We’re starting 2025 with reserved optimism. Investors, the markets, and the world at large are still reviewing, digesting, and anticipating the implications of the results of last year’s U.S. Presidential and Congressional elections.
One year ago, analysts and economists still voiced lingering recession fears. These faded as the U.S. economy remained resilient with respect to general growth, consumer spending, the financial markets, and inflation-combatting efforts.
Over the past few years, the U.S. economy has had the best post-COVID-19 recovery of any major developed country. Some economic headwinds we’ve seen more recently may simply be the result of coming down off the post-pandemic boost for manufacturing, retail, the labor market, and consumer demand. But there’s also been solid progress and reasons for continued optimism.
In the 1st Quarter of 2024, inflation remained above 3% and was still growing. By the 4th Quarter, it had remained under 3% for the second half of the year. The lower inflation rate, coupled with a continued strong labor market, allowed the Federal Reserve to begin cutting interest rates after 11 rate hikes. The Fed cut rates three times before the year ended and has indicated there will be more cuts this year, although its target of 2% has proven elusive.
The labor market, while beginning to slow toward the end of last year, added jobs in numbers that exceeded forecasts. Business investment also steadily rose through last year. And the stock market has shaken off periods of volatility, with the S&P 500 seeing 23% growth for the year. However, uncertainties remain.
Interest Rates
Indications of a cooling labor market seemed to ease pressure on the Fed to act urgently on further rate reduction. Notes from the last FOMC meeting of the year said members are concerned about the incoming administration’s plans for tariffs and other policies that could be inflationary. The fed has penciled in two rate cuts for this year, down from its original four.
Consumer Spending
Consumers’ willingness to spend has remained robust and last year helped fuel GDP growth, despite the fact that pandemic cash reserves have been depleted, households still struggle with the higher cost of living, and credit card interest remains high. One fallout from this is the rise of credit card debt to historic levels.
Jobs
The labor market has been cooling but wages have ticked up. A recent WSJ report noted that business leaders expect the global economy to improve and that some companies that paused hiring last year to assess the effect of AI concluded they’ll still need more human workers.
Inflation
Prices generally continue to edge down, driven primarily by lower energy costs, but relief has been uneven. Groceries are still high and housing has been a drag on any gains. Falling interest rates, investment in new housing construction, and the incoming administration’s focus on domestic energy production have the potential to move the needle but are still uncertainties.
Markets
Volatility and uncertainty remain but gains have been strong. Wall Street remains optimistic over moderating inflation and lower interest rates. Many analysts still see valuations as too high, though. Crypto is starting to become more accepted but is still seen as “edgy” by traditional investors. Intense interest and investment in AI is strong and expected to continue.
Changes in D.C.
The incoming Trump administration adds another layer of uncertainty to forecasts for the U.S. and global economies. Fear surrounds speculation on the effects of tariffs and mass deportations. But there are also hopes for potentially positive results from a tax cut extension, the prospects of deregulation, investment in the military, and an emphasis on domestic energy production.
Looking Ahead
With those factors in mind, the beginning of the year is an ideal time to assess your financial goals and make sure your investments are in line with your long-term investment strategy. We can help balance and diversify, fine-tune tax strategies, address risk and asset allocations, and talk through any of your questions and concerns. We look forward to serving you as we move through the bracing winter months and prepare for a busy year ahead.