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The big topic this year has been international trade, and specifically tariffs. On “Liberation Day” when Trump rolled out tariffs on America’s trading partners, the US stock market initially crashed, expecting devastating economic contraction and inflation.
The S&P 500 gained 25% in 2024, for the second straight year of 20%+ returns. The last time it had three such years in a row was in 1878-1890. One of the greatest productivity-boosting new technologies ever came out in that period – the electric light bulb!
Based on the Shiller P/E, 99% of the return in the first half was driven by valuation increasing, and 1% by the underlying companies producing value. The 36.3x multiple is 68% above its fifty-year average, and 38% above its twenty-year average. For historical reference, prior peaks were 29.1x in September 1929, 45.5x in April 2000, and 39.6x in 12/21.
There were two big issues last quarter that captured investors’ attention. The first was interest rates. The second issue that has rightfully held investors’ interest is geopolitics. Sentiment has moved around over the last several quarters. It now has shifted to convinced optimism. Very few people are expecting a recession now, and some have already begun their victory dance, complete with taunting the naysayers.
As we turned the calendar to 2024, it was 48% above its 50-year average and 21% above is average over the last 20 years, up from 35% and 11%, respectively a year ago. This trails only 1929, 1999-2000 and 2021 for the highest valuation in history.