A Case of Bad Breadth - Closing 2024
“Give a man a fish; you feed him for a day. Teach a man to fish; you feed him for a lifetime. " — Confucius
The Portfolio Performance
The portfolio is UP +19.17% YTD
The S&P 500 is UP +23.31% YTD
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A Case of Bad Breadth
2024 was a year of records in a bull market driven by momentum and corporate earnings. Just seven companies dominated the stock market in 2024: Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and Nvidia, also known as the Magnificent Seven. Together, they comprise about 29% of the S&P 500 market capitalization and over half the returns. In other words, those seven companies gained about 63% in 2024, while the other 493 added about 6%. I hope to see more initial public offerings in 2025 and beyond and more investment finding its way to the rest of the market, as breadth is healthy. 2024 is in rare company as the 5th most record high in stock market history.
Year | Record Highs |
1995 | 77 |
2021 | 70 |
1964 | 65 |
2017 | 62 |
2024 | 57 |
Stocks are still near record highs, as the S&P 500 reached 6,099.97 before taking a breather. The DOW blew past 45,000, the NASDAQ reached a record 20,204, and the small-cap Russell 2000 reached an all-time high of 2,466 in late November. While those record highs make headlines, we care about gains in our portfolio. The S&P 500 had a great year with a 23.31% gain year-to-date. The NASDAQ delivered 28.64%, the DOW eked out a meager 12.88%, and the Russell 2000 a 10.18% gain. Meanwhile, investors in Bitcoin enjoyed a 121.29% gain YTD.
Confusing Economics
2024 delivered some serious challenges to those of us with a macro-economic view of the markets and a love of market history. The Federal Reserve lowered short-term interest rates, but long-term rates continued to rise. Unemployment grew, and interest rates remained restrictive, but consumer spending increased. Bonds and stocks rose and declined together, the equivalent of finding a new element in the universe. Inflation remained above target, and corporate earnings growth accelerated. Typically, higher input costs would lower earnings. Historically, investors view large multi-billion and trillion-dollar companies as too big to be considered growth companies, yet 2024 was another year of massive growth for our biggest companies. The problem now is those ultra-high valuations.
In August, a slew of bad economic reports caused investors to worry that market growth was over and that positioning for a recession was the order of the day. Two bad labor reports triggered a sell-off, and some of the lowest manufacturing reports had investors flocking to utilities and consumer staples names. Worried institutional investors bought bonds, driving yields lower and taking cash out of stocks, while retail investors moved cash to money market accounts. Cash sitting on the sidelines tends to coil up like a spring under tension.
Looking back at 2024 and how investors were positioning their portfolios, I’m stunned by the few who got it right and by the hoards of fearful investors who missed out. A tremendous amount of time was wasted trying to figure out which stocks were growth stocks and which were value stocks. I was often asked, “Should I be in dividend stocks?” There’s no money to be made sorting stocks into these groups. Warren Buffett is frequently categorized as a value investor. That’s the wrong way to look at the market and investing. Warren Buffett buys stocks at value prices and expects them to outperform the rest of the market, which is how we should all invest. Overpaying for an investment is a losing strategy. Berkshire Hathaway was a value name, yet it delivered a 26.83% return in 2024.
If we look at the six most popular factors to rate a portfolio, Momentum, Growth, Quality, Low-Volatility, Value, and Dividend Yield, and how they delivered in 2024, we see a landscape of huge winners and not-so-huge winners.
Investing Style | Return |
Momentum Investing | 48% |
Growth | 38% |
Quality | 27% |
Stay Invested Portfolio | 19.17% |
Low-Volatility | 14.9% |
Value | 13.4% |
Dividend Yield | 7.8% |
Pure momentum investing trounced everything, delivering more than double the S&P500 index. This strategy aims to capitalize on the continuation of existing market trends. Momentum investing has strict rules governing when a stock is bought and sold. It differs from day and high-frequency trading because a momentum investor may stay in an investment for years until a technical indication triggers a sell signal. A strong argument can be made for momentum investing in a market where automated, algorithmic computer platforms trade 80% of the daily share volume.
Investors who pursued a low-volatility strategy missed out on over 11% in gains compared to those who owned the S&P 500 index and 33.1% versus momentum investing. Low volatility, value, and dividend yield investing are all fear strategies. Fear can quickly turn into panic, and nobody ever made any money by panicking.
