As we approach the end of 2024, it's an opportune time to reflect on the year's financial developments and consider what 2025 may bring. We believe in understanding both the past and potential future of our economic landscape, which may help inform financial decisions.
This year has brought its share of financial developments, from market fluctuations to policy changes that have shaped the economic environment. Shifts in various sectors, interest rate movements, and global events have influenced financial strategies across the board.
Looking ahead to 2025, we anticipate new opportunities and challenges in the financial world. Our team watches current trends and indicators to provide some insights for the coming year.
In this review, we'll examine the key financial events of 2024 and their impact and potential implications. We'll then turn our attention to 2025, offering our perspective on trends that may emerge in the coming months.
Whether you're a long-standing client or simply interested in staying informed, we believe this overview may provide some insights for your financial strategies as we move into the new year.
Key Economic Factors in 2024
- Interest Rates
During the September meeting, the Federal Reserve voted to lower interest rates by 0.5 percent, the first reduction in rates since 2020. While the pivot was long-anticipated, the size of the cut surprised many pundits following the Fed’s all-out fight against inflation launched two years ago. The move, unusual in an election year, brought the benchmark federal funds rate to a range between 4.75% and 5%. Some anticipate the Fed may adjust interest rates again in 2024.1 - Inflation
The decision to trim interest rates moved the central bank into a new phase, and preventing further weakening of the U.S. labor market is now an important priority. For most of the past 2½ years, the Fed focused on fighting inflation. With the Consumer Price Index receding from 6.4% in January 2023 to 2.9% this July, the Fed pivoted attention to the softening job market. By comparison, the seasonally-adjusted unemployment rate rose to 4.2% in August, up from 3.7% in January.1 - GDP Growth
Real GDP growth rose by 3.0% quarterly annualized in Q2 2024, up from 1.6% in Q1 2024. This increase was led by stronger domestic demand and a surge in inventories. The Conference Board Economic Forecast estimates a 0.8% annualized GDP growth for Q3 and 1% annualized for Q4. With the third and final Q3 GDP estimate due to be released on December 19, attention will shift to Q4 and 2025. Looking into 2025, some economists watch the Atlanta Fed's GDPNow tool, which gives a running estimate of real GDP growth based on available economic data for the current measured quarter.2 - Market Performance
Equity markets have seen strong, if uneven, performance in 2024. As of the end of October, the S&P 500 index was up 19.62% while the Dow Jones Industrial Average rose 10.81%. The tech-heavy NASDAQ increased 20.54%.3
Bonds have also shown volatility in 2024. As of October 31, the total return of the 10-Year Treasury Note was 4.28%.4
Past performance does not guarantee future results. Individuals cannot invest directly in an index. The return and principal value of financial markets will fluctuate as conditions change.
Key Takeaways
- Up Markets Can Still Experience Volatility
While equity markets had strong overall performance in 2024, stocks did not go up in a straight line. There were some scary moments for investors, like April 12, when inflation and geopolitical worries saw the Dow Jones Industrial Average slide by 1.24%, the S&P 500 tumble by 1.46%, and the Nasdaq pulled back by 1.62%. That bad day for the markets was dwarfed on August 5, when worries about slowing U.S. economic growth caused the Dow to fall more than 1,000 points or 2.6%, while the broader S&P 500 lost 3% and the Nasdaq fell 3.4%.5,6
As disconcerting as these pullbacks felt at the time, stocks returned to record highs by September. An important lesson from this year is that stocks can, and often do, go down. It’s also critical to know that, on average, stocks have corrected approximately every two years, and that correction typically lasts a few months. Corrections, which are declines of between 10% and 20% from a recent high, can occur for a variety of reasons, including when unexpected news shakes investors’ confidence. Selling investments during a downturn may lock in your losses and lower your potential long-term returns.7 - Don’t Fight the Fed
The past year has reinforced the influence the Federal Reserve has over the markets and investor psychology. The Fed held rates steady for much of 2024. It wasn’t until the September meeting that they made an adjustment. Markets reacted to every Fed meeting and Chairman Jerome Powell press conference. With inflation down from its highs (but not yet at the Fed’s 2% target) and employment softening, but not cratering, the Fed may have orchestrated the oft-talked-about “soft landing” for the economy. The lesson learned for next year is to pay attention to what the Fed is doing and remember the old Wall Street saying, “Don’t fight the Fed.” - Markets Shift Focus in an Instant
We all know that stocks can be volatile, but we only seem to care when they are volatile on the downside. Those 24 hours of angst between August 5 and 6, when the Dow dropped more than 1,000 points due in part to angst over the Bank of Japan boosting interest rates at a time when investors were borrowing the yen on the cheap to buy higher-risk stocks and derivatives. I doubt many of us had “Bank of Japan” on our radar, but market psychology can shift abruptly from "it's all good" to "the sky is falling" without much justification. Focus can flip from concerns over an overheating economy to fears of a job-crushing recession on a dime. One lesson we hope you take away from 2024 is not to let emotions control your investment decisions. A solid financial strategy should be designed to withstand short-term market moves and keep you on track toward your long-term financial goals.9 - Artificial Intelligence (AI) is Here to Stay
AI has been a major market story in 2023 and 2024 and shows no signs of slowing. While AI has been advancing for decades, innovations in machine learning have found exciting and extraordinary new use cases in areas from healthcare to manufacturing. One popular chatbot jump-started the current AI interest, reaching 100 million monthly active users just two months after its launch, making it the fastest-growing consumer application in history.8
AI is being seen as the most innovative technology of the 21st century and has the potential to both enhance and disrupt major industries. Innovations in electricity and personal computers unleashed investment booms of as much as 2% of U.S. GDP as the technologies were adopted into the broader economy. Now, investment in artificial intelligence is ramping up quickly and could eventually have an even bigger impact on GDP, according to Goldman Sachs Economics Research.10
The AI lesson to take away from 2024 is that AI is not just focused on a handful of companies. Company interest in AI has already increased rapidly, with more than 16% of enterprises in the Russell 3000 mentioning the technology on earnings calls, up from less than just 1% in 2016.10 - Asset Allocation is Essential
Asset allocation is an approach to help manage, but not eliminate, investment risk in the event that security prices decline. The strategy involves spreading your investments across a wide range of assets to spread the risk associated with concentrating too heavily on any single investment. Simply put, diversification is the “don’t keep your eggs in one basket” approach to portfolio construction.
