Economic Overview

From an economic lens, the fourth quarter held some key similarities to the rest of 2024. The U.S. economy continued to grow at a solid pace that beat expectations, activity in Europe remained weak with dispersion across countries, and China’s challenges persisted. Meanwhile, most major central banks continued their rate cutting policy. Despite the aspects of resemblance to recent quarters, there were also some notable shifts with lasting implications. After an eventful race, Donald Trump was elected the 47th president of the U.S. The change in government is in store for early 2025, but markets have already started to discount the implications. During the quarter, investors started to more seriously consider inflation risks from potential policies of the incoming administration. Amid these risks, a resilient economy and slower progress in inflation data, the Federal Reserve signaled a more cautious approach to rate cuts moving forward.

Market Returns

Markets experienced a notable surge in November following the midterm elections, which brought heightened expectations of deregulation under the incoming Trump administration. The prospect of a business-friendly environment initially bolstered equities, as investors anticipated reduced regulatory burdens for key sectors such as energy, finance, and technology. However, this optimism was short-lived.

During its December meeting, the Federal Reserve dashed hopes for aggressive monetary easing, revising its projection to only two rate cuts in 2025, down from the previously anticipated four. This shift signaled to investors that the fight against inflation remained a priority, further dampening risk appetite and triggering a broad market pullback.

Interest rates moved up across the yield curve most notably in the leadup to the U.S. election and after the December Fed meeting. High yield fixed income benefited from a constructive credit backdrop– leaving it slightly higher overall in 4Q. U.S. equities drifted slightly upwards in October before reacting favorably to the cleaner-than-expected GOP sweep U.S. election outcome. Areas like small cap equities, cyclical sectors and regional banks saw the strongest reaction. However, equities began to fade in December with a step lower following the December Fed meeting.

The “Magnificent 7” held up well while many other parts of the market faded in a weak finish to a strong year for U.S. equities. The Magnificent 7 accounted for more than all of the S&P 500’s 4Q gain and over half of the index’s 25% gain in 2024.

Both emerging markets and international developed market equities trailed the U.S. by around 10% in 4Q. Real assets also lagged with more weakness in natural resources and global real estate while global listed infrastructure fared better given its favorable exposure towards increased power demand. U.S. economic resilience continued in 4Q, bolstered by a solid consumer and labor market backdrop.4Q intensified divergence in regional returns observed earlier in 2024.

Fed Cuts Rates

In December, the Federal Reserve reduced the federal funds rate by 25 basis points, setting the new target range at 4.25% to 4.5%. This marked the third consecutive rate cut, totaling a full percentage point reduction since September, as the Fed aimed to balance economic growth with inflation control.

Fed Chair Jerome Powell indicated a more cautious approach for 2025, suggesting fewer rate cuts than previously anticipated. He stated, “We are at or near a point at which it will be appropriate to slow the pace of further adjustments,” and emphasized the need to “see more progress in lowering inflation” before making additional cuts.

These comments suggest that the Fed is likely to implement only two rate cuts in 2025, compared to the four cuts projected earlier.

Looking Forward to 2025

The remarkable gains in equity markets last year, fueled in large part by advancements in artificial intelligence (AI), may not come back for a repeat performance. While institutions caution against expecting another year of 20% returns, the AI-driven innovations will likely continue.  The broader adoption of AI is expected to support market growth, though perhaps at a moderated pace.

Recent developments from DeepSeek–a cutting-edge AI firm–are challenging the foundation of this narrative, raising questions about the sustainability of the current AI ecosystem and the long-term outlook for key players in the market. DeepSeek recently announced a breakthrough in AI innovation that fundamentally alters the landscape. The company’s new technology slashes the cost of training AI models.

For fixed-income investors, bonds may present a more traditional appeal this year. With yields on rates and credit at solid starting points, the potential for generating steady income has returned. Further, banks continue to drop their Certificate of Deposit and Money Market yield, making fixed income a more attractive investment moving forward. 

Given the uncertainties tied to the incoming administration policies and lower expected returns from equities, diversification becomes even more critical.

Our team is here to ensure our clients’ financial strategy aligns with their goals, in an ever-changing environment. Whether it’s positioning a portfolio to take advantage of growth opportunities or mitigating risks through diversification, together we can navigate the year ahead with confidence.

Please don’t hesitate to reach out with any questions or concerns you may have in 2025.