The Best and Worst Asset Classes in 2024 and the Key Risk Some Investors May Be Missing

The S&P 500 crushed it in 2024—the index of Large-Cap stocks was up more than 25 percent. That’s on the heels of 2023, when it rose more than 26 percent. In fact, it’s been a top-performing asset class for much of the last 15 years. Why would you invest in anything but the index? It’s a question we’re hearing a lot lately. It’s the same question investors were asking more than a two and a half decades ago. 

In 1999 and 2000, the U.S. economy was strong thanks to the internet boom that led to the U.S. technology sector being the envy of the world. It was playing a leading-edge role pushing the internet forward. The result was massive outperformance for U.S. Large-Cap equities driven by the technology sector. Investors questioned why they should own anything other than the S&P 500. 

Unfortunately, those investors who fell prey to concentrating in that asset class learned the value of diversification the hard way. After peaking in early 2000, the S&P U.S. Large-Cap technology sector ceased its growth trajectory. It took more than 17 years to reclaim new highs. The story was similar for the tech-heavy Nasdaq composite, which took slightly less than 15 years to recover. 

The bursting of the Dotcom bubble and the fallout from the Great Financial Crisis led investors to chase the next hot area. By 2010 no one wanted to own the S&P 500. The index had just come off the so-called “lost decade,” returning an average of 1.21 percent over 10 years. Investors had moved on to emerging markets. They had returned more than 17 percent over those 10 years (a better performance than the S&P’s current 13.9 percent average return over the last 15 years). The question investors were asking was similar: Why own anything else? 

What happened next? Coming out of the Great Financial Crisis, the script flipped again. Emerging-Market stocks returned on average a mere 3 percent annually over the past 15 years as Large-Cap again dominated. While it’s easy to think that what’s worked over a long period of time will continue into the future, the reality is that the script flips—and it will flip again.  

While these are just two examples, as the table below shows, performance leadership is fickle, with different asset classes emerging to drive future gains in each economic cycle. 

Even year-to-year periods can bring big changes. Last year’s winning asset class can become next year’s loser. Each year, we update our “quilt” (it looks a bit like one), visually representing the performance of the nine asset classes we use to build our well-diversified portfolios. It shows the swings in performance from year to year. That cyclical nature, whether year to year or decade to decade, is exactly what a diversified portfolio is built to weather. 

The quilt includes a diversified portfolio, which won’t perform as well as the top asset class. That’s by design because the opposite is also true: It helps to protect you from the downside risk when the script flips. The second part is what people often overlook or ignore when asking why they shouldn’t just invest in what’s currently performing well. 

With that in mind, let’s look at what performed in 2024—and what’s happening under the surface of the numbers. 

S&P 500 performance wasn’t as strong as it looks 

For the second year in a row, Large-Cap stocks were the top-performing asset class. And once again, the double-digit returns for the S&P 500 fail to tell the whole story. As was the case in 2023, strong gains for the S&P 500 were driven by a cluster of companies commonly referred to as the “Magnificent Seven.” These businesses are closely tied to information technology and artificial intelligence. As such, they are viewed as less economically sensitive and potentially less risky than smaller businesses or sectors that are heavily reliant on economic growth.  

While the quality profile and growth prospects of these companies are better than the average S&P 500 company, investors are pouring into them. The result: These seven stocks now make up more than a third of the total index. This has resulted in the emergence of a common risk professional investors watch out for: concentration risk. Too many eggs are in one (or in this case seven) basket(s). 

A look at what drove the performance in the index underscores the concentration. As we detail in our latest Quarterly Market Commentary, 2024 marked the second year in a row in which fewer than 30 percent of companies beat the overall index return. In other words, most companies aren’t doing as well as the performance of the index might lead you to believe they are. To find similar numbers in the past (on an annual basis) you’d have to go back to 1998 and 1999 and, before that, 1980 and 1973. 

Even in a year when the Magnificent Seven logged strong full-year performance, there were periods when these beloved Mega Caps trailed the other 493 names in the index as expectations around interest rates evolved. 

