November 30, 2024

Elections are finally behind us and with 2025 approaching fast, the financial markets continue to show remarkable resilience amid evolving economic conditions. Here’s what’s shaping the current landscape:

Monetary Policy Shift

The Federal Reserve’s 50-basis-point rate cut in September marks a pivotal change in monetary policy. While the Fed projects a terminal rate of 3.4% by end-2025, longer-term bond yields have actually increased since the meeting, reflecting concerns about slowing economic growth and the widening U.S. deficit.

Economic Strength Persists

Nevertheless, recent economic data has consistently exceeded expectations, with robust job growth and strong retail sales suggesting a potential soft landing. This U.S. economic resilience contrasts with more modest growth in Europe and Japan, where services sectors provide support despite manufacturing weakness.

Broadening Market Rally

The equity market’s gains have expanded beyond the initial tech-driven surge, with small caps and value stocks showing strong performance in 2024’s second half. This broadening suggests a more sustainable market advance, though we maintain our preference for large-cap value stocks while selectively increasing expectations for growth and small to mid-cap opportunities. Foreign equity markets remain uncertain and pose difficulties in assessing relative value, particularly for foreign small caps and developing market names relative to the U.S.

Fixed Income Strategy

While many retail investors maintain an overweight position in cash relative to bonds, we “stepped out into duration” earlier this year for intermediate-term bonds in order to lock in decent yields at discounted prices. Meanwhile, we are evaluating high yield bonds, which seem to offer attractive return potential despite tight spreads.

Looking Ahead

The investment landscape for 2025 appears promising but complex. We will be tracking the following very closely:

  • GDP growth, which is expected to maintain a moderate 2.5-3% pace
  • Earnings growth, which should continue broadening beyond technology
  • Market participation, though likely to increase could potentially lead to higher volatility
  • Interest rates, which seem to remain elevated for longer than analysts anticipated initially

Fun Fact 

Did you know? The largest pile of leaves ever recorded was 17 feet high, 60 feet in circumference and weighed an estimated 20,000 pounds. Could you resist diving in?