BY STRATEGIC ADVISERS INVESTMENT TEAM — DECEMBER, 2024
Market Conditions
We believe the U.S. economy continues to expand. Volatility during this phase of the business cycle is normal. However, historically, stocks and bonds have risen as the U.S. economy grows, even through bouts of volatility.
- Recent U.S. job market data remains positive. Weekly jobless claims have hovered near historic lows indicating minimal corporate layoffs.1 U.S. businesses added 227,000 jobs in November, marking a sizable increase from the previous month.2 External challenges such as hurricanes and labor strikes likely impacted October's slower growth.
- During Q3 2024, U.S. corporate profits grew about 8%3 and the outlook for corporate profit growth continues to remain healthy for Q4 2024.4
- Consumer spending remains strong and service industries are doing well, which are positives for the economy.5 In fact, U.S. online spending during the Thanksgiving holiday weekend was 8% higher than last year. Cyber Monday alone set a record as the biggest online shopping day of all time, with customers spending a total of $13.3 billion, a 7.3% increase year-over-year.6
- Inflation ticked up in November, with the U.S. consumer price index up 2.7%, which was below its long-term average.7
- Meanwhile, bond markets are signaling another interest rate cut on December 18.8 What lies ahead in 2025 remains uncertain. Recent statements from the Federal Reserve suggest they are taking a measured, data-driven approach to additional rate cuts. This may mean that they will closely track jobs, inflation, and the pace of economic growth in the coming months.
What it may mean for your portfolio
As we reach the end of the 2024, U.S. stocks continued to rise over the last month and corporate earnings rose during the third quarter. The economy continued to grow as well. A healthy job market appeared to support consumer spending.
Furthermore, the U.S. dollar has risen in recent weeks and U.S. interest rates have also headed higher. Both may reflect global investor confidence on the outlook for U.S. economic growth in 2025.
The current backdrop of rising earnings and economic growth could potentially benefit stock and bond investors in the new year. At the same time, the investment team will closely follow several areas in the coming year. This includes inflation, interest rates, market fundamentals, and shifts in global trade, among others.
First, inflation has declined to below 3%, down significantly from its unusual 9% peak in 2022. Strong economic growth may keep inflation near current levels, or it could potentially rise from here (though very unlikely to reach extremely high levels). This may lead to limited interest rate cuts by the Fed in the new year.
Even if the Fed may cut short-term interest rates, medium to long-term rates (which affect areas like mortgages) may remain elevated. These tend to reflect investor views on future growth and inflation over the coming years, so Fed cuts typically have limited effect on these interest rates. These higher rates may lead to income opportunities for bond investors, but may also lead to slower growth opportunities for borrowers.
As for U.S. stocks, earnings are expected to continue growing in 2025, but they are also expensive as measured by price-to-earnings ratios and other factors. Higher valuations have historically led to more modest gains in the stock market. While stocks may rise again in 2025, it may be hard to repeat the exceptional gains from 2024.
For international stocks, the earnings growth outlook is also positive, especially for emerging markets, such as Asia or Latin America. Despite a few areas of conflict around the world, most companies overseas remain largely unaffected by those specific situations, and their valuations are much lower than U.S. stocks. This combination could potentially influence performance in international stock markets.
Regarding the potential for tariffs and trade tensions, details on these remain sparse. We will follow our typical approach of adjusting client accounts as needed when actual policies are passed, which will take time to develop for the incoming administration. Historically, economic and corporate profit growth have been more significant drivers of stock market returns than policy changes. So while following policy changes may be important, they are part of a broad range of information that may help investors manage risk.
Outlook
To sum things up, there are many potential positives in place for investors heading into 2025, as well as some risks. We will continue to closely research and analyze the current position of the U.S. economy within the business cycle and the outlook for corporate profits. We will also closely follow policy developments in areas like global trade. If the need arises, we will seek to reduce the level of risk within client accounts. Just as importantly, we will seek out potential long-term growth opportunities when the U.S. economy is expanding. We believe these actions have the potential to deliver strong risk-adjusted returns for our clients.
Make a plan, stick with it, and stay invested
Market conditions can change quickly. Historically, the market has sometimes rallied, even as news headlines may have felt discouraging. We aim to guide our clients through market conditions, including the ones we have experienced this year. As a result, we have maintained healthy exposure to stocks, even through bouts of market volatility. We believe that staying invested through varying market conditions can ultimately help you reach your financial goals over the long term.
