Stock performance
The global stock markets returned -1.48% in the fourth quarter and 14.61% for the year.
The United States stock market returned 2.35% in the fourth quarter and 22.17% for the year.
Here are the returns of the “Big Four” major indices in the U.S. stock market:
Here is the United States stock market broken down by size and style:
Over the last 17 years, a recurrent theme in the stock market has been the underperformance of International/Small/Value vs. US/Large/Growth. This trend continued in both 2024 and in the fourth quarter as well.
Most investment professionals have seen as many full cycles of small cap value stocks outperforming as they have Yetis.
This chart below consolidates the three dimensions of the global stock markets into one indicator.
small vs. big
“The markets were volatile” is an overused phrase when it comes to end of the year summaries. But over the last couple of months, it happened to be true when it came to small cap stocks. The Russell 2000 index (small cap stocks) went up 10.8% in November and down 8.4% in December.
Small-cap stocks’ poor December had the net effect of the Russell 2000 having its worst year relative to the S&P 500 (big cap stocks) since 1998.
But it is interesting to note what happened after 1998.
The small cap/big cap ratio bottomed a few months later in April 1999.
Russell 2000 outperformed the S&P 500 in 1999, 2000, 2001, 2002, 2003, 2004, 2005 and 2006.
value vs. growth
Over the last two years, value stocks underperformed growth stocks by the widest amount in history. The previous record was 1998-1999.
The value/growth stocks ratio bottomed a few months later in March 2000.
Value stocks outperformed growth stocks in 2000, 2001, 2002, 2003, 2004, 2005 and 2006.
On December 19, 2024, value stocks ended the day down for the 14th day in a row.
According to Jason Goepfert of Sentimenttrader.com, this tied the record from Halloween 1978.
In fact, the 1978 and 2024 streaks are the only times when value stocks went down more than 11 days in a row.
Since the dataset goes back to 1926, such an occurrence happens about once every half century.
What happened after October 1978?
The stock market went up 50% in 25 months before running into a bear market.
But value stocks fared even better.
Our research shows that from October 1978 to May 1981, the top 10 percentile Earnings Yield stocks (i.e., equities like the ones in our Equity Model) went up 90% in 31 months.
There were more declining stocks than advancing stocks every day over that same 14-day time-period as well. This also tied another record…also from October 1978.
The only other close match was October 1967 when the advance/decline line was negative 13 days in a row.
Since we already looked at October 1978, what happened after October 1967?
The stock market went up 15% in 13 months before the bear market kicked in.
But high earnings yield stocks (like the ones in our Equity Model) fared better.
From October 1967 to November 1968, the top 10 percentile Earnings Yield stocks went up 46% in 13 months.
u.S vs. International
Despite having only 4% of the world’s population, the US stock market is bigger than the other 96% of the world population’s stock markets combined.
Many market commentators bullish on the US stock market say the US global market cap dominance is justified by the superior U.S. earnings growth.
Here is a table of the S&P 500’s trailing 12-month earnings compiled directly from a Standard & Poor’s data spreadsheet:
Using the $200.28 number, U.S. companies have grown their earnings by 1.2% over a 2.75-year time-period.
On an annualized basis, that comes out to 0.44%.
The United States stock market is expensive. Using the Robert Shiller data (which goes back to 1871), the U.S. stock market’s earnings yield is at the 4.4% lowest percentile.
International valuations are better.
Since we are overweight China in our Model Portfolios, let’s look at how China stacks up vs. the U.S.
Chinese stocks have well over double the earnings yield of U.S. stocks.
According to the Efficient Market Hypothesis, the US should have a higher expected growth rate than China to compensate investors for having a lower earnings yield. Yet the US hasn’t grown more than China in many years.
US Bond Yields are 2.56 times that of China. That means the bond market is much more competitive for investors’ attention in the US than in China.
A lower discount rate (like China has) also equates to a higher net present value for future cash flows.
US Bond yields are 1.44x stock US earnings yields (+4.79% bond yield / +3.3% earnings yield).
Chinese Bond yields are 0.26x Chinese stock earnings yields (+1.87% bond yield / +7.2% earnings yield).
When is the last time U.S. 30 Year Bond yields were 0.26x U.S. stock earnings yields?
August 1951.
U.S. stocks proceeded to go up 117% over the next five years.
Putting it all together, the ratio of bond/stocks yields in the U.S. is 5.5x that of China (1.44 / 0.26).
Therefore, Chinese stocks are considerably more attractive than U.S. stocks.
But U.S. stock market has momentum. International stocks do not.
The U.S. momentum will continue until it does not.
Which is a nice segue to the next question:
how much farther does the bull market have left to go?
