The Cornerstone Investment Commentary: Year-End 2024

In a year with an abundance of ‘noise’ – to borrow from statistician Nate Silver’s book title – the twin
‘signals’ of interest rate expectations and corporate profit growth most impacted 2024’s investment results.

Throughout 2024’s twists and turns, we worked to keep these two ‘signals’ in focus as market sentiment
and expectations moved from “the Federal Reserve will soon cut interest rates” (Quarter 1) to “the Fed
will hold off due to inflation” (Quarter 2) to “inflation is beaten and the Fed will cut rates a lot in the next
year” (Quarter 3) to “the Fed may not cut rates much at all in 2025” (Quarter 4). Talk about ‘noise’!

As 2024 began, the consensus of Wall Street ‘experts’ was that U.S. equities would rise modestly (+6-8%),
small-cap stocks would beat large-cap stocks, value stocks would outgain growth stocks, foreign stocks
were poised to outperform, and longer-term (and mortgage) interest rates would decline rapidly. In fact,
2024 did not unfold in this way at all. A review of the year’s investment results from dozens of large U.S.
financial institutions makes us even more pleased about the level of gains in portfolios using Cornerstone’s
allocations and recommended holdings.

Our emphasis on U.S. large-cap stocks (particularly large-cap growth over value) and underweighting of
international stocks were the foundation of these results, which were enhanced by the overall results of
actively-managed funds in your portfolio. Among overseas holdings, emerging markets shone brightest
with a double-digit gain. The bond market rallied strongly last summer when interest rate cut expectations
were highest, but it gave back most of these gains following the election. That said, we continue to believe
that interest rates will continue to fall in the coming years and look for intermediate-term bonds to fare
better than short-term in this environment.

Looking ahead, the pace of declines in those two key ‘signals’ – expectations for interest rates and inflation
– remains key. A case does exist that foreign and small-cap stocks will be the stars of 2025. However,
there is much conflicting ‘noise’ around how these signals will be nudged along as a new Administration –
whose party also narrowly controls Congress – takes office. For example, the imposition of tariffs would
increase prices for the affected goods (applying upward inflation pressure) but, as in 2018, this would also
lessen economic activity overall (applying downward inflation pressure).

Until more clarity emerges, we believe that maintaining your portfolio’s current course is the most prudent
one, along with our usual practice of periodically rebalancing out of equity categories that are overweighted
due to their recent outsized gains. And it goes without saying that we will be watching how markets react
to the events and ‘signals’ of 2025 to determine the need to make changes.

With wishes for a healthy and happy 2025, we thank you for the continuing opportunity to work together.