Economic Update: A Review of Fourth Quarter 2024

With the 2024 election finally behind us, the U.S. economy appears to be navigating a period of cautious optimism. Despite the political uncertainties leading up to the election, the economy has shown resilience. However, while inflation was generally seen to be on the decline during the first half of 2024, it has been a little stickier in recent months. 

The labor market, while softening, remains relatively strong with only a slight increase in the unemployment rate to 4.2% in November, per the Bureau of Labor Statistics. In October, 36,000 jobs were created along with an additional 227,000 in November. Wage growth has also remained relatively strong, which has continued to provide a foundation to the strong consumer spending our economy relies on. Consumer spending represents roughly two-thirds of our country’s economy. 

U.S. spending during the Christmas season is expected to have reached record levels for this past year. Holiday shoppers were projected to have spent between $979.5 billion and $989 billion according to the annual December survey from the National Retail Federation and Prosper Insights & Analytics. 

U.S. Economy 

At the most recent Federal Open Market Committee meeting in December 2024, the Federal Reserve decided to lower interest rates by 25 basis points, making the target range 4.25% to 4.5%. The guidance was more cautious for future cuts, however. Officials now foresee only two rate cuts in 2025, down from the four they envisioned in September. This is mostly a result of stubbornly persistent inflation, which remains a critical concern for the Fed. As of November 2024, the trailing 12-month inflation rate was 2.7%. The Fed expects that rate to decrease to 2.5% by the end of 2025, but that is still higher than its ultimate target rate of 2%. 

The U.S. trade deficit continues to grow. In third quarter 2024, the current-account deficit widened to $310.9 billion, representing 4.2% of the current-dollar GDP. This increase is due to higher imports outpacing exports. Increasingly aggressive trade policies, including increasing tariffs on imports from China and autos, are expected to affect the trade balance further in 2025. 

On a positive note, the University of Michigan's consumer sentiment index rose for the fifth consecutive month, reaching its highest level since April 2024. The index increased to 74.0 from 71.8 in November, driven by improved buying conditions. Despite this positive trend, sentiment still remains midway between the all-time low of June 2022 and pre-pandemic levels. 

The U.S. GDP grew at an annual rate of 3.1% in the third quarter, following a 3% increase in the second quarter. According to the U.S. Bureau of Economic Analysis, this was driven by consumer spending, exports and federal government spending. Looking ahead, Goldman Sachs forecasts 2.5% U.S. GDP growth in its Macro Outlook 2025 forecast, citing diminished recession fears and a rebalanced labor market. 

International Economy 

The global economy outside the U.S. is experiencing varied growth rates across different regions. The same Goldman Sachs forecast predicts that India is expected to see significant economic growth in 2025, with a projected GDP increase of 6.3%, making it one of the fastest-growing major economies. China follows with an anticipated growth rate of 4.5%, despite facing challenges from U.S. trade policies and internal economic adjustments. 

In contrast, many European countries are experiencing slower growth. For instance, Germany's GDP is expected to grow by only 0.3%, while France and Italy are poised to see less than 1% growth. These slower rates are affected by ongoing economic uncertainties as well as structural issues within the Eurozone. 

Global trade dynamics have been shifting, with new tariffs and trade policies affecting various economies. For example, the U.S. has already imposed significant tariffs on electric vehicles imported from China, which has led to retaliatory measures and affected global supply chains. More tariffs are expected to follow with the incoming Trump administration. Trade tensions are contributing to economic stress in several regions including Europe and Asia. Per the World Economic Forum, BRICS economies (Brazil, Russia, India, China and South Africa) now account for an estimated 37.3% of global GDP based on purchasing power parity. This continued shift highlights the growing influence of emerging markets on the global stage. 

Markets 

After achieving comparable performance during the first nine months of the year, a strengthening dollar helped the U.S. stock market diverge from most of the rest of the world during the fourth quarter 2024. U.S. large-cap equities, as represented by the S&P 500 Index, gained 2.41% during the quarter. They finished up 25.02% total for the year. On the other hand, developed international equity markets, as represented by the MSCI EAFE Index, were down 8.11% for the quarter. That index finished up 3.82% for the year. The MSCI Emerging Markets Index also posted similar performance, finishing the quarter down 8.11% and the year up 7.5%. 

