2024 in review – Where was the volatility?
2024 had the makings of what could have led to a spike in market volatility, yet many risk-oriented markets finished the year strong. Billions of people across the globe were participating in significant elections, challenging inflation and interest rate expectations, hurricanes wrought devastation across the southeastern U.S., Artificial Intelligence (A.I.) investments were phenomenally large and wars ensued. Yet, while the fourth quarter saw many stock and bond markets taking a breather, the year capped off with the strongest back-to-back years for the U.S. public stock market in decades.
2024 had the makings of what could have led to a spike in market volatility, yet many risk-oriented markets finished the year strong. Billions of people across the globe were participating in significant elections, challenging inflation and interest rate expectations, hurricanes wrought devastation across the southeastern U.S., Artificial Intelligence (A.I.) investments were phenomenally large and wars ensued. Yet, while the fourth quarter saw many stock and bond markets taking a breather, the year capped off with the strongest back-to-back years for the U.S. public stock market in decades.
Fixed income had a decent third quarter of the year, but the final quarter saw some declines in total returns as investors weighed the implications of “higher for longer” interest rates. The models began to reset expectations for how quickly and when interest rates could start moving back down. Much of the short-term CDs and money market interest rates paid by banks saw continued drops throughout the quarter as even the most competitive rates trend toward high 3%’s low 4%’s APYs.
Planning for 2025 involves a reflection of where the markets have grown to. Markets are pricier by several common metrics than a few years ago, so expectations from this point in time have to be surpassed to potentially see continued upward momentum in the markets. A few of the known variables that will be important to watch (lest we forget some of the unknown variables that suddenly make headlines) are the prospects of tariffs, persnickety inflation and potential federal income tax changes. Heading into the year, the broader U.S. stock market is already pricing in continued positive scenarios, so should something derail the economy, it could pave the way for some downward pressure on the markets. Continued price increases without a corresponding increase in corporate earnings is possible, although we consider it typically less predictable. Markets do not have to necessarily correct in price (i.e. decline) to “adjust” to the current valuations since they can also grow into their earnings should some of the massive investments in A.I. begin to bear fruit or at least some semblance of profit-generating capabilities begin to see promise. The Magnificent 7 alone are currently spending about $400 billion per year, so there are large amounts of dollars chasing the opportunities.
Wishing you a great start to 2025! Read on as we discuss interest rate expectations and uncertainty in the year ahead.
The Fed cut rates – again – what’s next?
In the final meeting for the Federal Open Market Committee (FOMC) in December, the Fed announced an interest rate cut of 0.25%, which brings the short-term target rate down to 4.25% – 4.5% (Source: FederalReserve.Gov). The markets did not react favorably since many had anticipated a larger cut before the end of the year. One reason for the lighter-than-anticipated cut was a strong labor market and inflationary pressures that may still exist in pockets of the economy. So, expectations had to be adjusted for a potentially slower and more gradual decline in rates in 2025 than previously expected.
Ultimately, the Fed is aiming to help the economy get back to “normal” inflation at approximately 2%/year. The economy is not too far off that mark at 2.7% year-over-year inflation in November (as measured by the CPI-U; Source: BLS), but the Fed also increased their growth expectations for the economy for 2025 to 2.5%. Further, civilian employment remains strong with unemployment numbers recently hitting 4.2% in November (Source: BLS), so the Fed continues to tip-toe around the delicate balance of helping the economy let off some steam while not trying to push the broader economy into a recession. Thus far, the economy has staved off a recession despite so many forecasts for one nearly two years ago in the first half of 2023.
The quarter also saw a spike in mortgage rates from a low of 6.1% in September to a high of 6.9% at the end of December (Source: yCharts). The implications for higher mortgage rates for buyers coupled with a housing market that remains resilient may mean continued difficulties in some areas of the real estate market with financing costs remaining significantly higher than they were pre-pandemic. Plus, price appreciation adds fuel to the fire for buyers.
With the uncertain path forward for interest rates, we continue to advocate for pairing your financial resources with the proper goals, timeline and strategies in accomplishing those objectives. While short-term rates remain high, there are some great strategies to consider in getting more bang for your buck in shorter-term instruments like savings accounts, money market holdings, and/or CDs – particularly for tax payments or other more defined goals less than 12-18 months. And, with lots of movement in interest rates the last few years, it is always a good reminder to confirm the rates you are getting paid on those short-term holdings since we’ve seen some larger institutions create new account types and/or tiered structures to be able to take advantage of their highest and best offers which has left some of their existing deposit holders at lower levels.
