2024 Year-End Review and Outlook

Current Market and Economic Conditions

• In 2024, the S&P 500 Index was up 25.04%, while the Bloomberg Barclays US Aggregate Bond Index was up 1.25% and the Bloomberg Barclays Municipal Bond Index was up 1.05%.¹
• The bull market for the US stocks that started in October of 2022 accelerated during 2024. Despite the election year’s uncertainty, the S&P 500 Index managed an annual total return greater than 18% for the fifth year in the last six years.¹
• Investors in bonds enjoyed higher yields. However, the slowing improvement in inflation has constrained the Federal Reserve’s progress in reducing short-term interest rates. The bond market ended the year with growing uncertainty over potential fiscal policy changes and their effect on inflation.

Bond Market: Review and Outlook

• 2024 Review: The Federal Reserve Open Market Committee (FOMC) reduced the Fed Funds interest rate by a full percentage point during 2024 from 5.33% to 4.33%. With the significant improvement in the inflation rate from its peak of 9.0% in June of 2022 to the most recent reading of 2.7%, the FOMC has, thus far, been able to engineer continued growth (“no landing”) in the US economy while normalizing the employment situation. While the unemployment rate did rise during 2024 by about 0.5%, this was mainly due to people being drawn back into the job market rather than a reduction of the workforce by employers. As Federal Reserve Chairman Jerome Powell stated in his December press conference: “as for additional cuts, we're going to be looking for further progress on inflation, as well as continued strength in the labor market. And as long as the economy and the labor market are solid, we can be cautious about, as we consider further cuts.”^2,3
• 2025 Outlook: Projections released in December by the FOMC showed the central bank forecast reducing the Fed Funds rate by a half of one percent before the end of 2025. This is a change from the prior outlook in September when the Fed was anticipating a full point reduction in 2025. The Futures market had adjusted their collective outlook shortly after the election and had correctly anticipated this slowdown in rate cuts. It seems that both the Federal Reserve and the markets are taking a wait and see attitude on how changes in tariffs and immigration brought on by the new Federal administration may influence the inflation picture. Responding to a question during the November press conference, Chairman Powell said that “the election will have no effects on our policy decisions…we don’t know what the timing and substance of any policy changes will be. We therefore don’t know what the effects on the economy would be. We don’t guess, we don’t speculate, and we don’t assume.”³
• For bond investors 2024 was a positive year with higher yields offsetting interest rates that fluctuated based on the changing inflation picture. The yield on the bellwether 10-year Treasury bond started the year just below 4%. It rose to 4.7% by May only to fall back to 3.6% in September. From there to the end of the year, the interest rate rose again by a full point to finish at 4.6%. This fluctuation impacted bond values by buoying the higher starting rates. For 2025, bond returns will again be affected by the monetary policies of the Fed and their reaction to the potential changes in fiscal policies of the US government.²

Stock Market

• 2024 Review: The stock market in the election year was anything but typical. The market had defied the typical election primary season volatility and roared higher as the “AI Trade” took control. The market has also continued to find positive traction from rising earnings and, until recently, the improving inflation picture.
• 2025 Outlook: The stock market appears overvalued but that may be reflecting of the AI euphoria at the top end of the market. With the bond market pushing up interest rates, the enthusiasm has been tempered by the specter of a valuation correction going into the new year. The remainder of the market - value stocks, small stocks, and most definitely international stocks - are all significantly undervalued relative to US large cap growth stocks. Rather than a significant across the board decline, we may see a rotation toward stocks that have been generally ignored by the market in recent years. A broadening of the market’s strength across different segments of the market would be a healthier outcome and reflect the general strength of the overall economy.
• The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. The Federal Reserve entered the next phase of lower interest rates during the final part of 2023 and into 2024. With uncertainty surrounding the impact of fiscal policy changes, the stock and bond markets as well as the Federal Reserve are in a bit of a wait and see attitude going into the new year. In the event of a near term correction, investors should continue to focus on the longer-term path of the stock market and the economy and take advantage by rebalancing to their appropriate risk profile.

Portfolio Management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.