“We plan, God laughs.” — Old Yiddish Proverb
Fourth Quarter Recap
The last quarter of 2024 ended with U. S. equities on a positive note. The S&P500 and NASDAQ 100 were higher 2.4% and 4.9% respectively. Meanwhile, the more cyclical Dow Jones Industrials and the small cap Russell 2000 remained flat.
Foreign bourses finished lower, however, as the MSCI EAFE (Europe, Australasia and Far East) index fell over 8%. Fixed income also dropped, with the Bloomberg US Aggregate (“US Agg”) Index down 3.1% and Bloomberg US Treasury: Long Index (“Treasury-Long,” 10-30 year Treasuries) fell 8.6%. Gold was unchanged while WTI (West Texas Intermediate) oil rose sharply during the period.
For the year both the S&P 500 and the NASDAQ 100 rose over 25%, the Dow up 15% and the Russell 2000 rising 11.5%. Comparatively, the EAFE lagged behind at 4.4%. After a correction in the summer, Magnificent Seven (“Mag 7”) and AI-related stocks spiked higher in autumn. Bonds fared worse, with the US Agg up only 1.3% and the Treasury-Long dropping 6.4%. Gold was sharply higher at 27.2%, followed closely by WTI oil at 24.1%.
The U.S. Vote Culminated a Year of Elections Around the World
The American general election was somewhat surprising. The Republican party was able to capture the White House and both chambers of Congress, although the majorities in the House of Representatives and Senate were slim. This led to a sharp stock market rally in November – President Trump has stated on a few occasions that he likes a strong stock market – although bond markets continued to sell off due to apprehension about future Federal budget deficits. Mr. Trump and his advisors are advocating a sweeping agenda, covering four large areas – taxes, deregulation, immigration and tariffs (TDIT) – along with others, such as healthcare and deficit reduction.
The U.S. electoral uncertainty of 2024 has now been replaced by policy uncertainty for 2025. The exact form and implementation of the proposed policy changes will take time, due to the thin GOP Congressional majority and the vetting process of the new President’s nominees for Cabinet and other government positions, some of whom are controversial.
Additionally, foreign government reaction to some of the new proposals such as tariffs and immigration are unknown and will remain so for some time. To add to the complexity, some measures can occur quickly by executive order or by regulatory agency rulings, whereas others will have to be enacted though Congress.
The Fed and a Tale of Two Bond Markets
The “recalibration” of the short term Federal Funds Rate appears to be tapering off. Distortions to the labor market caused by hurricanes ran their course, with job creation normalizing to pre-pandemic tempo by October. As a result, the Fed slowed its pace, easing from 0.50% in September to 0.25% in the November and December FOMC meetings and has signaled a further slowdown in 2025.
Curiously, though the Fed Funds and other short term rates have fallen, long rates (10 years or more) have increased steeply since the Fed began its easing program. The 10 year Treasury bottomed at the September FOMC meeting at 3.60% and ended 2024 at 4.57%. Numerous reasons exist for the dichotomy. Fixed income traders reacted after the September 50 basis point Fed cut by immediately selling longer maturities, feeling that the economy and the jobs market were not weakening as the Fed seemed to believe, and that sticky inflation was still a problem. While likely an overall positive for equities, bond investors are somewhat skeptical that the Trump agenda will reduce budget deficits over the next decade.
The “fiscal cliff” argument has been known for the last few years but has taken on somewhat more urgency within the last year. Even more interesting, it is now being manifest in some other countries, from France, Germany and the UK to Canada, whose economies are not as strong as America’s, but whose sovereign bond yields are rising. It may also reflect global political uncertainty, with geopolitical risk still a major factor.
The Economy and the Outlook Going Forward
While there is much debate about American exceptionalism, the U.S. economy remains a global standout. A resilient jobs market has aided consumer spending, which makes up over two-thirds of GDP (Gross Domestic Product). Solid consumer spending in turn helps corporate profits which translates into higher equity prices. Housing prices continue to be firm in most parts of the country, resulting in steady increases in net worth (wealth) among most households.
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- If this trend persists, equities should do well, although closer to historic returns rather than the past outstanding year. In November, we trimmed International Equity exposure in accounts by cutting countries most vulnerable to the Trump tariff proposals while maintaining holdings in others that may be beneficiaries of the new trade policy.
- TRP has also introduced a Mid-Cap Equity sector. Mid-caps are more profitable than smaller companies, are less interest rate sensitive (similar to their larger-cap peers) while deriving most of their revenues domestically.
- We anticipate that the Fed will cut short rates once or twice this year. However, long rates will remain under upward pressure due to the reasons highlighted above.
- We continue our barbell approach of global bond (including corporates) funds in nontaxable accounts, thereby deemphasizing long-term U.S Treasuries, while keeping short-term fixed income such as money market funds, which served us very well in a difficult yield environment. Taxable accounts with clients in high tax brackets are best served with high quality municipal bonds balanced with money market funds.