SFM Observer- December 2024

SFM OBSERVER

December 2024 Recap

A CONCISE REVIEW OF THE MONTH IN THE INVESTMENT MARKETS

Issued: January 7, 2025 

The Dow closed the month of December at 42,544 for a monthly loss of -2,366 points or -5.3%.  A complete flip from the month of November when the market was up over 7%.   The Santa Claus rally stalled out this year.

I am going to use this issue of the OBSERVER to go over annual investment returns over the past few years.  

The main indices U.S. investors use to measure the performance of their investments are the following:

1. The Dow Jones Industrial Average – An average comprised of 30 prominent U.S. companies which is the oldest index in common use.  It was created by Charles Dow in 1896 and has been used widely ever since.  Charles Dow was one of the founders of the Wall Street Journal which has also been published since the 1800’s.
2. The S&P 500 – the Standard & Poor’s 500 Index is an index of the largest 500 companies in the U.S. weighted by market capitalization.  Market capitalization is the value of all of a company’s stock i.e. what you would have to pay to buy the whole company.
3. The NASDAQ Composite – the “National Association of Securities Dealers Automated Quotation” is the first fully electronic exchange to trade stocks and it is the newest index being created in 1971.  It is home to many technology companies and is often used as a proxy for how the technology sector in the U.S. is doing.
4. Bloomberg Aggregate Bond Index – Often referred to as the “Agg”, it is the broadest index of bonds in the U.S. including all of the government debt.

The chart above shows you how much you would have made or lost if you were invested in one of these indices.  For instance, if you invested $100,000 in the Dow Jones on January 1, 2022, you would have lost -$6,900 during 2022 or -6.9%.  Leaving you with $93,100.  If you kept your investment for 2023, you would have made $15,082 giving you $108,182 at the end of 2023.  So, you made back the loss from 2022 and gained roughly $8,000.  If we continue our investment into 2024, we made 15% or $16,227 bringing our 3-year investment total to $124,409. After three years of investing, you have a profit of $24,000 which averages out to 8% per year (simple).  This is a good example of how good years in the stock market and bad years combine to offer good returns over time.  If you panicked at the end of 2022 and sold your investment (which some people did), you would still have your $93,100 plus a little bit of bank interest.  If you stayed invested, you now have $124,000 or about $31,000 more than the investor that couldn’t stand the one-year loss.  The past three years are a good example of how the markets work over time.

You can run this exercise on the other indices.  You can see that the tech heavy NASDAQ has higher returns with higher risk.  If you invested in the NASDAQ instead of the Dow in 2022, you would have lost -$32,500 the first year leaving you with $67,500.  This result takes a strong stomach.  Losing 1/3 of your investment right off the bat is tough for anybody but look at the returns the next two years. You ended up with a greater return over three years but it was a rough ride.  This is why we use a variety of investments to minimize the annual losses but still provide good three, four and five year returns.

Thank you for reading this issue of the SFM OBSERVER.  If you have any comments or questions, please send us a reply.  If you have a friend or associate that might be interested in the SFM OBSERVER, feel free to forward this email. 

Wishing everyone a happy and healthy new year.

Until next month,

Glenn Sweeney CFA