Happy New Year 2025! 2024 proved to be a second consecutive exceptional year in US equity markets following the Fed’s rate hike campaign which began in 2022. Bond markets had a choppier year with both positives and negatives, but ultimately did squeak out positive returns.
As in 2023, we generally saw growth positions outperforming value this year. Much of the focus for this year has centered around the Fed’s interest rate policy. Specifically, when and how much would they lower interest rates?
Over the course of the year, economic growth has continued in the mid 2% range. Job growth has continued at a healthy clip, although slower than the year before. The unemployment rate has continued to tick up (although still at a very low historical rate). Inflation continued to moderate, but has become stickier as the year progressed. The consumer has continued to spend. But, after inflation, consumers are not bringing home as much for those dollars being spent. The last mile on inflation was always going to be the toughest. With all of that said, and after some fits and starts, the Fed did start to lower rates.
The much anticipated start to this rate lowering cycle would have to wait until September as inflation continued to give the Fed pause. But by September, the Fed felt more confident about inflation and began to turn its focus to the slowdown in labor markets. However, once the Fed began to lower rates, the Fed also started to lower the projections for how much they would ultimately lower rates, and they lengthened the amount of time it would take to get there. The result of this is the market over anticipated the amount of relief to be expected from rate cuts. As this has become clear, we have actually seen longer term rates increase, rather than decrease as the Fed lowered rates. We’ve also seen equities take a little breather.
We had an election in November which will bring drastic policy changes from Washington once President Biden turns the reigns over to President Trump. These changes are important to understand as we navigate the future investment landscape in 2025 and beyond.
While a book could be written on the changes that are anticipated, we’ll share our outlook on a few key areas:
- Tax policy – Details will come into view as the debate unfolds, but tax policy is largely expected to remain consistent with the current system and structure, with some potential for additional tax relief.
- Regulatory policy – It is anticipated that we will be moving from a hyper regulatory environment to a deregulatory environment.
- Energy policy – will shift from an adversarial to a supportive environment for traditional energy sources. There will be a pullback in “clean” energy policy, but the amount is uncertain, particularly with the amount of energy the US will need to meet demands with AI and data centers, among others.
- Immigration policy – A much tougher immigration policy is expected, and controls that were in place during the first Trump administration are expected to be reinstated.
- Geopolitics & Trade policy – Trade tariffs are expected to be used as negotiating tools which likely will result in a number of tariffs increasing. A tougher stance will be taken on security policies and the wars in Ukraine and the Middle East.
A lot will depend on the timing and magnitude of the changes. Market participants also seem to be fairly exuberant about the future. While we hope that turns out correct, it is also a great time to review portfolio positioning and ensure you are accounting for the downside risks that others may be overlooking!
- Federal Reserve Policy. The Fed lowered its interest rate target by another 50 bps to 4.25%-4.50%. Growth in M2 money supply has accelerated during the quarter. While the Fed lowered rates further this quarter, it signaled a slower rate cut path going forward.
- Economic Growth – GDP. Growth came in at 3.1% for Q3, and Q4 is currently projected to be in the upper 2.0% range as well, according to GDPNow forecast by the Atlanta Fed. This cements the view that the Q1 slowdown was an outlier.
- Labor Markets. Job growth has continued to slow and the unemployment rate ticked up slightly to 4.2%. U6 unemployment also ticked up and currently sits at 7.8%. The Labor Force Participation Rate has also declined a bit to 62.50%. Monthly job growth averaged 180k in 2024, but a bulk of the jobs were in government and government related sectors such as healthcare and education.
- Inflation. Inflation progress actually reversed during the quarter with headline inflation rising to 2.7% from 2.4% at the start of the quarter. The Fed’s preferred gauge has also started to increase again. While it is not anticipated these rates will rise to the heights seen post-pandemic, this will present a challenge to further interest rate cuts. It will also continue to inflict pain on the consumer economy.
- Consumer Sentiment & Spending. Retail sales are still increasing, however they have been close to the level of inflation meaning that consumers are not taking much more home for the amount they are spending. While the latest reading came in at 3.8% year-over-year growth, much of the year has seen this figure in the 2% range and many months have come in below inflation.
- Housing & Real Estate. The real estate sector was hoping for a shot in the arm with the advent of lower interest rates. However, as the Fed has lowered rates, key lending rates have actually increased. This has continued to hold back certain real estate activity, and while there was a short burst of activity in the mortgage refi market, that has relaxed as rates increased.
- Business Investment & Manufacturing. We continue to see overall contraction in the manufacturing side of our economy according to recent ISM survey results. This measure has now been in contraction for 25 of the last 26 months. At the same time, the service side of the economy continues to hum along with healthy growth readings under the same ISM survey results, sitting at 54.1 on December's reading.
- Regulatory Environment. The FCC’s net neutrality rules were struck down in court. While much activity slowed prior to the election there are a few rules being finalized prior to President Biden’s departure. The Energy Department finalized rules shortly after Christmas which will increase requirements on home water heaters. President Biden has also moved to block the sale of US Steel and moved to ban millions of acres of offshore land for energy development.
- Global Economy. Central banks are running into a few headwinds in their quest to lower interest rates around the world. Political establishments across the globe are being voted out with voter discontent on inflation and economic circumstances. China continues to struggle to find its growth footing and is implementing more stimulus via relaxed home ownership and bank lending rules and is preparing for trade battles with the incoming Trump administration. There has been some public jockeying in the Russia-Ukraine war before an expected push to end the war early in 2025. Israel has made gains against Hamas, Hezbollah, Iran, and various groups in Syria. Between this pressure and Russia’s attention to the war in Ukraine, the Assad regime in Syria has fallen, and Israel is in a stronger position in the region.