January 31, 2025

In the fourth quarter both domestic and international markets, as represented by the S&P 500 and All Country World Index (ACWI), reached new highs once again before pulling back in December. The Fed followed its September rate cut with another in December but only 25 basis points as they cautioned that domestic inflation remains stubborn. As highlighted previously, geopolitical tensions continue in the Middle East, between China and the U.S., and between the Ukraine and Russia. A new U.S. Administration ushered in by the November elections may result in significant changes to policy as it relates to these areas.

In our opinion, the environment at this point in time does not look favorable for EAFE international markets (i.e., Europe, Australasia, and the Far East) and these countries largely, given a strong dollar, continuing geopolitical concerns, and the likely imposition of tariffs. In addition, Germany is struggling, China remains weak, and neither seems poised to improve in the near to intermediate term.  In contrast, we believe  industrials should benefit from the lower interest rates as the Fed begins its new easing cycle.  Additionally, the Indian economy continues to be strong, and India continues to benefit from the transition of outsourcing from China.

During the quarter rates, as measured by the 10 Year Treasury, moved higher from 3.7% to 4.6% at quarter end. This reflects stubborn inflation numbers, hawkish comments from the Fed and increasing expectations of fewer rate cuts in 2025 versus previous expectations.  That said, we continue to support allocations to  bonds.

The U.S. economy continues to show surprising strength.  Real gross domestic product (GDP) increased at an upwardly revised 3.1% annual rate in the third quarter, consistent with the 3.0% annualized growth recorded in the second quarter.  Growth continues to be supported by resilient consumer spending.  The possibility of lower taxes and less regulation now seems to be lifting sentiment not just for investors, but also consumers and small business owners.  Such animal spirits have the potential to boost economic activity, leading to increased hiring and investment.  For the fourth quarter, the Atlanta Fed’s GDPNow real-time forecasting model currently predicts real GDP growth of 2.4%.  As a result, full year 2024 GDP growth will likely come in at the top end of our prior +2-2.5% forecast – a solid year indeed.  Our initial forecast for 2025 real GDP growth is a similar     +2-2.5%. International markets by comparison face multiple headwinds as highlighted previously. Valuations in the international markets are more attractive, but growth may be muted in the near to intermediate term except for India.