2024 Q4 Investing Insights (Stocks)

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Hello, and thank you for joining this quarter's WealthFactor presentation. I'm Bill Woodruff, founder of WealthFactor. At WealthFactor, we are dedicated to helping individuals confidently navigate the complexities of investing by providing clear and actionable insights. In this presentation, I'll share my thoughts on the current state of global financial markets with a particular focus on the stock market.
Together, we'll examine how recent developments in the economy, interest rates, and corporate earnings are influencing market dynamics. My goal is to offer you an evidence based perspective to support informed and strategic investment decisions. Before I dig in, a few words for compliance purposes.
Statements made during this recording are for informational purposes and are my opinions. They are subject to risk and uncertainty, some of which are significant in scope and by their very nature beyond our control. There can be no assurance that such statements will prove to be accurate and actual results in future events could differ in a material way from said statements.
Historical results are not [00:01:00] necessarily indicative of future performance. Let's begin by looking at the performance of key areas in the equity markets over the past 3 years. The S& P 500 showed a strong rebound in 2023 and 2024, following a challenging 2022. US large growth stocks, while the most volatile, have seen impressive returns in 2023 and 2024 after a sharp decline in 2022.
Meanwhile, US large value stocks delivered steadier, though more modest gains. Non US equities have experienced mixed results, with a notable recovery in 2023 after a significant decline in 2022. These numbers set the stage for a deeper discussion on what's driving these trends. In the next few pages, we'll explore factors such as valuations, differences, economic conditions, and sector dynamics that have influenced these performances.
We'll also discuss how these trends might shape opportunities and risks going forward, helping you make informed decisions about your portfolio. This slide [00:02:00] compares market returns across different valuation levels and time horizons. On the left, we see one year forward returns plotted against P. E. ratios. This The data suggests that valuations aren't very predictive of short term market outcomes, as returns can vary significantly within a single year due to other factors. On the right, the focus shifts to 5 year forward returns, where a clearer pattern emerges. The data shows that higher valuations tend to correspond with lower returns over the longer periods.
This suggests that while valuations may not offer much guidance in short term decisions, they are more relevant when considering proper investment time horizons. Let's talk about the growing concentration risk in the S& P 500. The top 10 holdings, names like Apple, Microsoft, NVIDIA, and others, now represent nearly 39 percent of the index.
These companies are undeniable leaders in their industries, but holding both broad market ETFs and these individual [00:03:00] stocks creates excessive overlap in your portfolio, like putting too many eggs into a few very shiny baskets. The lack of diversification isn't incidental. It's largely driven by the significant valuation premiums these companies command.
While their strong earnings and impressive growth justify some of the optimism, it also bakes in a higher risk of pullbacks if expectations all short. To mitigate this risk, we recommend avoiding direct ownership of these positions alongside market cap weighted ETFs. Instead, we prefer strategies that deviate from traditional market capitalization weighting to reduce concentration risks.
Alternatives like equal weighted indices and factor based investing provide meaningful diversification. These approaches spread exposure more evenly or focus on specific drivers of return, such as value or quality without requiring you to pick stocks or become an active investor. This page [00:04:00] highlights the historical trends of the U.S. dollar index since 1999. From 1999 to around 2007, the dollar experienced a significant decline, a period that coincides with strong performance in non U. S. equities, as a weaker dollar made international investments more attractive. However, since 2008, the dollar has generally strengthened, creating headwinds for non U.S. investments. This chart underscores the critical role of currency movements in shaping international investment performance. Over recent decades, the U. S. has increased its share of global market capitalization, much like the concentration seen in the top 10 holdings of the S& P 500. While part of this growth reflects strong historical corporate profits, a significant driver is the optimistic outlook for the U.S. compared to other regions, which may be driven too much by our recent experiences. However, with the dollar's relative strength, a prolonged period of non U. S. market underperformance, and [00:05:00] Comparatively attractive valuations outside the U. S. We believe investors should maintain a healthy allocation to non U.S. equities similar to our views on mega cap U. S. stocks. We recommend investors deviate from global market capitalization awaiting trends instead aim to rebalance towards a target exposure, consistent with long term historical global equity weights. This approach helps maintain diversification. As we wrap up, let's reflect on what we've covered.
Markets often feel easier to navigate when we look at past winners like Apple or Nvidia, whose historic performance has been remarkable. But if history and evidence have taught us anything, it's that the future rarely unfolds as we expect. The strongest returns often come from areas overlooked or undervalued today. That's why we emphasize the importance of discipline and an evidence based approach to investing. [00:06:00] By focusing on diversification, rebalancing towards long term targets, and avoiding the temptation to chase recent performance, we increase the probability of achieving sustained success over time. Thank you for joining me in this quarter's presentation, and I look forward to continuing the conversation as we navigate the road ahead together.