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Quarterly Market Commentary : January 2025

Capital Markets Recap

  • Real GDP growth surprised to the upside in 2024 and is now projected at 2.7%, matching the 3Q24 number, and a 4Q24estimate of 2.4% growth. This has led economists to revise up 2025 GDP growth expectations to 2.1% from 1.8%.

  • After hovering around 4.2%, the unemployment rate came back to 4.1% in December as the latest job report surprised to theupside with nonfarm jobs increasing by 223K in December versus 137K expected.

  • CPI Inflation re-accelerated in 4Q24 and rose 2.7% YoY in November and 2.9% YoY in December. Furthermore, the core CPI(ex food and energy) has stopped going down and has stayed north of 3.0% YoY for several months with December coming inat 3.2%. This will impact FED decision making for 2025. Currently, the FED has signaled a further 50 bp reduction in rates in2025, followed by 50 bps in cuts in 2026, but a strong economy and low unemployment rate could change this if core inflationcontinues to stay high. Recent strong productivity growth has helped to offset higher wages, which has kept labor inflationmuted. This could change too if too many illegal immigrants are deported, leaving gaps in employment forcing up wages.

  • The S&P 500 had another strong year in 2024, increasing 23.3% led by Communication Services (38.9%) and Tech (35.7%)as the market continued to reward growth companies generating high cash flows and that are well positioned for AI growth.

  • The 10-year Treasury bond yield increased by 78 bps during the quarter to end at 4.57% leading to a decrease in bond prices.The Aggregate US Bond Index decreased 4.3% in 4Q24, and was up 1.4% for 2024.

  • We favor investment grade intermediate term bonds. We recommend investors to stay away from long-maturity bonds sincecontinued large US deficits will force the yields on long-term US bonds to stay high, preventing price appreciation and riskingprice declines.

  • We recommend bond ladders of IG Intermediate bonds with attractive yields but we expect less price appreciation than in thepast with almost all bond returns coming from the coupons going forward.

  • Short term interest rates fell in 2H24 by roughly 100 bps, matching the cuts made by the FED. The FED is now guiding toanother 100 bps of cuts by the end of 2026, indicating further reductions to money market returns. With this in mind, werecommend investors to term out cash positions not needed for liquidity purposes.

  • Studies show that market timing typically produces inferior returns. We encourage diversification and a focus on workingtowards financial planning goals.

Economic Data Points                          As Of

Unemployment                               4.1%                10-Jan-25
10 Yr Treasury Rates                    4.78%                13-Jan-25
30 Yr Mortgage Rates                  6.93%                09-Jan-25
 CPI YOY                                            2.9 %               15-Jan-25
US GDP Growth 3Q 2024              2.7%               19-Dec-24


Model Portfolio Positioning

Fixed Income & Alternatives

Equities

Looking Ahead

  • Geopolitical unrest and the risks to global growth:
    • Global unrest increased in 2024 centered on the Middle East in addition to Russia’s war in Ukraine. However, as Israel decimated Iranian air defenses in October 2024, reduced Hezbollah in Lebanon, and Assad was forced to flee Syria, Iran’s ability to foment trouble in the region was drastically reduced. Even Hamas is seeking a truce with Israel after their leaders have been killed and their forces nearly wiped out by fighting in Gaza.
    • Cold War 2.0 has started with Russia, China, Iran, and North Korea on one side and the West and allies on the other side. The delineations are less clear than in the past, but this will have negative consequences for trade, globalization and economic growth as resources are allocated away from consumers to defense.
    • Trump won the US Presidential election and is advocating an assertive US on both trade and defense as he intends to assess tariffs on trading partners unless changes are made and demanding NATO partners increase their defense budgets.
    • The political wind in Europe is changing as historical ruling party coalitions are losing support among populations.

  • Economic growth, unemployment, and FED action:
    • The US economy surprised to the upside in 2024, led by consumers who received real wage growth as inflation came down. This created more jobs, expanding the labor force, and therefore spending, which helped the economy even further. The FED lowered interest rates by 100 bps last year and have signaled plans for reductions of 50 bps for both 2025 and 2026 as their focus shifts to balance both inflation and employment.
    • The corporate sector remains strong as earnings continue to come in better than expected. The EPS for the S&P 500 are now projected to grow 9.3% in 2024, 13.2% in 2025, and 16.2% in 2026. This should support job creation to keep the unemployment relatively low, bolster the consumer, and propel the economy higher.

  • US Government budget deficits:
    • The US continues to run large budget deficits as the fiscal 2024 deficit was ~$1.8 Trillion, 6.2% of GDP, despite a robust increase in tax revenues. The 2025 budget deficit is projected at ~$1.9 Trillion, or 6.3% of GDP, according to the CBO. While incoming President Trump intends to lower regulation and establish DOGE to reduce government spending, this will take time and will have less impact on fiscal 2025 than in outer years, if successful.

  • US Government Debt:
    • US Federal debt-to-GDP has risen to 124% versus 58% in 2000. The Congressional Budget Office (CBO) projects US Federal debt to rise by ~$20 trillion in the next decade even in the most positive scenario to ~$55 trillion.
    • Continued large budget deficits will make this worse and eventually force harsher changes when the music stops.
    • Interest payments on the Federal debt held by the public were ~$882 billion for fiscal 2024, and are projected to rise to $1 trillion for fiscal 2025. This compares to fiscal 2024 defense spending of ~$841 billion.
    • As the interest on the Federal debt will consume a higher, and higher percentage of the government’s budget, it will crowd out other spending, making it harder to make changes the longer we wait.
    • Increasing debt from low debt levels is not a problem. It becomes an issue when debt levels are so high adding more debt and refinancing existing debt becomes problematic.

  • Emerging market growth and China’s real estate bubble:
    • China’s economic growth has slowed partly due to poor economic policies from the top of the communist party, andpartly from its population having peaked. This created a real estate bubble with an oversupply of apartments leadingto price declines and an overhang of bad debt from large real estate developers. As a result, new construction hasnearly stopped. Along with infrastructure spending, which has also slowed substantially, this had been a large driverof economic growth in China, which now has ended.
    • Wages in China have become less competitive. Combined with higher geopolitical risks as China is threateningneighbors, companies have moved, or established new production, away from China to diversify risks. India hasbeen a big beneficiary as the country’s economic growth has surpassed China.
    • Higher demand for key raw materials used in the energy transition will benefit select EM economies such as Braziland Indonesia that have these resources, but Brazil is facing its own economic challenges. Mexico is anotherpotential beneficiary of near-shoring to the US.

  • Economic growth, corporate earnings, and financial markets:
    • Putting it all together, we expect continued US economic growth, led by the consumer. This should propel UScorporate earnings higher over the next few years, and make the US the standout among developed economies. Wefavor intermediate IG corporate bonds due to a combination of strong balance sheets and attractive yields. Werecommend long-term investors to stay invested despite darker clouds such as higher geopolitical risks, a slowingChina, and a recognition large US budget deficits and higher Federal debt will increase risks over time. We willeventually have a correction, but the timing is unpredictable. Importantly, the equity markets have moved to newhighs following corrections, rewarding patient investors.

Disclosures

These are the opinions of Ascend Wealth Planning, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in securities involves risk of loss. Further, depending on the different types of investments there may be varying degrees of risk Clients and prospective clients should be prepared to bear investment loss including loss of original principal. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors. Diversification and asset allocation strategies do not assure profit or protect against loss. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results. Registered Representatives offering securities through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC and Investment Advisor Representatives offering advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Ascend Wealth Planning, LLC are not affiliated.