2025 Outlook
When I examine the valuations of the broad market and the best-performing companies, it’s hard to see them continuing to rally higher in 2025, but that doesn’t mean the stock market will be down or that the best performers of 2024 won’t continue to rise in 2025. In fact, most investors and analysts made the same proclamation in 2023.
Let's look at the valuation of the market. The total stock market-to-GDP ratio is currently about 150%, but I saw it get as high as 207% in 2024. To put this ratio in perspective, below 80% is a reasonable valuation and a positive for stocks. 80%- 130% is a neutral area where stock picking becomes increasingly important. Valuations above 130% are too high, and investors should raise cash as we await a decline and repricing of stocks. This may be why Warren Buffett is sitting on $325 billion in cash, looking for deals in 2025. This is also why I’m sitting on $434,000 in cash, over 40% of the portfolio. If I were invested in a hedge fund or a private equity fund, I'd be inclined to increase my stake.
I’m always bullish on the stock market, but looking at the valuations of the Mag-7 and beyond explains my hesitation to be a raging bull. At the close today, the S&P 500 had a price/earnings ratio of 30.13. The mean is 16.12, so the market is richly valued on that metric. When we invest in a company, we pull forward future earnings to today to determine whether we’re buying a stock at a value relative to its future earnings and to the market. One check we can make for future earnings is the forward price/earnings ratio.
Apple is trading at 33.90 times forward earnings, a bit more than the broad market. Microsoft is at 32.26, and Amazon is at 35.34. Meta is a standout value stock in this group, trading at just 23.31 times forward earnings. Tesla investors are betting big on autonomous driving and Elon Musk’s connection to Trump. Tesla shares are trading at 121.95 times forward earnings. Nvidia shares have always been expensive, but for good reason. At today’s close, Nvidia shares trade at 32.15 times forward earnings. There are more egregious valuations. Forward earnings for Palantir are 161.29, AXON Enterprise is 96.15, SoFi at 78.12, Carvana at 105.26, and Cyberark Software at 88.50.
In 2025, I’m looking for stocks that fit into long-term growth strategies, such as those in artificial intelligence, transportation, new energy, the institutionalization of cryptocurrency, biotechnology, and financial technology. A momentum strategy will help identify companies that have the potential to be winners, but that will just be my shopping list. I can’t research every company I see, but I can whittle the list down very quickly by looking for good companies in high-growth industries and focusing my research on those companies with momentum. I’ll also look for high-growth companies in slow-growing sectors; these are the disruptors. SoFi is an excellent example of a fast-grower in the traditionally slow-growing industry of banking. Find me another bank expected to grow earnings by 110% next year, and I’ll look at it.
My other focus for 2025 is to spend more time discussing my approach to selecting companies to invest in. When I launched this blog, it was an experiment, encouraged by my mother, to see if I could build a portfolio for average investors that could beat the market indexes. That objective has been met several times. However, I left out some vital information and got too focused on the annual return. The old proverb, “Give a man a fish, you feed him for a day. Teach a man to fish; you feed him for a lifetime, " applies here. I will continue the blog in 2025, but more time will be spent on the how and why parts of investing.
My other wish for the new year is that my subscribers will engage more in conversation in the comments with each other and me. I hope my subscribers will ask questions and provide ideas for me to research, as an ongoing dialog and interaction is far more interesting for us all.
Have a happy and prosperous New Year, and always Stay Invested
"Markets don't go to zero; portfolios do.
Buy quality, be patient...and look twice for motorcycles."
- Clay Baker
Stay Invested,
Clay Baker
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Clay's Rules
Rule #1: Don't lose money
Rule #3: Portfolios go to zero, markets don't; Stay Invested
Rule #4: When good stocks you own drop 10% below your cost basis, add shares
Rule #5: Bull markets aren't sustained without the Transports
Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase
Rule #7: When an investment bank sells below book value, buy it
Rule #8: Tips are for waiters. Do your own homework.
Rule #9: Don't sell a stock because you're bored with it. Do your homework.
RULE #10: Don't expect a company's stock to perform according to your timeline; be patient.
Rule #11: Investing is easy. Waiting is hard; waiting is the hardest part.
Rule #12: It's hard to be incredibly intelligent. Not being stupid is pretty easy.
Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security.
I am invested short in these securities mentioned in this post:
None mentioned
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or be interpreted as providing a personal recommendation. This and all articles on this website are provided for entertainment purposes only. Investing involves risk and risk of loss of part or all of your capital. Invest wisely, make your own decisions, seek advice from multiple sources.
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