The 4th quarter of 2024 continued to be positive for major market indexes.
The Dow Jones Industrial Average advanced by 1/2 of 1% in Q4. The S&P 500 grew by 2.1% in Q4 and the NASDAQ 100 increased by 6.2% in the final quarter of 2024.
In comparison, The Gnostic Capital Portfolio advanced from $1,102.78 at the end of Q3 to a value of $1,116.11 at the end of Q4, for a return of 1.2% on the quarter.
2024 was an impressive year for the two primary, cap-weighted, major market indexes.
While the DJIA, a price-weighted index, increased by 12.8% in 2024, the S&P 500 ended 2024 with an increase of 23.3%. The star performer of the big 3 indexes, the NASDAQ 100 Composite Index, advanced by an eye-catching 28.6% on the year.
As for the the Gnostic Capital portfolio, it closed out the year with a total return of 32%.
2024 represented a year of meaningful divergence in return among the various equities, with AI themed large cap companies besting all other equities.
Ownership of businesses that participated in the early buildout and assemblage of viable artificial intelligence sectors drove equity returns for 2024. Enormous capital programs are underway to compile data for training, to interpret that data into usable forms, to store that data, for machine learning and to provide end users with a way to viably make use of AI. There is a form of Economic Darwinism underway as some of that capital devoted to AI themed investment is being removed from other tech budgets. These shifts in capital spending, displacing traditional equipment purchases from other tech sectors, made for a very bumpy ride. That should persist all throughout 2025 and beyond.
Within the portfolio, Taiwan Semiconductor increased in price by 98.2% in 2024. Palantir Technologies Inc. advanced by an eye-popping 473% in 2024. Due to the practice of not trading, of not hedging, all of this return was retained for the benefit of the account. Such growth from AI themed equities, as initially modest in weighting as they started out the year, more than propped up the several underperforming equities in 2024, primarily Novo Nordisk (-18.9%), Cigna Group (-12%), Grupo Aeroportuario Del Sureste (-10%), UnitedHealth Group (-5.8%) and Union Pacific (-4.9%).
AI focused equities, and AI alone, enabled the entirety of the portfolio to best all major indexes for 2024. In order to beat index investments, one typically requires at least two equities within a concentrated account to significantly outperform, a single performance outlier generally isn’t enough, on its own, to boost an entire account to index beating return. Thankfully/luckily, two return outliers were held and both were deemed integral for AI themed investors.
Equity Investment Inflation was extremely pronounced in 2024.
The S&P 500 market capitalization at the end of 2024 was $49.7 trillion, whereas the NASDAQ index year end capitalization was $26 trillion; a total of $74.7 trillion in equity values reported by the pair of indexes. Such a capitalization differential is noted by indexers in terms of relative importance for allocation; ie, as the S&P 500 is 91% greater in net capitalization than the NASDAQ, investors should, therefore, weight 65% of their index capital within companies in that index, while holding just 34.3% of their total portfolio holdings within NASDAQ equities. Had a basic indexer done precisely that, weighted their portfolio in that roughly 2/3 to 1/3 allocation between the S&P 500 and and Nasdaq 100, they would have earned a return in 2024 of 25.1%.
25.1%; this percentage increase, more or less, represents the line of demarcation between those whose investments are growing faster than the herd vs those whose investment capital is providing an insufficient return to maintain equity purchasing power. If your overall account increased in value by an amount greater than 25.1% USD, you, on the whole, have more investment purchasing power at your disposal than the street as a whole, heading into 2025. If not….
Given the annual absolute outperformance of the NASDAQ index as compared to the S&P 500 over time, one can readily predict a time when the aggregate investment capitalization of the NASDAQ Index will surpass that of the S&P 500.
This has meaning for those who, as do I, evaluate capital growth beyond basic return and take into account equity investment purchasing power resultant from rising equity prices, a very real form of inflation for investors.
The NASDAQ index, almost without fail, annually outperforms the S&P 500, while holding just 20% the number of equities. While I do have my own concerns about index investments as a whole, an investment industry dismissiveness of equity concentration is not one of them. The relatively more concentrated number of holdings within the NASDAQ vs the S&P, all the while persistently demonstrating superior performance over the years, clearly affirms that concentrated accounts have their merits. The absolute outperformance of the NASDAQ to the DJIA, an even more concentrated index, also affirms that superior equity selection remains vital to the success of any account.
Should the ten year trailing rate of outperformance of the NASDAQ to the S&P 500 persist, it is likely that the NASDAQ cap weight, in terms of global market capitalization held, will surpass the amount of capital held by the S&P 500, within a decade.
