End of Year Review of 2024

Big Picture of 2024

As we look back at 2024 it started off with a bang! Stocks and bonds that had begun a major recovery at the end of October 2023 continued to move forward. As the FED continued to hold rates the markets were happy for no further increases. Corporate earnings looked good, and inflation began to subside.

As the year went on, the markets took on a more stable pace, with the volatility lower than in 2023. This environment lent itself to incredible growth in large-cap growth stocks, particularly the stellar performance of the Magnificent Seven stocks (Nvidia, Tesla, Amazon, Alphabet (parent of Google), Apple, Meta Platforms (parent of Facebook).

These seven stocks are considered Mega stocks because their capitalization is far bigger than most stocks that are traded. These stocks also had a major impact on the S&P 500, which is a weighted index. The weighting of the index and the stocks that account for the lions share of its performance are very large-cap stocks. The S&P 500 was up 23.3% for the year.

The Role of the Fed

As the Federal Reserve watched the economy and the diminished level of inflation, it stayed neutral, until September of 2024. While the markets had been anticipating a rate cut, it was a bit of a surprise, when the Fed lowered the rate by a half a percentage point (0.5%). This was followed by a quarter point (0.25%) reduction in both November and December.

Although inflation had not reached the level of 2%, that the Fed is looking for, inflation was moving in a downward trend. While the trend appears good, the overall inflation rate for 2024, as reported by the Labor Department was up 2.9%, well above the Fed’s target. In December the index rose 0.4% driven by a rise in gasoline prices of 4.4%. In November the inflation rate was up 0.4% with 0.2% of that blamed on a 53% increase in eggs. It appears that various segments of the economy still have not squeezed out inflation.

Job Creation

One of the surprises in the economy has been the continued strength of new jobs. In December the consensus was that the economy would add about 150,000 jobs.

The actual result was 256,000 jobs created. This would appear to indicate that businesses are optimistic for the future.  In addition, the unemployment rate fell from 4.2% to 4.1%. Sounds like good news but for now the markets are trending down with this news. The belief is that this is likely to lead to higher wage inflation and a shortage of workers. Overall, the concern is that it might reignite inflation and most likely reduce any reductions in interest rates by the Fed.

Also on the job front, there is concern that the incoming President’s stand on immigration may reduce the available pool of employees. With the economy doing well, this concern, if realized, may destabilize some businesses. The agricultural, health care, hospitality, and maintenance business sectors are all reliant on immigrants taking jobs most Americans don’t want to fill. This has the potential to be disruptive for both businesses and the economy.

Recapping the 4^th Quarter

As we entered the fourth quarter of 2024 the major concerns driving the markets were the presidential election, continued reductions in interest rates by the Fed, and business earnings for the third quarter. All three of these were resolved by year-end. The Presidential Election was resolved quickly, the Fed made two additional interest rate reductions, and the business earnings were up.

Initially, after the November election, the markets went up. Unfortunately, by mid-December, the concerns about inflationary pressure from some of the incoming administration's policies, that would increase the national debt, and the conflict between the new administration and the position of the Fed, lead to a lowering of market values.

Looking ahead

Based on what can be seen at present, it appears that the economy will have a year of expansion. The incoming administration seems to be pro-business and will likely reduce much of the pressure from the prior administration. In addition, priorities seem to be changing. The money that had been used previously to encourage the use of alternative energy sources is likely to be reduced or eliminated.  A more positive view of technology will help boost that sector of the economy. We are seeing stable unemployment and wage growth which could lead to lower inflation.

A key element in investment prices is earnings. It appears earnings could rise for the year. Without major policy changes, inflation could slow to something closer to the Fed’s target of 2%.

The outliers that could have a negative impact are high tariffs, strict immigration policies, and higher federal deficits. All of these are highly inflationary and are troublesome to the Fed. To see interest rates come down, the Fed must believe that inflation is under control.

Ed Mallon