Market Update: Q4 2024

2024 Market Update:  The ‘Have Fun Staying Poor’ Edition

My friend Ben is a great guy—fun to be around, quick with a joke, and the kind of person who’d drop everything to help a friend in need. 

He’s also completely reckless when it comes to his finances. 

He owns a small business and he makes what I would call ‘decent’ money. 

Yet, he lives a lifestyle that is far beyond his means. He owns a massive home and is constantly buying luxury cars that he has no business owning. 

I’ll never forget the time he mentioned that he put $10k on a credit card for vacation. When I asked him if he was worried about carrying a balance, he just shrugged and said, “No, man. Money comes, money goes. I don’t worry about it.”

Way back in 2021, during the post-COVID meme stock frenzy and the 3^rd great cryptocurrency bull market, we were at dinner one night and he proceeds to tell my wife and me how he had pulled $50k out of his business and invested it in a cryptocurrency that was going to change the world.

He then tells us how that initial $50k was now worth close to $1 million!

My wife instantly glares at me with daggers in her eyes and scornfully asks, “Why didn’t you do that?”

Which is a great point. (Side note: If you are single, you should consider getting married. That way you’ll always have someone there to knock you down a peg or two before you can get too full of yourself.)

Now, I don’t tell you this story to flaunt my stupidity. Rather, I bring it up because (a) it’s pretty funny, and (b) I’m certain that we are in the midst of another speculative frenzy similar to what we saw in 2021, and it isn’t going to end well for those piling in right now.

Why do I think this?

A couple of reasons: One, we are starting to see rampant speculation on a scale that doesn’t make a lot of sense. 

The poster child for this is the stock of a company called Microstrategy, a struggling software firm that consistently loses money in its core business.

You might think that a company which consistently loses money would pretty much be worthless. That’s where you would be wrong.

You see, Microstrategy pivoted away from its core business strategy to become a bitcoin holding company, borrowing billions of dollars to buy bitcoin. 

The total value of its stock is presently worth close to $90 billion, more than double the value of the bitcoin that it owns.

Let that sink in. People are paying a 2x premium to own bitcoin through MicroStrategy instead of just… you know… buying bitcoin directly.

And don’t bother pointing out how absurd this is to Microstrategy’s most devoted fans over at the investing forum ‘Irresponsibly Long $MSTR,’ where skeptics are regularly taunted with the acronym HFSP—'have fun staying poor.' 

I know this firmly plants me in the HFSP camp of idiots. And, of course, the standard disclaimer applies—nothing you read in this newsletter should ever be taken as investment advice. But if you like Bitcoin, just buy Bitcoin. Trust me.

The second reason I’m convinced we’re close to a top in these speculative assets is simple: every time a speculative bubble—3D printing, biotech, meme stocks, crypto, etc.—was within three months of crashing, I’d start getting client calls asking about buying in.

Can you guess what’s happening now?

Global Indices

The readers of this newsletter are pretty smart (obviously), which means most of you probably went all in on the top performing market of the year, which was—

Drumroll, please…

Cocoa beans! Up 176% in 2024.

If that was you, congratulations. Also, let’s talk. 

What else happened?

• U.S. stock markets have continued their recent dominance over international markets. The Dow finished the year up 14.5% while the tech-heavy NASDAQ index finished up 28%. 
• Bonds have continued struggling, earning a paltry 0.7%, which includes interest payments.
• Gold had a banner year with central banks, in particular, China’s, pushing up prices and continuing to buy despite record highs.
• Bitcoin passed 100k for the first time in December finishing the year around 92,000, up 120% in dollar terms. 

Outlook & Positioning

Last year at this time I pointed out that good years in the stock market are no more likely to be followed by bad years than a year with, say, average returns. In fact, strong years tend to cluster together, which is exactly what has happened. 

But, markets can’t go up forever, so…

Is this bull market destined to collapse, or is there enough fuel left in the tank to propel us to further heights?

Let’s unpack the bullish case first.

The Bullish Case

1. De-regulation and lower taxes lead to outsized economic growth. The post-election market rally is predicated on the assumption that this will happen. It is also predicated on the belief that there are sufficient guardrails in place to prevent the Trump administration from deporting 15 million illegal immigrants while massively raising tariffs, which would hurt GDP growth and negate the positive impacts of deregulation and lower taxes. 

I’m not here to debate what’s best for the country, but simply want to highlight the bullish case for the incoming administration’s policies.

