The markets went on a wild ride this week, giving back a little bit more as December appears to be somewhat of a reversal of November. However, fear not, the markets are all up significantly for the second consecutive year. While we may fizzle into the end of this year, 2025 will go down as one of the best years in the past couple of decades. Not to minimize things but remember the great years help offset the not-so-great years. The S&P 500 has returned a historical annualized average of 10.25% since its inception in 1957 (through the end of 2023 – source Investopedia). While that average may sound great, time in the market is everything. Getting in or out at the wrong time will result in returns substantially lower. Enjoy the benefits of being in the market during these times. We cannot count on years like 2024 and 2025 repeating indefinitely. Perhaps the bombshell this week was the Federal Reserve’s announcement that while it is lowering interest rates by another 0.25%, it will not be so quick to drop rates further. Expectations for additional interest rate cuts in 2025 dropped from four cuts (or roughly 1% over the coming year) to just two cuts. Chair Powell tried to thread the needle when discussing the rationale during his press conference but left many scratching their heads. When asked directly about the next administration’s policies he deferred to ambiguity suggesting that maybe some voting members considered potential policy shifts next year. However, he steered very clear of the political when faced with direct questions. The Fed indicated, without saying directly, that it believes inflation will move higher next year and in turn implied that further rate cuts will not be necessary, to the extent they previously believed. It hasn’t gone so far as to suggest a reversal to begin raising interest rates, but this simple future pause in rate cuts was enough to send markets tumbling lower on the news. Despite the wet blanket, the Federal Reserve threw on us, we remain optimistic about the prospects for 2025 for the following reasons:
- Economic growth remains healthy: Real GDP expanded at a 3.1% annualized rate in the third quarter, signaling a healthy economy. Consumer spending, which is responsible for nearly 70% of GDP, grew by a robust 3.7%, while non-residential investment grew by a healthy 4%.
- Labor market conditions remain supportive: A key driver of economic growth over the past two years has been a strong labor market. The unemployment rate currently sits at 4.2%, well below the 30-year median of 5.1%. Additionally, strong non-farm-payroll gains in November bring the monthly average to 190,000, which is above the 10-year average of 160,000.
- Corporate profits are rising: S&P 500 earnings per share is expected to grow by 9% in 2024, the strongest yet coming out of the pandemic. Looking ahead, analysts expect S&P 500 earnings to grow by nearly 15%. Admittedly, analysts are always a bit overly optimistic going into a new year, but even if EPS falls short of the estimate, it could still be strong historically.
The remaining bit of news this week is the potential for a government shutdown. It is possible that by the time you read this email, the shutdown will have been averted. Wednesday, President-elect Trump expressed opposition to a bipartisan deal backed by House Speaker Mike Johnson that would have extended government funding until March. A revised solution was proposed yesterday that would have suspended the debt ceiling for two years but that too was rejected in the House. Despite this sounding scary, this isn’t the first time, nor will it be the last time these political tactics will be employed. Essential workers will be required to work without pay but will be paid in full once a deal is reached. It seems inconceivable that a shutdown will last long even if it doesn’t feel great occurring over the Christmas holiday. I don’t mean to minimize the downside to those affected by a shutdown, I simply want to recognize it probably won’t last long nor have long-term consequences. Considering this, I tasked ChatGPT with writing a short piece about the potential government shutdown to the poem titled “A Visit from St. Nicholas” otherwise known as Twas’ the Night Before Christmas. Please enjoy.
‘Twas the night before shutdown, in the nation’s great hall,
The clock ticked down, with urgency for all. The budget stood tangled in a thick, weary web,
With deficit spending rampant, frustrations spread.
The national debt, looming like a shadow so vast,
Threatened the future, a consequence of the past.
As talks of the debt ceiling echoed through the night,
Lawmakers struggled to make wrongs turn right.
In chambers, the leaders gathered with care,
Pondering solutions to answer the prayer.
Numbers and figures they poured over with zeal,
Seeking a path to a balanced deal. The caucus was restless, yet hope remained bright,
For collaboration to break through the night.
Compromise bloomed as discussions took flight,
Drawing all factions into the light. At last, they emerged, with agreements in hand,
A vision for balance across this great land.
The ceiling was lifted, responsibly raised,
A future safeguarded, and joyous praise. So the nation slept soundly, with hope in the air,
The shutdown averted, the burden shared.
For in unity's glow, the path was clear,
A brighter tomorrow, drawing near.
Merry Christmas,
Bruce J. Mason, MBA