Seeking clarity on uncertain outcomes
Despite the potential for volatility from global geopolitics and natural disasters, markets remained relatively calm with only slight declines in the final trading weeks of the year. Markets dislike uncertainty, so with the U.S. election results behind us, at least some uncertainty was lifted during the quarter, thus allowing some companies and individuals to begin to settle into the coming years as they plan for budgetary spending and capital expenditures during Trump’s second term. However, a large degree of uncertainty remains when we look at the prospects of tax plans, tariffs, deportations, and higher costs at the grocery store.
Making decisions in real-time can often be challenging when we’re faced with a barrage of news and new information, but it’s often important to maintain a flexible mindset that allows you to make decisions with 60-80% of the available information at the time. Potential tax changes and legislation are a good example of this in recent years with some of the twists and turns from what is/was proposed to what ultimately makes it into law. What can be done is focus on creating a framework that helps you assess the potential decisions TO make and build enough flexibility and resilience in your plan to accommodate some of the unknown components thrown your way. For example, a recession is only known AFTER the fact when we can see the data on whether the right conditions were met to hit those magic levels and trying to make a decision when you have 100% of the information in that example is way past the point of having been able to take action. We’re not advocating for market timing and don’t believe that those events can be reliably, consistently predicted, but by periodically assessing the different roles and components of your overall wealth, you can be more strategic around decisions made in real time when events unfold which will allow you to focus on making decisions that are accretive to your particular goals.
As a result of the Tax Cuts and Jobs Act of 2017, tax rates are set to revert to the pre-2017 levels with some adjustments for inflation on January 1, 2026. One significant change is the cutting in half of the estate tax exemption which could propel a number of households into an estate tax situation. As legislation around potential changes are likely in 2025 given the incoming Trump Administration, we encourage you to check in with your Advisory Team on whether there are any strategies to potentially get in front of in 2025. We anticipate it will be a busy year for estate law professionals and tax advisors, so addressing some of the potential changes early could be helpful with respect to leaving room for taking any action (if appropriate) for your long-term plan.
With U.S. budget deficits remaining high (with the potential to further trend higher in the coming years), we remain bearish on the long-term path of U.S. tax rates – i.e. we believe it would be reasonable that tax rates may go up over the long-term from where they are today. So, as you plan for your personal and/or business financial plans, keep in mind the current relatively low tax rates compared to historical norms.
Closing Remarks
Reflecting on the year can be a healthy exercise since it’s important to see what can be learned that could be adapted for the years ahead. History does not repeat itself, but it often rhymes. There were a lot of potential opportunities for an economic misstep and a spike in volatility, but the markets humbly remained quite calm despite the odds. In fact, the economy and the U.S. stock market has had quite a run since the depths of 2020 and why we continue to advocate focusing on the long-term picture. It is too easy to get lost in the noise of the daily, weekly, quarterly gyrations in the market. Plus, the post-pandemic world has demonstrated how difficult it can be to predict what companies and economies will do as decisions are made in real-time. It is easy to fall into the trap of focusing on the negative events of the day but the overwhelming tide of change tends to be quite positive and happen over a long period of time, so it’s important to remain disciplined in your approach as you plan for your future, adjusting and adapting as your circumstances and needs evolve and not by what’s happening specifically in the markets that day (or year).
Alas, a government shutdown continues to be a topic for the headlines and seemingly a game of chicken. It’s always a wild card on how/what/when an extension will be passed, and all the while we, and particularly government employees, are drug along. But, add it to the list of some of the events that could potentially spook the markets temporarily before they get back on track to resume their ascent over the long-term.
The markets are priced for positivity, so we remain cautious on events that could throw a wrench in things near-term. Add to that the uncertain path of inflation, tariffs, and potential deportations as some of the known variables this year. Many events that dramatically impact the markets in the short-term are not things that are on the immediate radar though, and by nature, are relatively unpredictable (COVID for example). However, the markets and global economy have continued to show exceptional adaptability to whatever curve balls are thrown its way.
Wishing you and yours a bright year ahead as we roll into 2025!