Asset allocation is more than choosing a single investment, like one that is based on the S&P 500 stock index. One of the more significant and concerning trends in recent years has been the rise of market-cap-weighted indexes, which have led to increased concentration in just a few dominant stocks, mostly in the technology sector. Due to their outsized market capitalizations, these stocks, dubbed "The Magnificent 7," may make up a disproportionate part of some investor portfolios. Another lesson from 2024 is that the downside can be significant when heavily concentrated stocks pull back simultaneously.11 - Emergency Preparedness is Always Critical
The year 2024 has shown us that unexpected economic downturns or crises can impact investors without warning. You should consider having an emergency fund to cover living expenses so you aren't forced to make short-term decisions that could impact your long-term goals. You should also work with a financial professional to discuss risk management strategies that can keep you moving toward your goals. - Prepare for What You Can, Don’t Overreact to What You Can’t
With the presidential election now behind us, potential tax and regulation policy transitions remain. Politically speaking, implementing policy goals and regulations is more challenging than making pledges. Be ready to shift strategies for you, your loved ones, and your heirs if necessary. In other areas, there may be little you can do other than to try not to overreact to what comes down from Washington. Working with financial, tax, and estate professionals can help you navigate what may happen in 2025 and beyond.
Applying Lessons and Looking Forward to 2025
As we reflect on the financial landscape of 2024, it's clear that the market continues to evolve in response to global events, technological advancements, and economic policies. The lessons from this past year underscore the importance of maintaining a balanced, long-term perspective with your personal finances.
To summarize the key takeaways from 2024:
- Market volatility remains a constant, emphasizing the need for diversified portfolios.
- The Federal Reserve's decisions continue to impact market dynamics.
- Emerging technologies, particularly AI, are reshaping industries and potentially creating new investment opportunities.
- Global events can rapidly shift market focus, reinforcing the value of a well-structured financial strategy.
Looking ahead to 2025, we anticipate continued evolution in the financial sector and are committed to staying on top of these changes and providing you with timely insights and guidance. Our team is dedicated to helping you navigate the complexities of the financial world and work towards your long-term goals.
We will continue to monitor key economic indicators, policy changes, and market trends, sharing our analysis through our regular blog posts and communications. Our aim is to provide you with the information and support you need to make informed financial decisions in the coming year and beyond.
Remember, personal finance is a collaborative effort. While we provide the insights, your personal goals and circumstances are at the heart of every strategy we develop. We encourage you to reach out to us with any questions or concerns as we move into 2025.
Thank you for your continued trust in our team. We look forward to guiding you through another year of financial opportunities and challenges.
1 The Wall Street Journal, September 18, 2024
2 The Conference Board, September 17, 2024
3 Yahoo.com, October 31, 2024. The S&P 500 Composite Index is an unmanaged group of securities considered to be representative of the stock market in general. Past performance does not guarantee future results. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
4 Yahoo.com, October 31, 2024. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.
5 NBCNews.com, April 12, 2024
6 NBCNews.com, August 5, 2024
7 American Century Investments, March 26, 2024
8 Reuters, February 2, 2023
9 U.S. News & World Report, August 8, 2024
10 Goldman Sachs, August 1, 2023
11 Institutional Investor, August 6, 2024
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The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock market index that tracks 30 large, publicly owned blue-chip companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.
The NASDAQ (National Association of Securities Dealers Automated Quotations) Composite Index is the market capitalization-weighted index of over 2,500 common equities listed on the NASDAQ stock exchange.
The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks, which represent about 98% of all U.S.-incorporated equity securities.
The S&P 500® Index, or the Standard & Poor's 500® Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.