Our Thoughts on FOURTH Quarter 2024

Matt Johnson, CFA® - Andy Nugent, CFA®

Market Recap, Portfolio Analysis, and Review

The fourth quarter of 2024 was a dynamic period for the U.S. economy. The re-election of President Donald Trump was the biggest news item. Economically, inflation has remained stubborn but lower than it has been, interest rates are moving, the Fed has been busy adjusting the Fed funds rate, and the stock market moved moderately higher.

Inflation

In December, the Consumer Price Index (CPI) crept higher than the previous quarter with a year-over-year rise of 2.9%. This is higher than the 2.4% inflation we saw at the end of last quarter. Shelter and Transportation services were up 4.6% and 7.3% respectively from the prior year.

Core CPI, which strips out volatile food and energy prices, fell slightly in the fourth quarter ending at 3.2% versus 3.3% in the prior quarter. Despite an increase in December, Fuel oil was down over 13% from last year.

Wages grew 3.9% higher over the last year, outpacing inflation. While this is good for workers, it leads to higher costs and potentially narrowing profit margins for the companies employing them.

Interest Rates

It has taken quite a while, but the yield curve is normalizing. We would expect that a long-term bond would yield more than a short-term bond, as you are investing your money for a longer period. As you can see, for the last couple of years, short-term bonds have had a higher yield. As the rates settle in, long and short-term rates are in the four to five percent range. If the Fed cuts rate further, that will affect the short-term rate more quickly and you could see a widening in spreads.

Home mortgages track closely with the 10-year note. As the yield on the 10-year note moved higher, mortgage rates followed suit. Interest rates climbed to 7.04% from 6.22% last quarter for a 30-year fixed rate mortgage, per Bankrate.

Fed Fund Rate

After keeping interest rates high for an extended period to battle inflation, the Federal Reserve cut rates three times in a row to close out 2024. The goal of the Fed is to have maximum employment and inflation at around 2%. Unemployment is 4.1%. That is a strong number. Inflation is under 3%, so the Fed is seemingly more comfortable going into 2025.

Sector Analysis

The S&P 500 was up just 2% in the quarter. However, it had a great 2024 advancing over 23%. Sector performance was led by Consumer Discretionary which was up 14%. Communication Services were up significantly as well. Materials and Healthcare were each down over 10%.

We made four trades in the quarter. We sold two materials companies and bought an energy and an information technology company.

Energy – We purchased Haliburton Company. It has steady revenue and trades with a Price to Earnings ratio under ten times. It also has consistent cash flow and grows its equity. The changing political landscape may prove to be an opportunity for Haliburton.

Materials – We sold out of two materials companies’ last quarter. Albemarle is a lithium miner who began to take on a concerning amount of debt in an area with volatile demand for its product. We also sold out of Dow, Inc. As revenue, earnings and cash flow all began to fall, we revalued the company at a price lower than what it was trading for and took the opportunity to exit the position.

Information Technology – We purchased Palantir Technologies Inc. Palantir builds and deploys software platforms that serve as the central operating systems for its customers. They are growing quickly, have government contracts and what looks like a bright future.

Summary

As the 2024 presidential election is behind us, we look toward an environment with steady interest rates, moderate inflation, and a strong economy. At the end of the day, company earnings are what matters. In areas such as Information Technology, valuations are rich, and companies need to keep up with lofty earnings expectations to see the market move higher. We have experienced particularly good market performance over the last couple of years. If the market does pull back, do not worry. We are in this for the long haul. Bumps are expected. We will use any pullback as an opportunity to reposition the portfolio, if needed.

Thank you for allowing us to be a part of your journey to financial freedom.

Matt Johnson, CFA® Andy Nugent, CFA®

Sage Capital Advisors, LLC is a Securities and Exchange Registered Investment Advisor. Sage Capital Advisors is headquartered in Sioux Falls, South Dakota. Advisory services are only offered to clients or prospective clients where representatives of Sage Capital Advisors are properly licensed or exempt from licensure. This market commentary is solely for informational purposes and should not be construed as investment advice, it is only intended to provide education about the financial industry. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of investment management fees, or the impact of taxes, all of which would have the effect of decreasing historical performance results. Indices are unmanaged and cannot be invested in directly. It should not be assumed that your account holdings correspond directly to any comparative indices. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered unless a client service agreement is in place.