2024 Was Great, So Now What?

Looking back over the past year, we’re gratified by all that has been accomplished. In the brilliant success of the economy & capital markets, it’s hard not to sense a sort of cooperation between Corporate America, Wall Street (investors), Main Street (consumers), and the Federal Reserve. Everything seemed to hold together despite a presidential election and ongoing (or worsening?) geopolitical tension. The word “resilient” has been used by investors to the point of becoming trite.

Success is self-evident. The US economy is tracking to a very healthy 2.7% growth rate in 2024. Inflation has fallen from 8% in 2022 to less than 3% this year, allowing the Federal Reserve to begin cutting interest rates. While the unemployment rate climbed gradually to 4.2%, it remains historically low. Wages are still rising faster than inflation, and consumer spending remains healthy. Finally, this will be the second consecutive year in which the S&P 500 Index has returned more than 20%. The Nasdaq Composite Index is up a bit more than 30% in 2024.

Maybe 2024’s success is the last nail in Chicken Little’s coffin. What I mean is that the proverbial sky hasn’t fallen. For the past two years many smart investors and most of the news media have predicted a collapse in consumer finances, economic recession, weak stock markets, etc. Too many have professed with fantastic confidence the belief that armed conflicts in Europe or the Middle East would spin out of control and damage the US economy, or that a contested and dysfunctional election would result in political & social chaos. I think we can say that all the handwringing wasn’t productive.

All of this should auger well for investors in the new year. Barron’s ran an article last week titled, “Why the Stock Market Could Gain Another 20% in 2025.” Its main points are these: no signs of recession are on the horizon; consumer confidence and investor “animal spirits” are on the rise; Trump Administration policies should be pro-growth; AI investments continue apace; Wall Street forecasts 15% profit growth for US companies. The 20% prediction seems fanciful given how much the stock market has already run. But the author points out that statistically, stocks are more likely to post a 10-20% annual gain vs. a smaller 0-10% gain.

There is good reason to believe the rally will continue. Nevertheless, when it comes to making concrete predictions, we’ll admit that the crystal ball is rather murky. This is partly because we can’t know with any reasonable level of confidence what the Trump Administration will be able to accomplish. It’s not enough to wave one’s hand like a magic wand and chant “less regulation, lower taxes” or conversely, “trade war, deportations.” We wonder whether investors will be increasingly concerned about the lack of government spending restraint and its impact on interest rates throughout the economy.

Also, the Federal Reserve’s fight against inflation isn’t quite finished. Knocking inflation down from 3% to 2% may be much more difficult than the journey from 8% to 3%. We believe inflation will gradually trend lower, but it won’t be a straight line. So borrowing rates may not fall as quickly as we would like.

As a result, some areas of the economy like manufacturing, commercial real estate and housing may continue to struggle in 2025. Housing is undersupplied, but low affordability and high mortgage rates are holding back growth.

Finally, we worry about the potential for rampant speculation in 2025. We continue to see the crypto complex as a danger to the stock market in that it is plagued by fraud and encourages gambling behavior.  Blackrock’s Rick Reider says the “last couple of weeks…felt a little bubblish” in areas like crypto. Thus far it has been an emerging financial side show, but risk will increase as it grows in size. History suggests that a bursting crypto bubble (as in 2018 & 2022) could create significant volatility in the stock market.

Weighing the risks and opportunities, we think investors would do well to be cautiously optimistic. The broad rally looks to be intact based on improving corporate earnings and a decent economic outlook.