2024 Stock Market Performance With Risk-Adj. Returns And Exposures

We all know that US stock market hit yet another record high in 2024. On top of that S&P 500 (^GSPC) has now delivered 20%+ return on two consecutive years. We also heard that the Bitcoin (BTC) hit record high briefly going over 100k. Overall it was very good year if you have invested.

In the mainstream financial media everyone can read tons of materials on those well-known facts. Unfortunately those materials as always tend to focus on few select objects in the financial markets and completely missing the entire more sophisticated picture. We've set a goal on ZetaMinds to be able to see that professional point of view although it might not be that popular. So lets get to it.

Whats different?

When presenting the performance of the financial markets in 2024 most people focus on return only and then measure it just on few objects like S&P 500, BTC, etc.. Instead of repeating this analysis we will add couple of details.

Risk

Everyone knows the Bitcoin had amazing return, but no one actually talks the risk that is associated behind this return. In simple terms risk is represented by the volatility or basically how much the price of the financial instrument was playing up and down. What we are going to do is estimated that volatility and to measure performance we will plug it in simplified version of the Sharpe ratio: Return divided by Risk. That essentially tells you how much % return you are getting per 1% of taken risk.

Performance across styles

Usually only main indices are presented in those yearly performance reviews. However the stock market is much deeper than that and instead of shown S&P 500 only we will show the performance of the well-known styles: Growth vs Value and Small vs Large.

Exposures to risk factors

In the end we will also go one step further and try to simplify what macroeconomic factors were driving the success of S&P 500. This is done by doing simple single factor regressions between S&P returns and returns of factors like oil, gold, VIX etc. There some interesting findings there.

Overall performance measured by Sharpe Ratio

The first table shows the performance of some of the well-discussed asset classes ranked not by return but by their Sharpe ratios. It is astonishing how BTC doubled this year and delivered almost 5 times more return than S&P, but it was also 4 times riskier than S&P and in terms of Sharpe ratios the difference is not that huge 2.1 vs 1.9.

Gold (GC=F) had an amazing run and actually beat the S&P 500 but quite surprising to me it was actually riskier than the stock market with almost 15% annualized volatility. Usually Gold is thought to be safe heaven so this risk is a interesting note. Another revelation by adding risk to the performance picture is that the wider Russel 2000 (RUT) index actually didn't produce value, it returned 10.6% but with volatility of 20% you got a take twice the risk to get unit of return. This reinforces the main line that large companies presented in S&P 500 were the best performing asset and were the driver behind the stock market.

Performance by sector

Next lets delve deeper in the stock market and checkout the performance by the different sectors. Again ordered by their Sharpe ratios rather than just return:

Contrary to the popular belief that Tech is the king, the clear best deal this year were the Communication Services (VOX) and Financial stocks (XLF). On top of their amazing return their volatility stayed remarkably low product impressive Sharpe ratios of more than 2, which are better than the BTC! The fame Tech sector (VGT) ( did produce impressive return of 28.4% but the risk was huge at more than 22% barely producing actual value added with 1.13x (Sharpe) units of return per unit of risk. The clear poor losers this year were the Healthcare (VHT) and traditionally bad Materials (VAW) sector. In the Materials sector it is interesting that their risk was above average..further compounding the poor return. Another interesting note is the Energy sector (VDE), that didn't had good year mainly because of the huge 20% annualized volatility driven by the changes in the political risk impacting the oil prices throughout the year.

How different styles performed this year?

For the boring academic investors the so called Fama-French model is actually quite exciting. So we will try to hype you as well on what this segmentation of the market told us in 2024. In layman's terms Fama-French factors divide the market in two by different common variables. We will stick to the two famous ones: Large vs Small and Value vs Growth.

Large vs Small segmentation basically separates the entire stock market into two portfolios - stocks with smaller market capitalization (VBR) and logically stock with higher market capitalization (VV). Tracking the performance of the two is saying which one of the two types the investors loved more in 2024:

The clear trend from previous years continues and Large cap stock ousted Small cap by far. A 100 dollar investment would have yield 124 dollars (24% return) in Large caps vs 111 dollars (11%) in Small caps. This is validating the widely noted fact that investors go for the big stock - Magnificent 7, gigantic corporations rather than trying to seek hidden gems in the small caps. The ongoing winning streak of Large caps will definitely has to be discussed further as we go in tumultuous 2025.

Value vs Growth is segmenting the market by the growth expectations. On one side we have high growth companies (VUG) that may not be producing currently much earnings versus the value companies (VTV) that are producing huge earnings today but don't have so high growth projections in the future. Usually the classification is made by the Price/Earnings ratio. Typical growth company would be TSLA that doesn't have so good financial results but has huge potential and thus very high P/E, while typical Value company is MSFT that is producing huge output today but going forward it will be difficult to keep growing.

As expected in overall good year the Growth stocks are killing Value stock with 32% return vs 14%. It is not really surprising because it is quite logical that during cheerful times on the market investors are looking for high growth opportunities. Growth stocks are actually the best asset this year:

What has driven the performance of S&P 500?

This is very popular question that has so many answers. Here we will attempt to put some math and business logic behind. Basically regressing the weekly returns of S&P 500 vs our selection of factors will measure the exposure of the benchmark. This exposure (technically known as Beta) basically tells us if the factor moved by a unit how much this led to change in S&P returns. For some of the factors we naturally expect the exposure to be negative, for example we know that rises in the Yield spread (the difference in return between 10 and 2 year government bonds) is impacting negatively stocks.

Here we are concentrating on 8 factors:

• BTC - effect of Bitcoin (BTC);

• Gold (GC=F);

• Oil (CL=F);

• VIX - measuring volatility of the markets (VIX);

• GMIN (ACWV) - Global Minimum Risk portfolio represented by ETF;

• ST Yields (FVX) - yield of 5Y government bonds;

• 10Y Yield (TNX);

• Yield Curve - the yield spread between 10Y and 1Y government bonds.

So here are the exposures against those 8 factors of S&P 500 (main benchmark), Russel 2000 (small cap benchmark) and the portfolio of so called Magnificent 7 stocks (NVDA, TSLA, MSFT, AMZN, GOOG, AAPL, META).

It turns out that BTC is actually positively related to the stock market, contrary to the popular belief that he crypto asset class can serve as a diversification to the stock market. You can't be diversifying risk if both are going up and down together. Same goes for the Gold, Oil and VIX. Those small positive relations are a signal that those factors/asset classes are not determinants to the stock market, but rather they are influenced by the overall bullish mood. Strong determinant for the market are the yields. All 3 of them have strong negative impact on the market as it is expected by the financial theory. This is only confirming yield curve spikes are very important to your portfolios, you should've seen dozens of headline on particularly bad days for the market that the"yields have spiked". That yield curve is something to look at in 2025. Looking at the numbers it is evident that large companies represented by S&P 500 (the sweethearts of the investors) and big tech (Mag 7) are particularly vulnerable to changes in the yield curve.