By Rick Schwerd | December 20, 2024
Our investment team remains committed to sharing updates and market insights to keep you informed. Please look for our next update on January 10.
Even with a Rate Cut, the Fed Plays Scrooge
As expected, the Federal Reserve announced a quarter-point rate cut following their meeting this week. The Fed has now cut rates a full percentage point since it started lowering rates in September. Their statement and Chairman Jerome Powell’s press conference was quite hawkish in tone however, shaking up markets. The Fed also lowered the number of quarter-point rate cuts they predict for next year from four to just two.
The reason behind the more hawkish tone is threefold. The inflation data has been disappointing over the last few months, the labor market has been a bit stronger than expected and economic growth has remained robust. Given the latter two factors, the Fed has leeway to take things slowly to protect against another surge in inflation.
Markets Hit a Rough Patch
Markets plummeted following the news. The S&P 500 lost 3 percent Wednesday, its biggest one-day drop since August 5. The tech-heavy NASDAQ had its worst day since July, dropping 3.6 percent. The value-oriented Dow Jones Industrial Average fell 2.6 percent, suffering its tenth straight losing session, its longest skid in more than 50 years. Value stocks have been particularly low this December. We do not suggest yesterday’s sell-off is the start to a major downtrend, but it is a reminder that markets do not go up in a straight line.
Intermediate and longer-term bonds also sold off following the Fed meeting. Yields increased, given the inverse relationship between bond prices and yields. The benchmark 10-Year U.S. Treasury bond yield rose to 4.57 percent, its highest level since May and a full percentage point higher than where it was in early September. This has also pushed fixed mortgage rates higher as well.
Potential Government Shutdown
The collapse of a continuing resolution deal to fund the federal government for three months occurred late this week, adding additional uncertainty to markets. These episodes have traditionally contributed to volatility in capital markets. However, the effects are generally short lived and are usually reversed soon after a deal is eventually agreed upon.
Looking Forward to 2025
Even after yesterday’s sell-off the S&P 500 is up 23 percent for the year, nearly matching last year’s 24 percent return. It makes sense to question whether the good times can continue into next year. There is a good deal of uncertainty as we look forward, but it is important to note that the current bull market is still young on a historical basis. The bull market, which started in October 2022, is 26 months long, just over half the average of 50 for the 17 bull markets that have occurred since 1932. Furthermore, the current bull market has seen a total gain of 65 percent since its start, less than half of 152 percent average gain of the prior 17 bull markets.
Two of our research providers recently put out their 2025 outlooks and we thought their summaries would be good to pass along.
Evercore-ISI
- S&P 500 2025 year-end price target – 6,800 (15% from current level). “Momentum with positive business sentiment around Trump, more volatility … typical of the year following two ‘Roaring 20%+’ return years as valuations extended, sensitive to policy and geopolitical news flow.”
New Davis Research
- S&P 500 2025 year-end price target – 6,600 (12% from current level). “Clear skies with potential storms on the horizon. Pillars of the bull market remain in place, but they may come under threat later in the year.”
Both firms see positive returns in 2025, but with more volatility. We expect the economy to remain healthy next year, which certainly helps equity markets, but doesn’t guarantee good returns. On the plus side, we expect a more business-friendly tax and regulatory environment after Trump is inaugurated. Artificial intelligence and increased productivity are secular tailwinds that we believe still have years to play out. However, tariffs, trade wars and immigration issues may work as headwinds. Inflation and higher interest rates could also create some choppy sailing next year as well.
Happy Holidays!
We will soon find out what the new year brings. What will not change is that a properly diversified portfolio with an appropriate allocation to equities remains one of the best ways to beat inflation and growth wealth over the long term.
Thank you for continuing to partner with us. It is a privilege to help you work toward your financial goals by providing the best advice and service possible. We wish you all happy holidays and a wonderful New Year.
As always, if you have any questions or concerns regarding markets or your financial planning needs, please reach out to us at (518) 415-4401.
About the Author: With almost three decades of financial industry experience, Rick serves as a Senior Investment Officer at Glens Falls National Bank. He oversees individual and corporate retirement plans, personal trusts, investment management accounts, foundations and not-for-profit relationships. He is also co-portfolio manager of the proprietary North Country Large Cap Equity Fund.