Years when the S&P had returns of at least 23% for the second year in a row:
1809. The S&P 500 then went up 3% in 1 month (Jan 1810). Then it had a 36% bear market
1844. The S&P 500 then went up 17% in 35 months (Nov 1847). Then it had a 24% bear market.
1863. The S&P 500 then went up 8% in 6 months (June 1864). Then it had a 22% bear market
1928. The S&P 500 then went up 31% in 9 months (Sep 1929). Then it had an 86% bear market.
1936. The S&P 500 then went up 8% in 3 months (March 1937). Then it had a 60% bear market.
1955. The S&P 500 then went up 9% in 8 months (Aug 1956). Then it had a 21% bear market
1998. The S&P 500 then went up 24% in 15 months (March 2000). Then it had a 49% bear market.
2024. ???
In every instance since 1800 when the market continued to go up after 2 big years in a row, all those gains were wiped out…and plenty more.
Here is a summary table:
When U.S. stocks were up 23% two years in a row, a bear market started within 9 months 72% of the time.
When U.S. stocks were up 23% two years in a row, a bear market or 13% correction started within 9 months 100% of the time.
If stocks followed the average situation in the above table, they would be up 14% for the year in November, then decline 43%.
dividend yield
Here is a table of all the months since 1871 where the United States stock market dividend yield was as low the most recent reading.
If history repeats, the market will be up around 10% for the year in August and then have a 49% bear market.
a 55% ^vIX day
The average situation projects into an August peak.
In summary, quite a few indicators we have looked at suggest the market will power higher for months before eventually having issues in the second half of the year.
The second half of 2025 may be a good time to take a closer look at alternative investments. Many alternative investments have historically fared better than the stock market during downturns.
Evidence suggests the bull market in stocks has more room to run. But the U.S. stock market has low earnings and dividend yields. The probability is low that this is a 2010 or 1988 situation where we have another 10-12 more years left of a bull market.
debt
It was yet another lousy year for bonds.
The Bloomberg Global Aggregate Total Return Index (in USD) returned -5.1% in the fourth quarter and -1.69% for the year. After years of speculation about the Federal Reserve lowering interest rates, the Fed finally began making a series of rate cuts.
Bucking most expectations, long term rates have gone straight up since the Fed began cutting short term rates. A reason for this is the bond vigilantes believe the Fed has lost control of inflation and are demanding a higher rate of return to compensate for the declining purchasing power of their dollar-based investments.
Let us look at yields for the 3-month T-Bill, the 30-Year Treasury Bond and Baa Long Term Corporate Bonds:
T-Bills are currently trading 1.52% above inflation. Usually, they yield a little bit below inflation. So, they are a pretty good deal right now, relatively speaking.
On an absolute basis, long-term investment grade corporate bonds offer the highest yields. The bad news is (not shown here) credit spreads are low. Do note that all the bonds listed above have a higher yield than the U.S. stock market’s earnings yield of 3.3%.
On a final note, the 30-year break-even inflation rate is 2.27%. So, the financial markets are expecting a lower-than-average inflation rate over the next few decades.
real estate
According to NCREIF, the cap rate for commercial real estate is 4.7%.
Like stocks and many bonds, real estate is not yielding as much as it has in the past.
Meanwhile, High Yield Chinese Real estate has dropped 82%.
According to CBRE, cap rates in Greater China are ranging from 4.75% to 6.5%.
One of the more enticing cap rates can be found in India. The cap rates there are hovering around the 7.5% to 9% range.
commodities
The FTSE/CoreCommodity CRB Index is an index which covers 19 categories of raw materials. These materials are in the energy, soft commodity, metals, produce and livestock sectors.
This index has been around since 1957 and is considered by many to be a benchmark index.
On December 31, 1980, the $CRB closed at 308.
On December 31, 2024, the $CRB closed at 296.
As you can see, commodities are typically not the greatest investments.
But one can make an argument that, after a 44-year road to nowhere, there might be some built-up value somewhere in this beleaguered asset class.
One commodity that does NOT seem to be undervalued, however, is gold.
The current reading is 75 hours of work for an average person to buy an ounce of gold.
When gold approaches 2-weeks’ pay, people find something else to do with their money.
About a 10% rise in gold would equal an all-time high for this 94-year indicator.
That isn’t much upside.
The gold to oil ratio is telling a similar tale.
Source: MacroTrends
We have expressed our views on this by having an overweight position in the energy sector in our model portfolios.
summary
The United States has overvalued stock and real estate markets. Credit spreads are very low in the bond market so there are issues there as well.
Of the major asset classes in the United States, bonds are presently offering the highest yields.
While fundamental analysis shows that International/Small/Value stocks offer more considerably more potential than U.S./Big/Growth stocks, this also has been the case for quite some time.
The big question is when exactly is this going to happen?
Multiple indicators suggest we are close to a reversal in a decades long trend.
Disclosure: This summary is provided for informational purposes only, and should not be used as a basis for investment in a particular security or asset, and is not investment advice. Please consult with your investment advisor to discuss your goals and circumstances prior to making any investment decisions. Data is relevant as of the time of posting, but may not be relevant as of the time of viewing. Any information provided has been prepared from sources believed to be reliable, but its accuracy is not guaranteed. This information does not constitute a recommendation of any kind. Any projections, forecasts, or predictions may not be accurate and should not be used for investment decisions.