Key Takeaways
1 The first investment lesson from 2024 is how difficult it is to do macroeconomic forecasting, and investors should have a healthy amount of skepticism around forecasts.
2 The second lesson is that markets can surprise on the upside.
3 The next lesson is that diversification isn’t dead, particularly the diversification that bonds can bring to a portfolio.
4 The next lesson is that the relationship between interest rates and different market segments isn’t set in stone.
5 The last investment lesson from 2024 is that change is the only constant in the markets.
Susan Dziubinski: Hi. I’m Susan Dziubinski with Morningstar. Despite concerns about stock market valuations and the possibility of a recession, 2024 turned out to be a pretty lucrative year for inventors. Joining me today to discuss a few investment lessons from 2024 and their implications for portfolio planning for 2025 is Dan Lefkovitz. Dan is a strategist with Morningstar Indexes and the co-host of The Long View podcast. Good to see you, Dan.
Dan Lefkovitz: Always great to be with you, Susan.
Why Investors Should Have Healthy Skepticism Around Macroeconomic Forecasting
Dziubinski: All right, so let’s talk about some lessons from this year. Your first lesson from 2024 has to do with macroeconomic forecasting or, more specifically, how difficult that is to actually do. Go into that.
Lefkovitz: Yeah, I mean, how long was that debate raging? Soft landing versus hard landing, and we’re still airborne, Susan, to torture the metaphor. At one point, the market was expecting seven interest-rate cuts coming into this year, expecting that recession and needing monetary stimulus. Then it ratcheted down to six interest rates, then three. So far we’ve had two, and that might be it for the year. China, at one point, was viewed like a coiled spring, ready to bounce back from the pandemic and be an engine of the global economy coming out of that zero-covid lockdowns. That has not panned out. So, the consensus view on the economy has just been so off so many times lately.
Dziubinski: What’s the takeaway for an investor—just ignore forecasts?
Lefkovitz: Well, I wouldn’t necessarily say ignore them, but just treat them with a healthy dose of skepticism because they’re very often wrong. And I think what’s really important is to not make massive investment bets based on macro forecasts. You know, if you had stayed out of US equities because you were expecting a recession and a collapse in corporate profits, that would not have turned out well in 2025. If you would bet on bonds because you were expecting seven interest-rate cuts this year, that would not have turned out really well.
Why Markets Can Surprise on the Upside
Dziubinski: Your second lesson, to build on that, is that markets can surprise on the upside, and we certainly saw that this year. Talk a little bit about that.
Lefkovitz: Here we are at the end of November, and our US market index, broad gauge of equities, is up roughly 25% for 2024. Similar gain in 2023. Very few people were expecting those kind of gains this year or last year for that matter. And if you look back over the past 15 years, there have been a lot of bumps along the way, but US equities have averaged about 14% average annual returns, which is well above the historical norm. And I think it’s really a Triumph of the Optimists, if you will. That’s one of my favorite books about investing. It looked at equity market returns over the 20th century. There’s this paradox where pessimism tends to sound smarter than optimism. Pessimism sort of sounds clear-eyed, and optimists kind of sound like naive Pollyannas.
But this year, and really over the long term, the stock market has really rewarded optimism and made fools out of the skeptics and the doomsayers. Our colleague John Rekenthaler, who wrote his last column for Morningstar.com—maybe not his last, but a “farewell for now” column, retiring after 36 years with the company—he talked about how US stocks have just produced these phenomenal returns over the course of his career—and I wanted to, I wrote this down because I wanted to get it right—“despite the perpetual belief that equity investors had missed the party.”
Dziubinski: Yeah, that sounds like John. We’re going to miss John. Then, what are the takeaways for investors on this particular point heading into the new year?
Lefkovitz: Yeah, so Susan, I’m forecasting another 25% leg up in 2025. I’m totally kidding! I have no idea what the market’s going to do next year. I don’t think anyone really does. Markets are very hard to forecast in the short term. Over the long term, I think valuation is a great way to think about equity market investing. Our colleagues on the equity research side of Morningstar, they have their market level view, which is an aggregation of all of the individual stock-specific fair value estimates they do, and looking at stock prices versus the fair value of businesses, they think the market overall is overvalued. But there are certainly pockets that they have identified that are attractively valued—healthcare being one of them. And there are stocks across economic sectors that they think are attractively valued. So there’s still bargains. There’s still upside to be found, even if the market overall looks a little frothy.
How Bonds Can Help Bring Diversification to Your Portfolio
Dziubinski: Now, your next lesson is that diversification isn’t dead, particularly the diversification that bonds can bring to a portfolio. Talk about that.
