In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
4th Quarter 2024 Commentary
Stock Market Update
Stocks rose over 23% in 2024, due to a resilient U.S. economy, excitement over artificial intelligence (AI), record profits in the third quarter, and continued interest rate cuts from the Fed. 2024 marked the second consecutive year for 20%+ growth for the stock market, which hasn’t happened since the late 1990s.
Another encouraging trend in 2024 was that more companies participated in the growth of the stock market compared to 2023. The group of the largest tech stocks known as the Magnificent 7 were still the primary drivers of growth in 2024, with just these 7 stocks responsible for 55% of market gains for the year (vs. 63% in 2023). While the Magnificent 7 stocks continue to drive growth, the S&P 500 equal weight index, which represents a broader picture of stocks, still gained over 10% in 2024. This points to more robust growth throughout a variety of sectors, not just among the largest tech companies, indicating improved health for the overall stock market.
Portfolio values and markets topped out in November, with stocks up over 5% for the month on optimism following the election of Donald Trump. Investors are hopeful that the Trump 2.0 administration will bring deregulation, lower taxes, and a friendly business climate. Stocks then ended the year on a weak note, as reality set in on policy uncertainty, possible inflationary pressure from tariffs, and the impending deportation of undocumented immigrants which could raise labor costs.
Economy Update
The U.S. economy looks poised for continued growth in 2025, with many of the same trends from 2024 expected to continue – a strong economy, stable employment, declining interest rates, and increasing corporate profits. The likelihood of the extension of the Tax Cuts and Jobs Act could further drive economic growth, and we’re already seeing an uptick in merger & acquisition activity. One of the biggest risks for the economy and markets in 2025 is inflation. Time will tell if the Fed has gone too far in their easing policy, or if expected tariffs and immigration changes reignite inflation.
We are optimistic heading into 2025, but with stocks near their all-time highs, and policy uncertainty and geopolitical risks continuing into the new year, risks for a pullback in stocks remain.
Interest Rate Update
One of the key themes for fixed income in 2025 will be a slower pace of interest rate cuts by the Fed. Given the strong economy, stubborn inflation that remains above target, and a healthy labor market, it’s likely that there will be only two smaller rate cuts of .25% each in 2025. If this prediction holds, the stock market won’t be influenced as much by these milder Fed actions, and the fixed income environment will likely remain stable for bond investors. Unfortunately, a largely unchanged interest rate environment also means that Americans who are looking to buy a house or take on any new debt likely won’t see much relief this year in everything from mortgage rates to car loans to credit cards.
Portfolio Impact
In client portfolios, we’re anticipating broader market gains (albeit not as strong as the last two years), and positioning portfolios with a stronger tilt toward U.S. stocks. We’ve also been allocating more to small-cap and mid-cap stocks, which are likely to perform well in the year ahead due to lower interest rates and a friendly regulatory environment. Many of these adjustments are on the margins, and dividend growth stocks remain the foundation of most clients’ stock portfolios.
As for bonds, we continue to move out of money markets and short-term bonds to lock in attractive yields and extend maturities before interest rates decline further. We continue to utilize bond laddering in many client portfolios as an important strategy to provide stable income, as well as lock in rates at current levels.
Bottom Line:
We expect continued economic growth in 2025 due to further developments in AI, less regulation, a friendly business environment, and broader growth. The stock and bond markets should follow suit, but likely with less robust gains compared to the last two years. Risks remain due to inflation, policy uncertainty and geopolitical issues outside the United States.
