Capital Markets Performance

U.S. equity markets ended the year with a second consecutive 20% plus annual gain for the S&P 500 which set 59 record highs in 2024. Supported by further Fed interest rate cuts and a still strong U.S. economy, the S&P 500 ended the fourth quarter up 2.4% and 25.0% for the year. Growth stocks outperformed value stocks for both the quarter and year with large caps outperforming mid and small caps in 2024. Large Cap Growth was the leading market segment in 2024, driven by the “Magnificent Seven” stocks linked to artificial intelligence, which drove performance. Ten of the eleven S&P 500 sectors were positive for the year, led by the Communication Services and Technology sectors. The Materials sector was the lagging sector for the quarter and year.

International stocks were relative underperformers versus the U.S. in the fourth quarter and 2024 as slower economic growth and a stronger US dollar impacted market returns. The MSCI ACWI ex USA Index lost 7.6% in the fourth quarter and was up 5.5% in 2024, while the MSCI Emerging Markets Index lost 8.0% in the quarter and gained 7.5% for the year. MSCI Europe was the weakest relative performer for the quarter and year.

Globally, the majority of central banks also began their rate-cutting cycles in 2024 as inflation moderated around the world. The Bank of England (BOE) cut rates by 25 basis points (bps) in both August and November, representing their first interest cuts in four years, while the European Central Bank (ECB) cut rates four times last year, lowering its main refinancing rate by 100 bps to 3.00%. The People’s Bank of China announced new stimulus to boost their economy, including cuts to mortgage rates for existing housing and a reduction in the reserve requirement ratio by 50 bps earlier in 2024. The major central bank outlier is the Bank of Japan (BOJ), which raised rates for the first time in 17 years at the March 2024 meeting to 0.25% as their economy has experienced inflation for the first time in several decades. The U.S. dollar (DXY) strengthened by 7.7% in the fourth quarter and appreciated by 7.1% in 2024. A stronger dollar is a headwind for international equity returns.

Interest rate volatility continued during the fourth quarter and year as the market digested Fed policy and the outlook for interest rates. The U.S. Treasury curve steepened during the fourth quarter after being inverted for over two years. For the year, the three-month Treasury yield declined 1.03% in line with the Fed’s 1% reduction in their policy rate. The 2-year Treasury yield was flat for the year, moving up by 2 bps to end the year at 4.25%, while the 10-year Treasury moved higher by 70 bps to end the year at 4.58% as inflation expectations moved higher later in the year. The U.S. Aggregate Index was down 3.1% in the fourth quarter, with all six sectors recording losses. For 2024, the Aggregate Index was up 1.3% with all segments showing gains as higher coupon rates offset price declines. Lower-rated bonds and shorter-duration bonds were relative outperformers for both the fourth quarter and the year.

U.S. Economy and the Federal Reserve

While economic growth shows signs of continued moderation, we remain confident the U.S. economy will be able to avoid a recession in the short term. We expect the economy to grow above its historical trend growth of 2.0% Real Gross Domestic Product (GDP) for 2025, which should continue to support corporate earnings. We remain focused on the potential economic and market impacts of President Trump’s policy.

The job market strengthened in the fourth quarter as the economy added 511k nonfarm jobs as compared with 477k in the third quarter. The unemployment rate ended the quarter at 4.1%, flat with the September level and up from 3.8% in December of 2023. We will be watching the potential impact of President Trump’s immigration policies on the job market and the supply of workers. Wage inflation was up 3.9% year-over-year in December and down slightly from the 4.0% year-over-year gain in September.

Inflation trends accelerated in the fourth quarter as the December Consumer Price Index (CPI) was up 2.9% year- over-year, which compares to a 2.4% year-over-year increase in September. Inflation, while moderating from a 9% level in the summer of 2022, remains sticky, driven by higher housing rental and car insurance costs. We remain focused on any inflationary pressures from President Trump’s tariff policies. It is important to remember that campaign rhetoric tends to differ from what is implemented.

The U.S. Federal Reserve lowered its target federal funds rate by 25 bps at both their November and December meetings to a range of 4.25% to 4.50%. The Committee cited inflation moving towards their 2.0% target and a softening job market as the rationale for less restrictive monetary policy. These two cuts followed a 50-bps cut in September as the Fed began its rate-cutting campaign. Fed guidance was updated to reflect two 25 bps cuts in 2025, down from four 25 bps cuts in their September forecast. Market risk remains should Fed policy diverge from market expectations as the potential for higher for longer interest rates becomes priced into capital markets.

Outlook and Portfolio Positioning

While we still anticipate a moderating U.S. economy in 2025, we expect a solid job market to support consumer spending, which represents 70% of the U.S. economy. Stubborn inflation, central bank interest rate policy, political agenda uncertainty, government debt levels and geopolitical tensions around the globe remain key market risks. It is prudent to remain balanced and diversified across asset classes in periods of market uncertainty.

We remain balanced in our equity positioning between growth and value, as we believe market performance will broaden out across the market sectors. Valuations for both mid and small-cap stocks remain attractive versus large caps, in our view. A weaker U.S. dollar, Chinese economic stimulus, geopolitical peace and attractive relative valuations remain potential catalysts for international markets. We believe valuation and quality remain the key factors driving global equity performance.

Our fixed income portfolio remains positioned toward intermediate duration and a tilt toward quality, consistent with our expectations for economic data to continue to moderate. Despite our expectations for continued interest rate volatility, we believe investors should continue to focus on the “income” component of fixed income returns in 2025, as we expect interest rates to remain range-bound throughout the year despite anticipated volatility.

Despite market uncertainty, it is important to stay diversified and invested for the long term. History shows that time in the markets produces better outcomes than attempting to time the markets.

As always, we thank you for your continued support and trust in Newport Capital Group.

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Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. In addition, information presented in this presentation is believed to be factual and up to date, but Newport Capital Group, LLC does not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.

This presentation includes forward-looking statements and opinions, including descriptions of anticipated market changes and expectations of future activity. Forward-looking statements and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. In addition, all expressions of opinion are subject to change without notice in reaction to shifting market conditions. Therefore, undue reliance should not be placed on such forward-looking statements and opinions.

Historical performance results for investment indices are provided for general educational purposes only. Indexes are unmanaged, do not incur fees or expenses (which decrease historical performance returns), and cannot be invested in directly. Therefore, it should not be assumed that future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by Newport Capital Group, LLC) or product will be profitable or equal the corresponding indicated performance level(s).

Investing involves risk including a total loss of the principal amount invested. In addition, diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Past performance is not indicative of future returns.