Update on the Markets:
| Index | 3rd Quarter 2024 | Full Year 2024 |
|---|---|---|
| S & P 500 (Large US Stocks) | 2.41% | 25.02% |
| Russell 2000 (Small US Stocks) | 0.33% | 11.54% |
| FTSE All-World ex-US (International Stocks) | (7.46%) | 6.14% |
| Barclays US Aggregate (Bonds) | (3.06%) | 1.25% |
January 2025
Key takeaways
► Another excellent year for stocks
► Inflation remains stuck
► Beware Trump’s policies
► First quarter may be bumpy
► American exceptionalism will prevail
Terrific stock market
It got a little scary there for a few days in mid-December. Fed Chairman Powell cut rates by another ¼ percent on December 18, but due to a robust economy and stable labor market (all good things!), he signaled that further cuts may be limited to two in 2025. Back in September, the Fed signaled four cuts. The market didn’t like the slightly hawkish tone, and the S&P 500 index lost almost 3%. The drop was short-lived as the market continued its rise the next day. The S&P 500 ended the year up 25.02%, making 57 new record highs along the way. Mid-cap and small-cap stocks also finally joined the rally – a healthy sign of a broadening market. Tech (primarily the so-called “Magnificent 7”) isn’t the only sector contributing to performance.
Inflation cools but remains stuck
Inflation moderated globally for most of the year but remains stuck, particularly in the US.
IMF 2024 Inflation Map
Almost all major economies have raised rates in the past two years to deter inflation. By this summer, most began to cut rates as inflation moderated. However, inflation has not yet been beaten, especially in the US, where recent CPI and PPI readings have ticked up. The Fed admitted as much a few weeks ago when it signaled only two cuts next year.
It’s also important to remember that a slowdown in inflation doesn’t mean prices are going down. Prices are simply not going up as fast. According to available data, the cumulative price level increase from 2020 to 2024 is approximately 21.90% – an average annual inflation rate of 4.04%. Higher prices are a reality that is not going away. Adjust your budgets accordingly. A recent letter from Nordstrom informed me that the revised annual percentage rate (APR) for Nordstrom credit card purchases is 31.15%. Ouch!
Trump’s policies
In September, bonds started to react to less favorable inflation readings.
10-year US Treasury Yield
Populist politics worldwide have led to protectionist policies, and global free trade is under attack. Both political parties in the US advocated tariffs as essential for protecting American manufacturers and jobs. China is usually cited for the highest tariffs.
After winning the election, Trump announced that he would impose tariffs on all products coming into the United States from Canada, Mexico, and China on his first day in office. During his first term, Trump imposed tariffs on some imports, particularly those from China, causing China’s share of imports to fall.
Imposing protectionist policies often work both ways. Our trading partners may retaliate with their own tariffs, resulting in pain all around. Also, some or all of the cost of tariffs may be passed on to us. Hence, tariffs may become a new source of inflation. Bond yields are a warning.
What to do?
The first quarter could be rocky, with all kinds of uncertainties swirling about:
- Is inflation coming back?
- How many times will the Fed cut rates? Maybe even raise them?
- How will the bond market react to the ever-growing federal debt?
- How much can US stocks rise after robust back-to-back annual returns?
- What will a Trump administration bring on tariffs, border security, immigration restrictions, deportation, and geopolitical tensions?
- Of course, there’s Ukraine, Gaza, and Taiwan.
American exceptionalism will continue in 2025. Tax cuts, deregulation, and a friendly Fed should help US stocks, especially large-value and small-cap stocks. However, moderate your expectations. A lot of good news may already be priced into the market. Europe struggles with slow growth, political dysfunction, higher defense costs, and Trump tariffs. I will not add to international stocks, except for emerging market stocks and bonds for those underweight. As for bonds, I recommend moving money from intermediate bonds to investment-grade floating-rate ultra-short bonds—a win-win. These bonds will protect capital if interest rates rise and allow for participation in tighter corporate bond spreads if the economy stays healthy. Their value will increase if interest rates fall. I maintain a small allocation to long investment-grade bonds as a hedge against a disaster event.
Thank you for your trust and confidence. Please let me know if you have any questions or comments.
All the best in 2025!
Sincerely,
Henry
Henry Gorecki, CFP®
HG Wealth Management LLC
401 N Michigan Ave, Suite 1200
Chicago, IL 60611
312-723-5116
