THE BOTTOM LINE
- On the economy
The economy is expected to cool in 2025 due to moderating consumer spending, a softer labor market, and nagging inflationary pressures. Pent-up demand for capital expenditures and potentially business-friendly tax policy could help offset any weakness, while an unexpectedly sharp rise in unemployment would signal a more significant economic slowdown is underway.
- On Fed policy
The complexities of a bifurcated economy and the unknown impacts of new government policies will make things challenging for the Fed to deliver on its dual mandate. Inflation levels above target, and prone to an uptick, suggest to us that the Fed will not likely cut as much as investors originally hoped. However, the Fed’s strong desire to engineer a soft landing keeps the door open to lower rates in 2025.
- On bonds
With risks roughly balanced for bonds over the next year, stay focused on income generation and look to take advantage of the favorable interest rate environment to secure historically attractive yields in portfolios. Avoid large exposure to longer-term maturities that are more interest rate sensitive and instead concentrate on intermediate-term maturities, which better balance risks but still offer attractive income potential.
- On stocks
If it can persist, the current backdrop of moderating inflation, stable interest rates, and robust earnings growth, sets the stage for a higher S&P 500 in 2025. However, the market has come a long way in a short amount of time. Exercise patience and selectivity with equity allocations and look to capitalize on market corrections.
- On cash
With cash rates coming down, long-term investors are likely better served by extending the maturity of cash holdings into short- to intermediate-term maturity bonds and taking advantage of still high bond yields.
- Overall
Remain informed and mindful of changing market trends. Be ready to make tactical adjustments to portfolios if, and when, market conditions change.