A continuation of the structural shift for investment capital toward NASDAQ stocks, and away from S&P 500 as well as DJIA equities seems logical. It also builds a very high hurdle rate for investors who wish to maintain or grow their equity purchasing power. As years pass, it may become increasingly hard for non NASDAQ investors, overweight in DJIA and S&P 500 equities, to stay in the peloton.
Put aside, for a moment, pushback about “valuations“. What difference does it make for your net worth and your ability to keep up in the investment economy, as compared to the consumer economy, to stay out of NASDAQ investments that you deem to be pricey, when confronted by the inexorable concentration of capital that results when passive investors shift away from DJIA investments, based upon cap weight requirements on fund flows?
Yes, many holders of NASDAQ companies have obtained their equity stakes via exceedingly generous option grants; accept it, deal with it and drive on. One doesn’t catch up with equity inflation by sitting on the sidelines. These holders of NASDAQ 100 equities compete against others in the consumer economy as well as the investment economy; they purchase cars, homes, take vacations and send their children to private schools. In a year when the DJIA returned 12.8% and those with a NASDAQ index portfolio returned 28.6%, who is now better equipped to win a bidding war on a home?
The year end return masked some major equity disappointments.
Novo Nordisk suffered a major R&D blow very late in the year with the relative trial failure of their “next-big-thing” diabetic and weight loss compound, Cagrisema. In the phase trial, it proved to be less effective, by far, than the present gold standard drug produced by Eli Lilly. In fact, questions were raised beyond efficacy and extended to drug tolerance, or lack of the same.
Normally, the relative failure of a promising new compound by a competitor buoys the share price of any company directly in competition, but Eli Lilly also declined on the Novo disappointment. In this case, Novo Nordisk finds itself with the second most effective drug presently in the space, one due to lose patent exclusivity in China/Asia/India in 2026.
The company now lacks a newer, better product to roll out in the near term. That places Novo Nordisk in the highly uncomfortable position of having to either compete on the basis of price or to cede market share to Lilly. Abdicating market share to Lilly would be the least bad option rather than engage in a price war, were it not for the fact that Novo Nordisk was recently forced to purchase a number of manufacturing facilities and retrofit them to boost Semaglutide output. The incremental output may no longer be needed, certainly not after 2026, but they are plowing ahead regardless.
So, downward pricing of Semaglutide seems to be what the markets are anticipating, as a result of the poor trial results from Cagrisema. Price competition diminishes profits for all participants, including Eli Lilly. A traditional oligopoly pursues pricing actions that do not damage itself or the other participants unduly; I have qualitative concerns about management atop Novo Nordisk and have held those concerns for some time, a price war cannot be ruled out. In the past decade, Novo Nordisk has completely frittered away the financial benefits that accrue from monopoly status products, not once, but twice. Institutional investors, based upon the year end share price collapse, now appear to share some of my concerns. It would be unwise to engage in price wars with Lilly, but the history of Novo is one of scientific innovation, followed by manufacturing bungles and opportunities squandered. There isn’t much precedent for Novo business modeling that starts off with a scientific bungle. What follows from here?
Cigna and Unitedhealth were pressured by possible regulatory changes to their PBM operations late in 2024. Unitedhealth was also punished by bad press, excoriating the business model, in the wake of the murder of the CEO atop the insurance division. Investors also had to model in a further reduction in government payor fees for the 2025 fiscal year. Regulatory pushback represents part and parcel of the HMO equity ownership thesis; it comes up periodically, scares the heck out of investors, who then sell. Ultimately, lobby groups work their contacts within government and the end result is seldom as bad as initially posited. In this case, all of the bad press, the pending legislation; it all is occurring immediately prior to the handoff for a new, Republican led, administration. While most would suggest that a Republican controlled house, senate, judiciary and office of the President would be more of a positive than a negative, the markets seem unconvinced at this time.
No transactions took place in 2024…
save for ongoing dividend reinvestment. Despite some key disappointments on the share price fronts, EBITDA margins reported by the companies within the portfolio, averaged in accordance to investment position weighting, rose to just under 50% in 2024. Reported revenue growth by the companies within the portfolio, overall, slightly exceeded year end 2023 forecast. Adyen (+21.2%), Visa (+21.7%) and Mastercard (+25.6%) all demonstrated revenues, EBITDA margins and earnings in line with historic rates of growth.
Mastercard has now started to break out segment revenues from their proprietary economic data sets, sold externally, for analysts to model into growth estimates. Data revenues could ultimately represent a line item all its own in fiscal reports. Something is there, to be considered in the years to come, but the framework is too indistinct as yet to build into a forecast. This multibillion dollar revenue, fast growing, data division certainly has value as a stand alone business, but how does one separate that division from the Mastercard franchise for the benefit of equity holders?
https://www.morningstar.com/funds/2024-was-another-strong-year-equity-funds
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