On January 30, 2025, we held a webinar with a special guest, Mark Peterson, who is the Director of the Market & Portfolio Insights Team at Blackrock. BlackRock is the largest asset manager in the world and we appreciate Mark making time to share with us the views from BlackRock. During the webinar, FJP Wealth Manager Scott Manley and Mark discussed important topics about the state of the US economy and the outlook for 2025. This article will recap the important points from the webinar.
In the blog this month, we will discuss:
- Current State of Inflation
- U.S. Federal Reserve and Interest Rates
- Continued Strength of the U.S. Economy in 2024
- Stock Market Update
- U.S. Federal Deficit
- New Administration in Washington D.C.
- Potential Tailwinds and Headwinds in 2025
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Current State of Inflation
On January 15, 2025, the Bureau of Labor Statistics announced the Consumer Price Index (CPI) through December 2024. The “All items” inflation number has been rising since September and is now at 2.9%. The “All items less food and energy” has been moving sideways in a range around 3.2%.
Source: 1Bureau of Labor Statistics, December 2024 Report
A concerning trend has been the rising inflation of “All Items” over the past 3 months.
Source: 2Bureau of Labor Statistics, December 2024 Report
On the positive side, from the chart above, we can see that Fuel Oil, Gasoline and Energy Commodities are falling. President Trump stated recently during his inauguration speech that he plans to increase oil production to continue to drive down the price of energy.
U.S. Federal Reserve and Interest Rates
The U.S. Federal Reserve reduced interest rates three times in 2024. With inflation starting to rise in the past three months, analysts are now expecting as few as none or only one interest rate cut during 2025.
Source: 3TradingEconomics.com
Jerome Powell, Chairman of the Federal Reserve, has said that the number of rate cuts in 2025 will be dependent on the rate of inflation through the year. Our view is that we expect to see from zero to one rate cut during 2025.
The U.S. Economy Remained Strong in 2024
Consumer spending and the economy remained strong in 2024, with U.S. GDP in the 2% and above range.
Source: 4Bureau of Economic Analysis
Throughout the year, we saw firsthand the signs of a strong economy with lots of people at our local shopping malls, large crowds at Disneyland, full airplanes and full cruise ships. Multiple news sources report that cruise lines expect bookings to reach record levels in 2025.
Stock Market Update
The U.S. Stock Market (as measured by the S&P 500 total return) finished both 2023 and 2024 with gains of 25% or more. We learned from our guest speaker that this is a relatively rare event. The years when the S&P 500 gained above 25% for two years in a row have occurred only a few times since 1926.
- 1927 – 1928, following year return -8.4%
- 1935 – 1936, following year return -35.0%
- 1954 – 1955, following year return 6.6%
- 1997 – 1998, following year return 21%
- 2023 – 2024, following year return ?
By most measures, the U.S. Stock Market has gotten relatively expensive. With many changes coming in the wake of a new administration in Washington D.C., we think this could lead to more volatility in the stock market. As always, we will continue to keep a close eye on the economy and stock market and make changes to client portfolios in a timely and appropriate manner.
U.S. Federal Deficit
We think one of the biggest challenges for the new administration will be to reduce the spending by the U.S. Federal Government, with the goal of reducing the federal deficit. The large federal deficit has been at a level that is much too high for the past few years, and during the last two years, it has only gotten worse.
Source: 5Federal Reserve Bank of St. Louis
President Trump has established the new advisory group, The Department of Government Efficiency (DOGE), led by Elon Musk, to recommend ways to reduce spending by the Federal Government. They will have the difficult task of recommending ways to make cuts in spending by the Federal Government that are large enough to slow down this growing deficit. We will keep a close eye on this during the year as we think the actions to reduce government spending could have a negative impact on the economy and the stock market.
New Administration in Washington D.C.
We are getting lots of questions from clients about how the new administration could affect the economy and U.S. stock market. We wish we had a crystal ball. We believe it is difficult to accurately predict how all this will evolve over the year, but here are a few of the themes we hear stated by our new president.
- Possible new tariffs for Mexico, Canada and China
- Reduce spending by the U.S. Federal Government, led by the DOGE
- Less regulations for businesses
- Closing the southern border and changes to immigration policies
- Keeping taxes low
- New approaches to the wars in Ukraine and the Middle East
We expect this to continue to evolve throughout this year. We will continue to monitor this closely.
Potential Headwinds and Tailwinds in 2025
In summary, we see 2025 as a year with many changes as a new administration in Washington sets new directions in many areas. After two very good years in the U.S. Stock Market, its valuation is much higher than the historical average. We are mindful that we could see volatility increase to levels higher than the past two years, so we will closely keep our eyes on this. But we also want to acknowledge that there are headwinds and tailwinds that could themselves push the market up and down. They include the following:
Potential Headwinds to Hinder the Stock Market
- U.S. Federal Government spending is unsustainable
- Less federal spending could weaken the economy
- Inflation could stay high
- Rising credit card debt
- Potential for new tariffs
Potential Tailwinds to Help the Stock Market
- Anticipation of the Federal Reserve lowering interest rates
- Federal taxes likely to remain low
- Consumer spending remains strong
- Consumer confidence is still good
- Some housing areas remain strong
- Artificial Intelligence developments
We remain cautiously optimistic about the coming year. We want to give our clients the peace of mind of knowing that our investment team meets every weekday, to monitor the news, health of the economy and status of the stock market. We actively manage our client accounts, meaning we will add equity when we think the markets look promising, and we will reduce equity when we think there is the potential for a correction in the market. If you have questions about the economy, markets or your portfolio, contact your Wealth Manager to discuss this further.
Financial Journey Partners - Partners in Your Financial Journey®
Our Financial Journey Partners office is based in San Jose, California. We have clients that live in many states across the country. If you have questions about your investments or financial situation, call us to schedule time to talk about your specific situation.
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References:
1Bureau of Labor Statistics – December 2024 Report, Page 1
2Bureau of Labor Statistics – December 2024 Report, Page 2
3TradingEconomics.com – U.S. Fed Funds Interest Rate
4Bureau of Economic Analysis – GDP, Corporate Profits Q3, 2024
5Federal Reserve Bank of St. Louis – Federal Surplus/Deficit