The Takeaway
Consensus forecasts coming into 2024 were upended, and investors who bet on US bonds, against US equities, or on China wound up disappointed.
Stock/Bond diversification worked well this year, as the Morningstar US Core Bond Index rose in value during equity market selloffs. The “Death of Diversification,” declared in 2022, was greatly exaggerated.
Signs of market “rotation” manifested in 2024. In the third quarter, the Morningstar Global Markets ex-US Index outperformed, and value stocks beat growth. Small caps rallied, especially after the election. Portfolios should be ready for a potential change in asset class leadership.
The cycle of greed and fear has been turning. Enthusiasm for artificial intelligence, which has powered the Morningstar US Market Index, a broad gauge of equities, ever since the launch of ChatGPT in late 2022, continued into 2024. Stocks have logged hefty gains this year, but not without serious bumps along the way. In the third quarter, jitters over the economy and equity prices roiled markets.
A "Trump bump" followed the US election. In a repeat of 2016, stocks rallied, especially segments seen as beneficiaries of lower taxes, regulatory rollbacks, and protectionism. The Morningstar US Small Value Index was the best performer within the Style Box on the day after the election, up more than 5%. Bonds sank, as debt fears sent yields rising.
Ultimately, investors overestimate the impact of politics on their portfolios. Markets' initial reaction to Trump's election in 2016 faded, as investment fundamentals reasserted themselves. The bigger question concerns valuations in the US equity market. Only time will tell who's right: bears predicting the bursting of the AI bubble or bulls who say the market is just "climbing a wall of worry." Pessimism tends to sound smarter. But it's the optimists who've been repeatedly vindicated in recent years.
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