January 10, 2025 –
To wrap up 2024, U.S. stocks, measured by the S&P 500, recorded their second year in a row of greater than 25% total return. This marks the best two-year period since the late 1990s. Throughout the year, there was plenty of anticipation leading up to the election. In the end, a quick and decisive outcome was a relief for the financial markets. During 2024, leadership in the stock market was once again centered around the biggest technology and communication names, with artificial intelligence continuing to dominate as a central theme.
The backdrop for the markets going into 2025 is largely positive. As always, external forces, both favorable and challenging, will influence investors and the markets in the new year. Two key factors expected to influence both bond and stock markets are the new administration’s policies and the trajectory of inflation.
| Market Total Returns (including dividends) |
Oct. – Dec. |
2024 |
|
| Large Co. U.S. Stocks | S&P 500 |
+2.41% |
+25.02% |
| Small Co. U.S. Stocks | Russell 2000 |
+0.33% |
+11.54% |
| Foreign Stocks | DJ Global (ex. U.S.) |
-7.42% |
+5.54% |
| U.S. Taxable Bonds | Bloomberg U.S. Agg. Bond |
-3.06% |
+1.25% |
| Tax-Free Bonds | Bloomberg Municipal Bond |
-1.22% |
+1.05% |
| Commodities | Bloomberg Commodity Index |
-0.45% |
+5.38% |
U.S. Economic and Policy Outlook
New Administration Policies
President-elect Trump’s stated policies are, on balance, well received by stock investors. The extension of 2017 tax cuts provide near-term support for stock prices. The intention to reduce regulation and to introduce accountability for government spending is broadly accepted as reasonable and pro-growth. Last quarter, we emphasized that addressing the federal debt is crucial to the long-term financial health of the country. In the months since, and especially post-election, there has been a renewed focus on run-away government spending. Hopefully, with political leadership from all quarters, that spotlight continues in the coming months and years.
Trade policy, including reshoring and “friendshoring” of the manufacturing supply chain, presents a mixed outlook. While these policies enhance American security in the long term, they are likely to raise short-term costs as production relocates to higher-cost regions. Additionally, tariffs, if enacted, may increase production costs, leading to inflationary pressures. These changes disproportionately impact U.S. multinationals reliant on exports, as higher costs and a stronger dollar reduce competitiveness abroad. Industries that rely on plentiful labor such as construction, agriculture, and hospitality may also face challenges due to tighter immigration policies.
Inflation Concerns
The largest immediate impact on both stock and bond markets will likely come from the path of inflation. Watching the yield on Treasury bonds is a real-time indicator of inflation expectations as yields rise with inflation concerns. Recently the 10-year Treasury bond yield reached 4.6% up a full percent point since the recent low in September. While annual inflation has declined from over 9% to the current rate of 2.7%, market concerns about resurgent inflation persist. The Federal Reserve confirmed this by signaling fewer rate cuts in 2025. In this environment each stronger-than-expected economic report sends bond yields higher. With recent economic data and the expectations of policies mentioned above: tax cuts, deficit spending, tariffs, deglobalization of trade, and less immigration, the concerns about the path of inflation are justified. Of course, many issues impact the financial markets beyond those discussed here. Economic growth, corporate profits, the strength of the U.S. dollar, and geopolitical developments will also play pivotal roles.
Asset Class Outlook
U.S. Stocks
Despite concerns about inflation, several factors support the outlook for U.S. stocks. With limited recession risk, a favorable economic environment, and supportive policies, continued economic growth is anticipated. Analysts estimate corporate earnings growth of 11% in 2025. Interest rates are expected to stabilize, with shorter-term rates potentially declining as the Federal Reserve continues its rate-cutting cycle.
Foreign Stocks
The outlook for foreign stocks is more cautious. Stronger economic growth in the U.S., coupled with tax cuts and potential tariffs, supports a stronger dollar. A stronger dollar, in turn, reduces returns on foreign investments for U.S. investors. As a result, we favor selective active management over broad index exposure in this asset class.
Fixed Income
Rate cuts generally support bond investments, but stubborn inflation may slow the pace of reductions, keeping the federal funds rate at a higher neutral level. We continue to capitalize on opportunities to invest in intermediate-term bonds at higher yields, holding them to maturity. Our preference remains high-quality bonds, and we manage interest rate risk by laddering portfolios across maturities of two to seven years.
For taxable accounts, we invest in tax-exempt municipal bonds, while in tax-advantaged retirement accounts, we focus on taxable securities such as CDs, Treasuries, government agency bonds, and corporate bonds. For short-term objectives, we use money market funds and Treasury Bills, which currently yield over 4%, though reinvestment risk exists if short-term rates decline further.
While we review many areas of the market, our priority is always your personal goals and creating an individualized strategy to reach those goals. As always, we welcome you to call or visit our office any time.