As we closed out 2024, the U.S. economy and stock market provided a mix of resilience and cautious optimism. While we saw a few bouts of volatility throughout the year as the presidential election and the Fed’s interest rate path weighed on the minds of investors, markets remained resistant to any severe drawdowns. While we have seen numerous market and economic shifts throughout the year, many of the same important market drivers of 2024 remain in focus for investors as we move into the new year – interest rates, AI, and global trade relations.
The Federal Reserve elected to continue rate cuts in Q4, as data continued to suggest that their aggressive rate hike campaign throughout 2022 – 2023 had finally begun to successfully curtail rampant inflation. Although we saw the Fed lower rates by an additional 0.25% in both November and December, the path forward into 2025 looks much more uncertain. The most recent dot-plot from FOMC committee members and statements from Fed Chair Jerome Powell suggest that the Fed may be planning to make fewer rate cuts in 2025 than the market expected at the beginning of Q4. This revision to previous expectations suggests the Fed may want to keep rates slightly higher for longer, or are waiting to see how inflation progresses as Trump embarks on his presidential term which may introduce a slew of potentially inflationary policies. Although most experts still expect at least a couple more rate cuts in the first half of the new year, the path beyond that remains murky.
The Tech/AI trade also continued to see outsized returns throughout Q4, which was encouraging to see after implementing the BlackRock Technology Opportunities Fund (BGSIX) across client portfolios at Relevé in early October. Although this sector can display markedly more volatility than the broad market over shorter periods (on both the upside and downside), the explosive growth, innovation, and consumer adoption of AI has led many experts to believe the growth trend we have seen in the space since 2023 could continue well into 2025 and beyond. Moreover, Trump has been an advocate of cryptocurrencies and AI/tech in the past – and additional support and/or protections to this industry on the legislative front may only add fuel to the fire of this impressive growth. However, shifting trade policies in the US could be a headwind to this industry and the US economy as a whole depending on timing, severity, and scope of these policies if implemented.
Since November and the results of the presidential election, US trade policy has emerged as a new key issue to watch in 2025. Donald Trump’s aggressive foreign trade policy stance has sparked debate among experts regarding the potential impact of his proposed tariffs on global consumers, markets, and the economy. There are a number of pros and cons that need to be considered when judging whether tariffs are an effective tool to manage global trade and our economic status – all of which are heavily dependent on the severity, scope, and timing of the tariffs:
Potential Benefits:
- Protection of domestic industries – Tariffs can shield U.S. manufacturers from foreign competition, potentially preserving American jobs and encouraging domestic production.
- Reduction of trade deficits – By making imported goods more expensive, tariffs may decrease imports, potentially narrowing the trade deficit with countries like China
- Leverage in foreign trade and geopolitical negotiations – The threat or implementation of tariffs can serve as a bargaining tool to negotiate more favorable trade terms with other nations.
Potential Risks:
- Increased consumer prices – Tariffs act as a tax on imports, leading to higher prices for goods such as electronics, clothing, and automobiles, which can burden American consumers.
- Retaliation/Trade Wars – Affected countries may impose their own tariffs on U.S. exports, harming American farmers, manufacturers, and service providers by reducing their competitiveness abroad.
- Disruptions to supply chains – Many U.S. businesses rely on imported components; tariffs can increase production costs, disrupt operations, and lead to inefficiencies.
- Potential economic slowdowns – Widespread tariffs can lead to decreased trade volumes, market uncertainty, and reduced economic growth, potentially harming the global economy.
- Legal/Policy challenges – Unilateral tariff impositions may violate international trade agreements, leading to legal disputes and undermining our rules-based global trade system.
While the path forward into the new year may look somewhat blurry at this point, the strong performance and economic progress we saw in 2024 has given markets a good deal of optimism and momentum to build upon this year. As it relates to your portfolio at Relevé, we are keeping a close eye on interest rates, inflation, and the Fed and stand ready to make any changes that are prudent as future economic data is released. We plan to reduce portfolios’ international equity exposure, in an effort to protect client assets from a strong US dollar and the negative currency exchange impact that has on many international mutual funds and ETFs, as well as the potential risks from any tariffs that are put into place this year.
Happy new year, and we look forward to meeting with you in 2025!
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Jake Fromm | Lead Investment Analyst, CFS® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.