As I write this final State of the Economy and Markets for 2024, we are just days away from the winter solstice. However, the cooling off of the broader U.S. stock markets has preempted the official start of winter. The Dow Jones Industrial Average recently fell for the 10th straight day—its longest losing streak in 50 years—and on Wednesday, December 18, stocks suffered their worst trading day since August. Wednesday’s drop came in response to the Federal Reserve forecasting more stubborn inflationary pressures and fewer rate cuts in 2025 than had previously been discussed. Over these several days, the Dow dropped 6%, the S&P 500 3.5%, and the Nasdaq 1.8%.
Despite this recent weakness, the broader markets appear to be well on their way to wrapping up a second-consecutive banner year. The three previously mentioned stock indices are each still near their all-time highs reached in early December. With the Nasdaq at nearly 33% for the year—followed by the S&P 500 at 26% and the Dow at 14%—stocks have surpassed the majority of 2024 forecasts. A healthy rally taking place today, December 20, is recouping much of the decline realized on December 18.
A positive takeaway from the Federal Reserve meeting is its projection for stronger economic growth and lower unemployment for 2025 than previously thought. This, followed by real gross domestic product (GDP) growing at an annual rate of 3.1% compared to the previous estimate of 2.8%, indicates that the U.S. economy is in good shape, with no recession in sight as we head into 2025. A strong U.S. economy and increasing corporate earnings could very well set the stage for a continuation of this current bull market, which began in October 2022.
Two impediments to a third-consecutive year of gains for the stock markets would be (a) higher-than-expected inflation, and/or (b) weakness in the narrow group of stocks that continues to fuel a large portion of the market’s gains. While 2024 saw increased participation compared to 2023, artificial intelligence (AI) and the stocks that have come to be known as the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) led the charge once again.
The questions on people’s minds as we began 2024 were likely to do with the strength of the economy (soft landing or recession); inflation; interest rates; and the next steps for the Federal Reserve, the U.S. labor market, and the presidential election.
What have we learned? We have a resilient economy—and one much stronger than forecast—led by consumers, who, despite higher prices, continued to spend at a healthy rate. Inflation remains above the Fed’s target rate of 2%, but is well down from the 9% seen in June 2022. In July 2023, after its last in a series of rate hikes, the Fed left rates unchanged for much of 2024, until lowering rates by 0.50% in September and twice again by 0.25%. Two additional reductions currently are predicted for 2025. The U.S. labor market remains healthy, with unemployment at 4.2%. The November election results saw the Republican Party gaining control of the White House, Senate, and House of Representatives, the first time since 2017, when President-elect Trump took office for the first time.
What lies ahead is never certain, and where we are 12 months from now will depend on a multitude of factors, many of which are unknown. Based on what we do know today, the economy is in a good place heading into the new year; corporate earnings are expected to continue to grow; and the Fed is projecting additional rate cuts but in a less aggressive fashion than previously thought.
I am often jokingly asked what my crystal ball tells me.
My answer, lately, has been, “It looks more like a freshly shaken snow globe.”
As always, we value your relationship and the confidence you have placed in Adirondack Wealth Management by choosing us as your financial partner. I hope everyone enjoyed a wonderful holiday season and wish you a happy, healthy and prosperous 2025.