.60%
SPXTR	S&P 500 Total Return	2.41%	25.02%
SVX	S&P 500 – Citigroup Value Index	(2.68%)	12.27%
RSP	S&P 500 Equal Weight	(1.85%)	12.78%
IWR	Russell Mid-Cap Index	0.65%	15.22%
IWM	Russell 2000 Small-Cap Index	0.33%	11.39%

There was a huge variance in 2024 returns between the S&P 500 (SPXTR in table above), where the “Magnificent 7” stocks (Apple, Nvidia, Microsoft, Google, Amazon, Meta and Tesla) constitute over 30% of the index and the RSP (also in the above table) where each of the 500 constituent companies has roughly equal weighting, meaning the “Magnificent 7” cumulatively have roughly a 1.4% weighting (each comany holds about 1/5 of one percent).  This divergence clearly illustrates how concentrated the market’s gains were during the year.  There was a similar difference in 2023 as the RSP gained “only” 13.70% vs. over 26% for the S&P 500.  Interestingly, for the 20-year period from 2003 through 2022, the S&P 500 equal-weight index outperformed the S&P 500 (weighted index) with annualized returns of 11.48% vs. 10.29%, respectively (per spglobal.com).  

As a portfolio manager who manages what are essentially “equal-weighted” portfolios and being agnostic to market capitalization in valuing companies, it has been a frustrating two years of relative underperformance for my single stock accounts.  The concentration in and momentum of large cap technology stocks that have dominated the markets over that period tends to feed on itself until it doesn’t, as we witnessed in the market selloff of 2022 after similar concentrations in the latter half of 2021.

Momentum certainly plays into market psychology and I believe it has been exacerbated by the “gamification” of the markets with recent introductions of leveraged ETF’s magnifying the performance of certain high-profile companies like Tesla and Nvidia as well as digital or cryptocurrencies (Bitcoin, Ether, et al…).  These ETFs allows traders (not investors) to essentially leverage their bets in either direction without needing to understand implied volatility, time decay and other variables that are critical knowledge in the use of options used in the construction of these ETF’s by their managers.  In the long-term, I’m confident that the people who will benefit most will be those managers.

Given the huge runups in the price of certain assets, I’ve clearly missed an opportunity.  However I am hesitant to chase gains made in assets that are driven more by speculation than fundamentals.  A clear example of the mania in cryptocurrency is the company Microstrategy (ticker symbol “MSTR”).  Per their SEC filings under “Business Overview”:

MicroStrategy® is the world’s first and largest Bitcoin Treasury Company. We are a publicly traded company that has adopted Bitcoin as our primary treasury reserve asset. By using proceeds from equity and debt financings, as well as cash flows from our operations, we strategically accumulate Bitcoin and advocate for its role as digital capital. Our treasury strategy is designed to provide investors varying degrees of economic exposure to Bitcoin by offering a range of securities, including equity and fixed income instruments.

 Basically, the company raises money through security offering to buy and hold Bitcoin, employing a great degree of leverage.  The company’s stock was up about 480% during 2024 as bitcoin rallied, and now sports a market capitalization of over $80 billion at the time of this writing. Its market value took a notable jump after Trump was re-elected having branded himself the pro-crypto candidate. The company has been around for 35 years and was originally a software company, which they still do and lose money doing so.  Looking at their balance sheet, their main asset is classified as “digital assets”, and their main liability is debt issued to buy those assets.  Interestingly, investors are willing to pay multiples of the market value of the digital assets owned by buying Microstrategy stock when they could just buy the digital assets outright without that premium.  There should clearly be an arbitrage there (buy bitcoin and sell the stock at some ratio), but I’ll leave that to someone with a stronger stomach than I as the premium is already at nosebleed levels but can get even more extreme.  As economist John Maynard Keynes once stated, “the market can remain irrational longer than you can stay solvent”!   

Fixed income (bond) markets lost ground in the quarter as market participants digested inflation and labor data as well as proposed policies and appointments of the incoming administration.  Despite Trump stating that rates should be lower and the Federal Reserve having started adjusting the Federal Funds Rate downward with their 50 basis point reduction in September, yields crept up during the quarter and have continued that trend early in January 2025. When higher yields are available on Treasury securities and corporate bonds, they become more attractive relative to stocks, although stocks have held up well despite these more attractive fixed income opportunities.

Should you have any questions about this email, your portfolio, or anything else related to your financial life, my line is always open.

Best regards,

Steve