The past year was full of challenges and opportunities for the economy and financial markets. Key concerns coming into the year were high interest rates, election year uncertainty, stubborn inflation, economic growth concerns, and geopolitical risk. Even with that “wall-of-worry” coming into the year, financial markets were able to move past those (and other) obstacles and produce a very solid year for equity (stock) markets. The equity market was ultimately supported with a healthy and growing U.S. economy which was reflected in solid corporate earnings throughout the year. Going into 2025, we will see a new set of challenges and opportunities, some of which will be different versions of the ones we experienced in 2024.
U.S. Economy: The U.S. economy has proven to be resilient as it grew (as measured by Gross Domestic Product, or GDP) by 1.6% to 3% throughout the year. We entered 2024 with concerns of an economic slowdown and a possible recession. While the technical definition of a recession has evolved, a recession is generally defined as a significant slowdown in economic activity that is spread across the economy. During the year, U.S. GDP growth was good (not great), and it was supported by solid corporate earnings during the year. Specifically, earnings growth for S&P 500 companies had solid results in all four quarters of 2024: 1Q +6%, 2Q +11.3%, 3Q +5.8%, and 4Q +11.0%. The 11.3% earnings growth for the 1Q 2024 was the highest growth rate since the 4Q 2021. Corporate earnings growth is one of the main catalysts for stock market returns over the long-term.
Inflation: Coming into 2024, the threat of higher inflation was a major concern for corporations, consumers, and governments as inflation can negatively impact all participants in an economy. In January, the Consumer Price Index (CPI) measured 3.1%. Then, CPI jumped to 3.5% in March, before ultimately dropping to 2.7% in November 2024. CPI is a broad measure of inflation used by the Federal Reserve Bank (Fed). So, inflation did fall throughout the year, but the bumpy road to get to a lower level was notable and it did cause some disruption along the way, mostly in fixed income markets. The current level of inflation is still above the Fed’s 2% target. The Fed’s interest rate hikes have helped reduce some inflationary pressures, particularly in sectors like durable goods and some services. However, rising costs in housing, food, and energy continue to strain some households.
Interest Rates: The year started with interest rates near a 20-year high as the short-term Federal Funds rate in January was 5.25% to 5.50%. In September 2024, the Fed announced their first interest rate cut since 2020, as they cut the short-term Federal Funds Rate by 0.50%. Then, the Fed cut rates in November (0.25%) and December (0.25%). At the end of the year, the Federal Funds rate was 4.25% to 4.50%. The narrative at the start of the year was the Fed would make “frequent” and “medium-sized” rate cuts as inflation cooled. However, as the year developed, mixed inflation data and jobs data was released that showed inflation cooling, but slower than previously thought. That lead to the Fed recalibrating and changing the narrative to interest rate changes becoming “less frequent” and “small-sized”. The Fed continues to be very methodical and deliberate when making interest rate changes with a focus on being data dependent.
The main premise from the Fed is that higher interest rates will slow down the economy, which will then slow down inflation. However, the transmission of lower interest rates throughout the economy is not always smooth and simple.
Election: The Presidential election came and went as President Trump won the election without any sort of organized challenge or delayed voting count. The somewhat simple election process proved to be helpful to financial markets as it removed uncertainty around the election process. Going into 2025, newly elected President Trump will look to make changes around tariffs, immigration, tax cuts, and deregulation, among other things. However, the actual scope, timing, and duration for these events is to be determined.
Stock Market Performance: Going into every year there is always a wall-of-worry surrounding financial markets and 2024 was no different. As mentioned earlier in this memo, some challenges going into 2024 included recession risks (didn’t happen), higher inflation (moderating, but still high), geopolitical risk (always there), and election uncertainty (has passed). Given these challenges (and others), the stock market was able to overcome this and posted solid returns for the S&P 500 (+23%), Dow Jones Industrial Average (+12%), and NASDAQ (+28%). The stock market was supported by strong corporate earnings throughout the year coupled with a boost from the Artificial Intelligence (AI) trade, which is still in early days. The path to strong returns did have several periods of short-term volatility (which is common, expected, and required). Specifically, there were two periods in 2024 when the S&P 500 experienced negative returns of greater than -5%.