Specifically, in the third quarter, when investors believed the Fed was on the cusp of cutting rates and economic strength would broaden as a result, investors began to snap up more attractively valued Large Caps as well as economically sensitive Small- and Mid-Cap stocks. During this period, the “other 493” names in the Index rose 8.02 percent versus the Magnificent Seven’s return of 1.69 percent. As doubts reemerged that the Fed was likely to take a less aggressive stance on rates in 2025 and dampened expectations of economic growth, the Magnificent Seven once again outperformed.  

2024’s plot twists 

Changing expectations around rate cuts played a meaningful role in volatility beyond Large Caps. When 2024 began, many investors expected the Fed would begin to cut rates as early as March and continue to do so, cutting six times by year-end. Eventually, those expectations were revised lower as sticky inflation and a mostly strong job market led the Fed to take a wait-and-see approach to rate cuts.  

The evolving views on rate cuts and expectations and how they would play out in the economy led to a reversal of fortune for Small-Cap stocks. Through the first six months of the year, the asset class was one of three asset classes to post negative returns. However, anticipation of lower interest rates and business-friendly policies in the incoming Trump administration had investors expecting economic growth to broaden. As a result, Small-Cap stocks (which traditionally are more sensitive to economic growth and interest rates) outperformed the S&P 500 by nearly 14 percent and the Magnificent Seven by 23 percent in the span of just 20 days in July. However, late in the year the plot thickened as rate cut expectations dimmed, and the group’s strength faded. 

Investors overlook valuations, but can it last?  

The rise in Large Caps—specifically the Magnificent Seven—resulted in stretch valuations for the group, while other asset classes (such as Small and Mid Caps) traded at significant discounts relative to their larger counterparts. While investors often overlook elevated valuations in the near term, price multiples have shown to have an impact on performance over longer periods. We believe the same holds true in the current market.  

“Small- and Mid-Cap stocks offer optionality at these valuations,” says Brent Schutte, chief investment officer of Northwestern Mutual Wealth Management Company. “These asset classes should benefit when economic participation broadens over the intermediate term, either through decreased inflation that allows the Fed to cut rates more than investors currently expect in 2025, a mild slowdown that snuffs out lingering price pressures, or simply the passage of time.” 

The case for diversification 

As we do at the end of each calendar year, we review the performance of various asset classes featured in what we call “the quilt.” It’s simply a color-coded chart that ranks, from highest to lowest, the returns of various asset classes each year. When you map it out across 15 years, you get something that looks like a disorganized patchwork of colors that’s been stitched together with no rhyme or reason. The random picture it creates vividly illustrates the unpredictable nature of markets and the importance of portfolio diversification for the long term.  

While the performance of individual asset classes can flip top to bottom (or vice versa) in the span of a single year, the one constant through the middle of the chart is a diversified portfolio. 

“While diversification is often viewed as a defensive tool, we see it as an all-weather approach that allows investors to have exposure to asset classes that may perform well even as others lag,” says Schutte. 

International stocks lose their footing 

Speaking of a lagging asset class, International stocks went from the second-best performing asset class in 2023 to the bottom third in 2024. The lackluster performance stems from a combination of slow growth, heightened geopolitical risks, and concerns about potential tariffs under a new Trump administration. While the challenges for the asset class may linger in the new year, investors with a longer-term horizon may benefit from the group’s relative cheapness when compared to domestic equities. As globalism has faded over the past few years, the asset class can also serve as a counterweight to other asset classes that are heavily tied to the U.S. economy.  

A bounce back for Commodities reawakening 

The back-and-forth that Commodities have experienced over the past several years continued in 2024, albeit the swing was less dramatic than in years past. After going from top of the performance heap in 2022 to bringing up the rear as the only asset class among the nine to post negative returns in 2023, Commodities logged solid gains in 20024. While still in the bottom third of the nine asset classes, Commodities benefited from a sharp rise in gold prices as investors sought a safe haven from geopolitical risks and economic volatility. Overall, we continue to believe the Commodities asset class offers significant diversification benefits, especially if inflation reemerges in the year ahead or the global economy gains momentum. 