2. AI and Tech Growth: Continued investment and innovation in technology are expected to support market growth.
3. Looser monetary policy and capital abundance: Inflation is expected to drop below the Fed's 2% target in 2025, meaning the Federal Reserve is expected to cut interest rates to a range of 3% to 3.25%. This means there is reason to believe that liquidity, including burgeoning private capital, will continue to support economic growth and cushion real economies.
4. Momentum from 2024 Gains: Strong market momentum and historical patterns suggest continued gains. 

Democratic strategist James Carville famously quipped, “It’s the economy, stupid,” when explaining the central focus of Bill Clinton’s successful 1992 presidential campaign. 

If Carville were a market strategist, his famous quote might have been, “It’s the momentum, stupid.”

While I’m skeptical about many of the bullish arguments above, one thing is undeniable: in financial markets, strength often begets strength—and it doesn’t need to be much more complicated than that.

Now let’s move on to the bearish case. 

The Bearish Case

1. Policy and political uncertainty: Basically, the opposite of the bullish case made for the policies of the Trump administration presented above.

2. AI overhype and potential bust: There is a risk that AI technologies fail to deliver on the enormous expectations set by investors and corporations, potentially leading to significant financial losses. If the AI hype cycle ends without clear, tangible benefits or revenue growth for companies heavily invested in AI infrastructure, stock prices could face a sharp correction.

3. Market froth and speculative excess: There are significant pockets of froth in areas like cryptocurrencies, leveraged ETFs, and zero-day options, raising the risk of sharp corrections. 

4. Slower economic growth: While a soft landing is the base case, there is still a risk of a hard economic landing, especially if policy missteps or external shocks occur. Housing market challenges are a great example of this. High mortgage rates, elevated home prices, and reduced construction labor availability could delay the recovery in housing affordability, limiting economic momentum. 

5. Geopolitical risks: I don’t want to diminish the impact of geopolitical instability or human suffering, but from a financial market perspective, most geopolitical events have a marginal impact on prices, and generally should not concern long-term investors. 

The big exception, however, would be if war were to break out over China and Taiwan. If that were to happen, all bets are off, and you’d better have a contingency plan.

Putting It Together

There are thousands of data points you can analyze when evaluating financial markets, yet only a handful have any sort of predictive power. 

Right now, the collective signal from those key indicators suggests investors should expect more good returns in 2025—at least for U.S. stocks.

One thing worth noting is that you should expect 2025 to be far more volatile than 2024, with sharp price drops triggered by even the slightest hint of weakness.

We’ve already seen this pattern emerge a few times in 2024, as traders were quick to sell at the first sign of uncertainty. The most recent example was on December 18th, when stocks fell 3%—not due to any change in expected earnings growth, but simply because the Federal Reserve announced they only expect to cut interest rates twice in 2025.

Schwab’s strategy team makes some great points in their 2025 market outlook:

“Much like with valuation, although frothy sentiment should be considered a contrarian indicator, it should not be considered a market timing tool. What it does suggest is that if a negative catalyst were to appear, there could be more downside risk given both frothy sentiment and already-lofty allocations to equities.”

“Market momentum and breadth conditions tend to bode well for returns over a 12-month time horizon.”

“But most historical studies do point to heightened risk of volatility spikes and periodic drawdowns, which is why discipline is warranted.”

— Schwab 2025 Market Outlook​

Positioning

At the moment, we are overweight U.S. stocks with 0% allocated to international markets. This may change in the future, but for now, the data suggest staying invested in the U.S.

Additionally, we don’t currently own any long-term bonds. While the outlook for bonds is certainly better than it was a couple of years ago, we believe there are much better ways to get income and/or market crash protection —the primary reasons for owning bonds. This stance could shift if we see a change in momentum or if interest rates move higher. 

Conclusion

As we step into 2025, the financial landscape is a mix of optimism, caution, and a fair bit of déjà vu. The bullish case rests on strong momentum, potential policy tailwinds, and continued innovation. On the other hand, the bearish side raises valid concerns about valuations, policy uncertainty, and the risk of heightened volatility.

So, what should you do? Stay focused on what actually matters. Tune out the noise, resist the urge to chase speculative trends, and remember that durable success in investing comes from making thoughtful, informed decisions—not reacting to every market headline.

Here’s to a steady hand and a prosperous 2025.

 Yours,

Steven