(1) -5.4% (March 28 – April 19)
(2) -8.4% (July 16 – August 5)
It is important to highlight that these short-term periods of volatility and negative returns are a normal part of a stock market cycle and the market recovered after each drawdown mentioned above.
Bond Market Performance: The bond market did not face the extreme headwinds of interest rates cuts throughout the year (such as in 2022). Instead, strong jobs data that was released in late September led to a changing narrative around the timing and magnitude of interest rate cuts. The strong jobs report stoked concerns the Federal Reserve would be more cautious around interest rate cuts going forward. That uncertainty resulted in interest rate volatility which negatively impacted fixed income assets.
Key Takeaways:
- Asset allocation is critical to long-term success: At Landing Point Financial Group we focus on asset allocation which takes a diversified and long-term approach. In short, we are focused on “time in the market” instead of “timing the market”. We are focused on building client portfolios using a disciplined and diversified approach which allows us to stay invested in markets and avoid short-term market timing decisions that could negatively impact returns. A solid financial strategy should be designed to withstand short-term market fluctuations and keep you on track towards your long-term financial goals.
- Up markets experience volatility: The S&P 500 had a strong year and returned +23%. However, the path to that strong return was not a straight line and there were several periods of volatility along the way. After each drawdown this year, the market was able to recover and reach a new market high. As we highlighted before, it is important to remember that volatility and drawdowns are a regular part of a stock market cycle. On average, stocks have a drawdown of at least -5% around 3-4 times a year. Stock market drawdowns are a fundamental aspect of investing. They help to reduce overvaluations, remind investors of risk, and create opportunities to purchase assets on sale.
- Artificial Intelligence: A key theme over the past 2+ years has been Artificial Intelligence (AI). It appears we are still in the very early innings of AI and the profound impact it will have on increased productivity and cost reductions for corporations. The evidence of this is reflected in the rapid growth of Nvidia which is the market leader in high processing chips used for AI.
What is Landing Point Financial Group doing: Our firm-wide investment decisions are based around our investment philosophy and supporting principles which include the following: managing risk, using a disciplined investing framework, and focus on long-term strategic asset allocation. Our investment committee continues to meet frequently to ensure that client portfolios are positioned appropriately.
We will continue to monitor key economic indicators and events that could impact the stock market and bond market. Additionally, we will monitor the new policies that will be put in place by President Trump. We will continue to share our insights through our regular blog posts and communications. Our aim is to provide you with the information and support you need to make informed financial decisions in the coming year and beyond.
Outlook: As we enter 2025, there are both positive and negative developments in the economy and financial markets. On the positive side, we have a growing economy, solid corporate earnings growth, and a good labor market. On the negative side, we have higher stock valuations (mostly for large-cap stocks), economic policy uncertainty, and inflation concerns. The largest concern for the economy going into 2025 is a resurgence of inflation. We anticipate near-term volatility during the first 2-3 months of the year as investors process and understand the impact of the administrations new economic policies. Also, mixed inflation data during the first few months of 2025 could impact financial markets. Beyond that, the stock market could be supported by positive catalysts from corporate earnings, clarity around economic policy, and continued innovation. Specifically, we are still favorable on U.S. large-cap growth stocks (strong fundamentals and continued innovation). Another compelling area is U.S. small-cap stocks that are supported by good valuations (relative to large-caps), a potential rate cutting environment, and a growing economy. The bond market could have headwinds from renewed inflation risk and interest rate volatility for longer-term (10+ years) bonds. Due to that, we are favorable on a diversified bond approach that is focused on short-term and medium-term bonds. Within bonds, we like investment-grade corporate bonds which are supported with solid fundamentals, a growing economy, and yields from 4.5% to 5%.
Thank you for your continued trust in our team. We look forward to guiding you through another year of financial opportunities and challenges. Please feel free to reach out to your advisor with any questions and/or concerns. We look forward to working with our clients in 2025.
We hope everyone had a holiday season filled with joy, hope, and celebration.
Warm Regards,
Brian Hider, CFA
Chief Investment Officer
Disclosure: LPFG, LLC d.b.a Landing Point Financial Group is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. For more information please visit adviserinfo.sec.gov and search for our firm name.