Welcome to the Q4 2024 Pomona Newsletter
"All past declines look like an opportunity, all future declines look like a risk."
- Morgan Housel
As we turn the page to a new year, I want to share insights on what I’m seeing in the markets and industry, along with an update on Pomona's growth. With a volatile year behind us and uncertainty ahead, it’s an opportune time to reflect on key trends shaping the economic and investment landscape.
As always, please let me know if you have any questions or would just like to chat. My cell is (509) 643-6028 or schedule a virtual/in-person meeting HERE if that is preferable.
What We’re Seeing in the Industry
One of the most common questions I hear is, “What are you seeing in the markets?” I spend significant time connecting with industry leaders, including Vanguard, JP Morgan, Goldman Sachs, Dimensional Fund Advisors, Avantis, Versus Capital, AQR, and others, to stay informed. Here are the main themes emerging:
Market Valuations: U.S. equities, particularly large growth companies, remain highly valued compared to historical norms. For instance, Vanguard’s 10-year capital market assumptions project an average annual return of just 0.6% for large growth companies. In contrast, international stocks and U.S. value-oriented equities are more reasonably valued. A diversified, global investment approach is as important as ever.
Fixed Income: Yields in the bond market are attractive, especially when viewed in terms of "real yield," or the yield above inflation. Current 10-year Treasury real yields are above 2%, providing a favorable risk-reward profile.
Alternative Investments: Reinsurance and private credit/lending are continuing to gain traction. Reinsurance bonds delivered strong returns of 10%+ annually for the past two years and continue to offer elevated yields. Infrastructure-focused lending funds are also drawing attention, reflecting the need for updates to domestic infrastructure in the U.S. Alternative investments remain an opaque industry, resulting with the need to do deep and thorough due diligence before investment in alternative funds.
351 Exchanges for Concentrated Stock Positions: Leveraging a long-standing section of the tax code, 351 exchanges now offer an accessible, tax-efficient solution for investors holding concentrated single-stock positions. By moving appreciated stocks into a diversified ETF portfolio in exchange for shares, investors can reduce risk, defer capital gains taxes, and create a powerful strategy for long-term wealth preservation.
Investment Vehicles: ETFs remain the preferred option for traditional investments due to their tax efficiency and lower costs, while mutual funds and direct LLC structures are often better suited for harder-to-access alternative investments.
RIA Growth: Independent Registered Investment Advisors (RIAs) are experiencing rapid growth, outpacing advisors at traditional name-brand brokerage firms. However, large Wall Street-backed RIAs—resembling the very firms that independent RIAs originally sought to differentiate themselves from—have been actively acquiring and consolidating small to mid-sized RIA practices around the country.
Company Update
This January marks Pomona’s one-year anniversary, and we are excited about the progress we have made. We continue to resonate with families and businesses seeking a more personalized, boutique approach.
Our commitment is to serve a limited number of families, allowing us to provide highly personalized investment strategies and dedicated service. To enhance our offerings, we’ve integrated advanced tools like MoneyGuidePro, Right Capital, and Holistiplan to support comprehensive financial and tax planning.
We’ve also expanded custodial options, adding TIAA CREF and Fidelity (expected later in 2025) alongside Charles Schwab, to offer clients greater flexibility. Additionally, we’ve secured an office space in Kennewick, WA.
Market Update - 2024
Despite some December volatility, U.S. stocks finished the quarter with another gain, bringing year-to-date returns to an impressive 25%. International stocks lagged behind U.S. equities during both December and the quarter. In the bond market, returns varied by duration: short-term bonds posted modest gains, while intermediate and long-term bonds experienced declines.
U.S. Stocks: After a more than 2% drop in December due to a tempered outlook on Federal Reserve rate cuts, the S&P 500 still ended the quarter with a +2% gain and +25% for the year. Strong performance earlier in the quarter, particularly following election results, drove these results. To put things into perspective, the S&P 500 has delivered back-to-back years of 20%+ gains—an achievement that’s only happened ten times since 1871, and the first time in US history the S&P 500 and gold were both up 25% in the same calendar year.
International Equities: Developed-market equities lagged U.S. stocks for the quarter and year, with a strong U.S. dollar adding pressure. Emerging markets struggled, reflecting broader global economic challenges.
Alternatives: The alternative investment portion of portfolios, including reinsurance bonds, managed futures, and commodities, performed well in 2024, delivering uncorrelated returns ranging from 2% to 14%.
Fixed Income: Treasury yields rose during December and the quarter, leading to declines in the bond market. Bonds delivered mixed returns for the year, and real yields (yield above the inflation rate) remain attractive going into 2025, with the 10-year Treasury real yield sitting slightly above 2%.
Inflation and Interest Rates: Inflation pressures persisted, with U.S. headline inflation rising from 2.4% in September to 2.7% in November. The Federal Reserve cut rates by 0.50 percent during the quarter but signaled a more cautious approach moving forward. Globally, the European Central Bank and the Bank of England also adjusted rates, reflecting ongoing efforts to manage inflation and economic growth.
Looking Ahead…
As we move into 2025, the investment landscape presents both opportunities and risks:
Valuations: U.S. equities remain historically expensive, especially in large-cap growth stocks. For example, Vanguard projects large U.S. growth companies to deliver just 0.6% annual returns over the next decade, or -1.9% after adjusting for inflation. Meanwhile, U.S. value stocks, small companies, and international equities are more reasonably valued and may provide better opportunities for long-term growth.
Fixed Income Outlook: Bonds, with their compelling real yields, remain an attractive option for balancing portfolios—particularly given lower expected equity returns in certain areas.
Currency Effects: If the U.S. dollar retreats from its current elevated levels, international holdings in local currencies could see additional gains.
The 10-Year Treasury Yield: This yield will be a key indicator of the new administration’s economic policies. If it remains in the 4.5%-5.0% range, it may signal a balance between deregulation, tax cuts, and inflationary pressures. A sustained rise above 5.0%, however, could indicate underlying economic challenges.
With stretched valuations in some parts of the market and inflationary risks still present, diversification and liquidity will be critical in navigating the year ahead. Pomona remains committed to helping you achieve your financial goals with a thoughtful, disciplined approach.
As always, don’t hesitate to reach out with any questions. I truly enjoy what I do and love helping those I care about.
Sincerely,
Kevin Floyd, CFA, CFP®, AIF®
