US Economic Outlook

Economic growth has exceeded expectations, the Federal Reserve has lowered interest rates and productivity has perked up after a 10-year period of sluggishness.  This year, the U.S. is expected to maintain its economic progress, with employment likely to be strong. Inflation will probably level out at a higher rate, possibly around 3%, rather than the Fed’s goal of 2%. Wage gains should exceed inflation, leading to increases in household discretionary spending.

Unless the economic growth trajectory weakens, or we see some kind of weakness in the labor market, it’s unlikely that the Fed is going to be very aggressive in cutting rates this year.  One negative to this picture, however, is our deficit spending, which was needed because of COVID but was never dialed back afterward. It isn’t a great concern now but will be if the U.S.’s spending habits aren’t adjusted.

The new administration’s actions also will influence the economic outlook — the likely loosening of governmental regulations could prove somewhat favorable for corporate profits. For other considerations, we will have to await the enactment of intended changes.

The stock market is materially above its average valuation levels. However, a change in circumstances could easily result in a sharp correction to market prices. That is likely to happen within the next several years or, more favorably, over the next five years perhaps without too sharp a correction. In the ideal case, large corporate profit rises would exceed stock gains, enabling stock valuations to come down in a controlled manner. Meanwhile, the overall stock market performance won’t reach the heights of 2024 levels, but this year instead could play out as a modest to moderate gain in share prices, reflecting further company profit advances.

One surprising figure from 2024 is that the estimated profit gains last year for the Magnificent 7 Big Tech companies totaled 30%, while the rest of the S&P 500 constituents’ profit increases were just 4%, according to one of our external mutual fund managers. It lends some fundamental support to the Mag 7 tech companies’ eye-popping gains over recent years. This year, those two stock groups’ profitability figures are likely to drift closer to each other but still be widely divergent.

US Market Recap

Equity and bond markets had a challenging fourth quarter as the U.S. economy was strong, inflation continued to be sticky and the prospect of significant interest-rate cuts by the Fed was diminished, causing a sell-off in bonds and equities globally. The S&P 500 remained a bright spot, however, with a 2.4% return for the quarter, again mainly attributable to strong gains by some of the index’s heavily weighted Magnificent 7 stocks. Absent the weighting effects of these mega-capitalization companies, the S&P 500 Equal Weight Index, which assigns the same weight to each of the index’s 500 member stocks, actually lost -1.8% for the quarter and gained only 13.0% in 2024.

U.S. bonds, which are sensitive to the Fed’s interest-rate trajectory, dropped -3.1% for the quarter but gained 1.3% during the highly volatile last 12 months, according to the Bloomberg U.S. Aggregate Bond Index.

International Market Recap

International equity markets were harder-hit in the fourth quarter, especially in U.S. dollar terms, driven by several factors including higher bond yields, a strengthened U.S. dollar against local currencies, persistent weak growth in major economies such as Germany and China and political turmoil in France. The MSCI All Country World ex USA Index declined -7.5% and the MSCI Emerging Markets fell -7.8% in the fourth quarter. For the full year, the two indexes had subdued gains of 6.1% and 8.1%, respectively, when compared with their U.S. counterparts.

Global bonds, as represented by the Bloomberg Global Aggregate Bond Index, had worse losses of -5.1% and -1.7%, respectively, for the two periods.

Altfest Portfolio Adjustments

Late in the third quarter we chose to sell out of our long-maturity bond positions when the Fed decided to cut rates starting in September. Then, over the fourth quarter, bond yields, especially on the long end, went up quite a bit, and the dollar strengthened. With that in mind, late in the last quarter we again moved back into long bonds as they began to look more attractive.

The other big change in the fourth quarter involved re-weighting most of our client portfolios’ equity allocations because over the past couple of years, equities have outperformed bonds by a wide margin, so the equity allocations have moved up quite a bit relative to what our model targets are. We took steps in late 2024 to return balance to client portfolios based on these models and to re-emphasize bond holdings to a degree to achieve that.

A few other adjustments included:

• Reducing exposure to emerging markets, especially in Asia, after strong performance in China, where our concerns in that country are over policy uncertainty and weaker macroeconomic data.
• Adding to holdings of small- and mid-capitalization U.S. equities and in the biotechnology sector.
• Initiating a position in the industrial sector, which is expected to benefit from continued higher government spending on infrastructure investment.

As of now, the firm expects only one or two rate cuts by the Fed this year — versus the six that were previously predicted — given the stickiness of inflation. We likely will continue to rebalance portfolios by reducing equities and increasing our fixed-income allocation.

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Altfest Personal Wealth Management has been guiding clients in their investment decision-making since 1983.  Our advisors take the time with each and every client to listen and ask thoughtful questions.  This allows us to design a tailor-made custom investment and financial plan to meet your exact needs.  Want to find out how Altfest can help you?  Schedule a complimentary consultation or give us a call at (212) 406-0850.

 

 

 

Past performance may not be indicative of future results.  Indexes are not available for direct investment.  Actual performance of investments attempting to mimic indexes will be reduced by fees and expenses.

Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.