Looking forward 

As we look ahead to how the next 12 months will play out, it’s worth keeping this asset class performance chart in mind. Inflation is lower but still lingers, the Fed has halved its forecast for rate cuts in 2025, and we are facing a new presidential administration with new and yet to be fully defined policies. These are just a few factors that may shape the economy and markets going forward. Uncertainty remains high, which brings us to a close with a conversation of risk. We believe that anyone who chooses to concentrate in any one part of the market is doing so based on their belief that they know exactly what is going to occur and when. We don’t share this belief and note that history is littered with examples of "sure bets” in the investment world that were eventually proven wrong. This is also often true of companies, where current winners are often relegated to yesterday’s headlines as time passes. 

Despite the near-certain narrative that many believe is in the cards for 2025, we believe that many plot twists and turns lie ahead. We’re humble enough to believe the script may flip again. Given this uncertainty, we continue to believe investors should follow a plan that accounts for the unexpected. We believe the best approach to an unknowable economic outcome—particularly over the intermediate to longer term—is diversification.  

 

 

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.  

There are a number of risks with investing in the market; if you want to learn more about them and other investment-related terminology and disclosures, click here. 

The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy. 

Compounded returns are measured by the geometric mean of a given portfolio, which takes into account the sequence of returns over a given period of time and more accurately shows the portfolio’s performance over that period of time, as compared to a simple average.  

Risk is represented by standard deviation, which is the measure of total volatility in a portfolio. It shows how widely a portfolio’s returns have varied around the average over a period of time. Standard deviations on this chart were calculated using monthly returns.  

Sources for asset class chart: 

U.S. Large Cap: The S&P 500® Index is a capitalization-weighted index of 500 stocks. The S&P 500 Index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 

U.S. Mid-Cap: The S&P Mid Cap 400® Index measures the performance of 400 mid-sized companies in the U.S., reflecting this market segment’s distinctive risk and return characteristics. 

U.S. Small Cap: The S&P Small Cap 600® Index is a market-value-weighted index that consists of 600 small-cap U.S. stocks chosen for market size, liquidity and industry group representation. 

International Developed: The MSCI EAFE® Index Net Total Return measures the equity market performance of developed markets (markets domiciled in high-income countries, as defined by the World Bank, that most investors consider having a well-developed operating and regulatory structure for its capital markets), excluding the U.S. & Canada. The index returns are calculated with reinvestment of net dividends after the deduction of applicable non-resident local withholding taxes. 

International Emerging: The MSCI Emerging Markets® Index Net Total Return measures the equity market performance of emerging markets (markets domiciled in lower-income countries, as defined by the World Bank, that are experiencing rapidly developing economies). The index returns are calculated with reinvestment of net gross dividends after the deduction of applicable non-resident withholding taxes. 

Real Estate: The Dow Jones U.S. Select REIT Index is composed of companies whose charters are the equity ownership and operation of commercial real estate and that operate under the REIT Act of 1960. Each REIT in the REIT Index is weighted by its float-adjusted market capitalization. The total return version of the index is calculated with gross dividends reinvested. 

Commodities: The Bloomberg Commodity Index (BCOM) is a highly liquid, diversified and transparent benchmark for the global commodities market. It is calculated on an excess return basis and reflects commodity futures price movements. 

Fixed Income: The Bloomberg U.S. Aggregate Index measures the performance of investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasurys, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. It rolls up into other Bloomberg flagship indices. 

Cash Alternatives: Cash alternatives are represented by the FTSE 3-Month Treasury Bill Index with income reinvested, representative of the three-month Treasury bills. 

Diversified Portfolio: A portfolio of all segments disclosed above, with the following weightings: 23% U.S. Large Cap; 6% U.S. Mid Cap; 3% U.S. Small Cap; 13% Int’l Developed; 6% Int’l Emerging; 4% Real Estate; 5% Commodities; 38% Fixed Income; 2% Cash Alternatives.