Happy New Year!
This time of year, our email boxes get clogged with webinar invites to hear experts predict what to expect in the new year. Studies show that predictions of the future are rarely accurate. Our team doesn’t necessarily ignore all these webinars, but we appreciate that there is a certain amount of Wall Street “groupthink” that needs to be questioned. If the future was truly that predictable, then investment returns would be much lower. We find the best strategy is to face the short-term with an open mind and the long-term with a fair amount of diversification.
A major milestone of 2024 was inflation falling below 3%. While inflation, as measured by the consumer price index (CPI), was down to 2.4% in September, it was back up to 2.7% in November. The cost of housing and rent remains the main sticking point. The housing market did cool in 2024, but overall home prices were still rising at a 3.4% annual rate in October.
Declining inflation helped the economy continue to grow 3.1% in the third quarter of 2024 and the Atlanta Federal Reserve is predicting 4th quarter growth of 2.4%. The job market remained tight with the unemployment rate at 4.2% in November. Overall, the economic environment continues to give consumers the confidence to spend which was reflected in solid retail sales growth over the past several months.
When the Federal Reserve (the Fed) first cut its short-term Federal Funds interest rate 0.5% in September, it did so to get ahead of a potential economic slowdown. The Fed cut rates a further 0.25% in November and again in December. After the December cut though, the Fed indicated that the slowdown threat had diminished such that it anticipated making only a couple small interest rate cuts in 2025.
The news that the Fed was cutting back its plans to cut interest rates brought a reversal to the US stock market’s late-year rally. The S&P 500 Index had rallied to an all-time high just above 6,000 in December based on expectations of several interest rate cuts in 2025. After the Fed news, it drifted back to its mid-October level by year-end. Overall, the US stock market still managed to be up 3.5% in the 4th quarter while turning in a very good 24% for the year according to the Morningstar US Market Index. Large cap stocks continued to lead the way in 2024, up 27.9% per the Morningstar US Large Cap Index on continued excitement over artificial intelligence. Small cap stocks were more adversely affected by the Fed’s news, losing 7.7% in the 4th quarter but still finishing up nearly 11% in 2024 per the Morningstar US Small Cap Index.
Since September, the US dollar has been strengthening which together with concerns about potential tariffs, pushed the Morningstar Global Markets ex-US Index down over 7.5% in the 4th quarter. The index did manage to gain nearly 5.7% for the year. While the Morningstar Emerging Market Index was down 7.7% in the 4th quarter, it was still up 7.4% for 2024 partially due to a rebound in Chinese stocks. The Morningstar China Index gained 16.7% in 2024 following 3 years of negative returns.
Inflation’s continued bumpy ride and December’s Fed rate cut news put a damper on what had been a pretty good year for bonds. The Morningstar Core Bond Index fell just over 3% in the 4th quarter but managed a 1.36% gain for the year. Shorter term bonds were less affected, down 0.38% for the quarter, while up 4.2% for the year per the Morningstar 1-5 Year Core Bond Index. Corporate bonds finished the year up 2% as measured by the Morningstar Corporate Bond Index. US Government Bonds eked out a 0.77% gain in 2024 according to the Morningstar US Government Bond Index.
Investing in hard assets like gold and certain commodities also worked well in 2024. Gold gained 27% on persistent global tensions and the Fed’s interest rate cuts. Consecutive years of poor harvests in West Africa led to a 178% gain in the price of cocoa beans in 2024. Drought in Brazil spurred the price of Arabica coffee beans to a 47-year high.
The start of 2025 means that tax time will soon be upon us again. Be sure to keep an eye out for those essential tax documents arriving in the mail. Also know that the Boulay team has reviewed all the tax law changes that take affect this year. So, let us know if you have any questions.
Wishing you a prosperous 2025!
Your team at Boulay Financial Advisors, LLC.
The Consumer Price Index measures the change in the cost of living by tracking the prices of a basket of consumer goods and services.
The S&P 500 Index tracks the performance of 500 of the largest US stocks. The NASDAQ 100 tracks the performance of the 100 largest and most actively traded stocks on the NASDAQ exchange. The Morningstar U.S. Market Index measures performance of company stocks comprising 97% of the tradeable universe of U.S. stocks. The Morningstar Large Cap Index measures the performance of the largest stocks comprising 70% of US exchange traded stocks. The Morningstar US Small Cap Index tracks small stocks that fall between the 90th and 97th percentile of the US investible universe. The Morningstar Developed Markets – ex U.S. measures performance of stock markets in the most developed countries outside of the US. The Morningstar Emerging Markets Index measures the performance of large and small-cap stocks in 24 emerging economies.
The Morningstar U.S. Core Bond Index represents the performance of a portfolio consisting of U.S. Treasury, mortgage-backed, and corporate bonds with a term greater than I year to maturity. The Morningstar US 10+ Year Core Bond Index measures the performance of fixed-rate, investment-grade, US-dollar denominated bonds with maturities of 10 years or greater. The Morningstar US 1-5 Year Core Bond Index measures the performance of fixed-rate, investment-grade US dollar denominated securities with maturities between 1 and 5 years.
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.