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The U.S. stock market finished the final trading week of the year with a whimper instead of a Santa rally, however US stocks still posted solid returns for the second year in a row. US large cap stocks outperformed both small and mid-size US stocks. US stock indexes also outperformed International and Emerging Markets stock indexes.
Stocks rallied after the election with hopes that the Tax Cuts and Jobs Act, which was passed in 2017 during the previous Trump administration and lowered Federal Income tax brackets, would be extended beyond 2025. However, bonds pulled back after the election due to worries regarding the possibility of increased tariffs, stickier inflation, and projected fewer Federal Reserve rate cuts in 2025.
The most recent reports on inflation came in-line with expectations. The consumer price index increased by 2.9% for the full year in 2024, while Core CPI, which excludes food and energy, increased by 3.2%. Both are an improvement from 2023, but still below the 2% level that Federal Reserve officials are targeting. It remains to be seen how upcoming discussions regarding increased tariffs may affect inflation rates in 2025. The Federal Reserve has indicated they will proceed with caution on further rate cuts to start the year.
The Federal Reserve lowered the Fed Funds rate by 0.25% at their December meeting. However, many Fed officials had an estimate of four rate cuts in 2025 in their October meeting but reduced their estimates to two projected cuts after their December meeting. Fed officials indicated that they have time to be patient before reducing rates further given that gross domestic product (GDP) continued at a steady pace in 2024. While labor market conditions eased slightly, the unemployment rate remained low at 4.1%. Both the stock and bond markets reacted negatively to the Federal Reserve’s projected rate cuts being reduced from four cuts to two for calendar year 2025. This poured cold water on a 2024 year- end Santa rally.
The market finished with another positive year during an election year with 2024 marking the twenty-first year out of the last twenty-five years that the market posted positive returns during an election year. There are more question marks for both stocks and bonds as we move into the new year though. There are questions regarding how high tariff rates will go and if foreign countries will retaliate with tariffs of their own.
Tariffs will also determine how much prices may increase and if they will cause inflation to slow its decline or even increase. These scenarios will have an effect on both stock and bond prices, but it’s too early to tell how big of an impact they will have. Consumer spending remains strong, and company earnings are projected to continue to increase this year which both bode well for the economy. We do not recommend making any investment decisions based on anticipated outcomes as there are too many unknowns at this time.
We continue to be mindful of the risks the market faces this year, from a Fed policy mistake, inflation remaining elevated, company earnings coming under pressure, and continued geopolitical risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market show positive returns at higher percentage rates the longer the time-period measured.
Please communicate with us if any short-term cash needs arise so we can look for opportunities to be pro-active when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market. We appreciate the trust you have placed in us and will continue to make prudent investment decisions as we navigate the markets going forward.
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