2024 Year End Review
Equity markets outperformed expectations in 2024 as the U.S. economy continued its strong performance and inflation continued to drop, prompting the Federal Reserve to lower interest rates three times during the second half of the year. For the year, the S&P 500 Index set 57 new record highs, and, despite a December sell-off, capped off its best two-year run since 1997-1998. Even with the Fed’s rate cuts, the bond market struggled at times as the economy continued to grow at a higher rate than the Fed wanted to see. Inflation, which is much lower than it was two years ago, was more persistent than the Fed had expected.
Looking ahead, there is much good news for investors as we head into the new year. Economic growth has been very strong and is expected to continue to be positive in 2025, although likely at a slower rate. Corporate earnings have posted strong growth the past two years and are also expected to continue to grow. If interest rates stay low and inflation continues to drop, the economy should be in good shape.
Despite the economic positives, there are some concerning things we are watching. In December, the U.S. stock market dropped for ten consecutive days, something that had not happened since 1974. Also in December, consumer confidence sank, giving up the gains seen in November. More importantly, the Consumer Expectations Index tumbled to levels that usually signal a recession. With equity valuations near record highs, any unexpected negative news for the economy or the markets could have a larger than normal impact on the markets. This two-year run has also pushed the stock market above its long-term trend by the second highest amount in the last 90 years. This cannot and will not continue indefinitely.
When we look at economic and market data to make determinations about the make up of our portfolios, we look at the risk of one asset class relative to the risk of other asset classes. Our biggest concern is the risk that there may be an increase in inflation, which would hurt both stocks and bonds. Even if inflation stays where it is, it appears likely that interest rates will not go much lower than their current level. The level of debt, both government and consumer, is also a concern. Economic growth built on debt is very dangerous when the level of indebtedness becomes extreme. We are approaching that tipping point.
We think it’s unlikely for the stock market to have another 20% plus return in 2025. Having said that, this economy and the stock market have been defying expectations and may continue to do so. Much will depend on inflation and interest rates, so keep an eye on these two numbers. These same two numbers will also determine what happens in the bond market in the upcoming year. We expect market volatility to increase in 2025.
As always, never hesitate to contact us if you have any questions about your investments. You can read our new Form ADV on our website when it is updated during the first quarter.
Wabash Capital