Lefkovitz: We had some volatile episodes in the third quarter. There were some pretty severe stock market selloffs in early August and then early September. And what we noticed was that while equities were selling off during those periods, bonds were actually appreciating. Our Morningstar US Core Bond Index was in positive territory when stocks were down sharply. And I thought that was really interesting and a positive development because, back in 2022, both stocks and bonds fell simultaneously. We had inflation and really rapidly rising interest rates that year, and that was like kryptonite for both stocks and bonds. And you heard a lot at that time about the death of diversification and the end of the 60/40 portfolio, meaning that 60% stock/40% bond, classic mix. And that style of investing has kind of come back this year, if you will. Bonds overall have not had a great year, but stocks have, and our multi-asset indexes are looking really strong for 2024. And I think stock bond diversification doesn’t always work. The correlations between assets are always in flux, always moving around. But I think it’s a perfectly sensible way to invest.
Dziubinski: The takeaway is investors don’t give up on bonds, but if they are a part of your asset allocation, are there some types of bonds that are going to be better diversifiers than others?
Lefkovitz: Yeah, this is a great question. So when I talk about that Morningstar US Core Bond Index, that is investment-grade. Mostly Treasuries, but also agencies and investment-grade corporate bonds. When you look at more kind of niche areas within fixed income, like high yield, or we have a leveraged loan index bank loans, those asset classes have great yields at the moment. They might have a really good long-term total return proposition, but from a diversification perspective, their correlations are higher with equities than a core bond allocation.
Why the Relationship Between Interest Rates and Market Segments Aren’t Set in Stone
Dziubinski: Now, your next lesson is that the relationship between interest rates and different market segments isn’t set in stone. Talk about that.
Lefkovitz: Yeah, you hear a lot like, oh, rates are going down. You want to be in this. Or in a low-rate environment, you want to own X. I don’t think it’s that simple. Just sticking on bonds, for example, we’ve had two interest-rate cuts, 75-basis-point reduction in the federal-funds rate in 2024. But bonds are almost flat for the year. So they haven’t really responded, despite this kind of conventional wisdom that you want to own bonds when rates are coming down. Back in 2022, we’ve talked about this before, growth stocks sold off really sharply, and the growth part of the equity market underperformed the value side. And there was this narrative that year that growth stocks were being disproportionately hit by the rising interest rates, rising interest rates were devaluing their long-dated cash lows, etc. But growth stocks have outperformed very significantly in 2023 and 2024, despite interest rates being elevated. And there are just all sorts of examples like that. Dividend stocks outperformed amidst rising rates in 2022, but they’ve underperformed, even though rates have been falling this year. Bank stocks have done well this year, despite falling rates. So just this conventional wisdom about what kind of asset classes do well in different kinds of rate environments, I think, is often challenged.
Dziubinski: Then what’s the upshot for investors as they’re tweaking their portfolios, say, going into 2025, knowing this?
Lefkovitz: I just think you want to be careful about the conventional wisdom around what kind of asset classes suit the macro environment. The macro environment is very hard to forecast as it is. But then what does well in a certain kind of macro environment? I think we know less than we like to think.
Why Change Is the Only Constant in the Markets
Dziubinski: And then your last investment lesson from 2024 is that change is the only constant in the markets. All right, go into that.
Lefkovitz: If you think about markets over the past 10, 15 years, you’ve wanted to be in stocks over bonds, you’ve wanted to be in US stocks over ex-US, you’ve wanted to be in growth over value, large cap over small. Overall, I think 2025 didn’t really upend any of these trends.
Dziubinski: 2024.
Lefkovitz: I’m sorry. I’m looking for, I don’t want to make you …
Dziubinski: You’re looking ahead.
Lefkovitz: 2024 did not upend any of those long-running trends. But we did see a rotation in the third quarter, which we’ve talked about where ex-US stocks beat US stocks, small beat large, value beat growth. And then we’ve seen a really powerful small-cap rally after the election here in the fourth quarter. Market leadership is changeable. The winners of the past are not necessarily the winners of the future. So I wouldn’t be surprised if some of these asset classes that have been doing really well give way to other asset classes going forward.
Dziubinski: Then it seems like the takeaway here is that, given that you can’t predicts the markets, just make sure that you’ve built a portfolio that can benefit from whatever seems to be doing well.
Lefkovitz: Yeah. Looking forward, stocks over bonds, that could change over periods of time. You know, US versus ex-US, maybe ex-US will outperform. Maybe value will outperform growth. Maybe small caps will go on a run and outperform large caps. I think you just want to have a portfolio that is robust and ready for a range of scenarios.
Dziubinski: Dan, great to see you. Thank you for your time today.
Lefkovitz: Thanks, Susan.
Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.
Watch You’re a Factor Investor. You Just May Not Know It Yet for more from Dan Lefkovitz.
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