Bond indexes posted a poor quarter as well, as hopes for prospective additional Fed rate cuts were diminished. The Barclays U.S. Aggregate Bond Index was down 3.06% during the fourth quarter. The Barclays Hedged Global Aggregate Bond Index was down 0.95%. The Barclays U.S. Inflation-Linked Bond Index was down 2.88% during the period. For the year thus far, the three indexes finished up 1.25%, 3.4% and 1.84% respectively. 

Commodities have lagged as inflation has slowed. The Dow Jones UBS Commodity Index gained a scant 0.45% during the quarter and completed the year up 5.38%. The Wilshire REIT Index, on the other hand, finished a volatile year by declining 5.03% during the fourth quarter. That index finished the year up 9.11%. 

Outlook 

The first Fed rate cut of this cycle occurred on Sept. 18, and the U.S. stock market has subsequently rallied since then. Historically, this is not surprising, as the U.S. stock market has tended to perform well in the 12 months following an initial Fed rate cut. This tends to be true as long as the U.S. economy does not go into recession. On that basis and given there are no immediate signs that a recession is imminent, this still seems like a good time to be invested in equities. 

Note, however, that markets have been so strong over the last couple years that many stock valuations appear to be a little stretched, particularly larger growth stocks in the U.S., possibly making it a good time to somewhat diversify from that area of the market. When investor sentiment shifts, markets can change quickly. Given that much of the U.S. stock market seems to be currently priced for perfection, it’s easy to imagine an unanticipated shock leading to a market pullback were it to happen. 

As always, we recommend a diversified portfolio containing a reasonable amount of equity exposure for any investor with a long enough time horizon. 

Bloomberg US Aggregate Bond Index: The Aggregate Bond Index is a broad-based benchmark that measures the investment grade, dollar-denominated, fixed-rate taxable-bond market including Treasuries and government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS. The Aggregate rolls up into other Bloomberg flagship indices such as the multi-currency Global Aggregate Index and the Universal Index, which includes high-yield and emerging markets debt. The Aggregate Index was created in 1986, with index history backfilled to Jan. 1, 1976. 

Bloomberg Global Aggregate Bond Index: The Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets. The Global Aggregate Index contains three major components: the Aggregate ($300 million USD), the Pan-European Aggregate ($300 million EUR) and the Asian-Pacific Aggregate Index ($35 billion JPY). In addition to securities from these three benchmarks (94% of the overall Global Aggregate market value as of Dec. 31, 2010), the Global Aggregate Index includes Global Treasury, Eurodollar ($300 million USD), Euro-Yen ($25 billion JPY), Canadian ($300 million USD equivalent) and Investment Grade 144A ($300 million USD) index-eligible securities not already in the three regional aggregate indices. The Global Aggregate Index family includes a wide range of standard and customized sub-indices by liquidity constraint, sector, quality and maturity. A component of the Multiverse Index, the Global Aggregate Index was created in 1999, with index history backfilled to Jan. 1, 1990. 

Bloomberg Global Inflation-Linked Index: The Global Inflation-Linked Index (Series-L) includes securities that offer the potential for protection against inflation as their cash flows are linked to an underlying inflation index. All securities included in the index must be issued by an investment-grade-rated sovereign in its local currency. The list of eligible currencies is the same set of currencies eligible for inclusion in the Global Aggregate Index. The Global Inflation-Linked Index (Series-L) represents a stand-alone multi-currency index exposed to the real yield curve for each relevant currency. As such, the index does not contribute to the Global Aggregate Index. The Global Inflation-Linked Index (Series-L) was created on Oct. 31, 1997. 

S&P 500^® Index: This is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. It measures the movement of the largest issues. Standard & Poor's chooses the member companies for the 500 based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility and transportation companies. Since mid-1989, this composition has been more flexible and the number of issues in each sector has varied. The returns presented for the S&P 500 are total returns, including the reinvestment of dividends each month. 

MSCI EAFE Index: The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the U.S. and Canada. As of April 2002, the MSCI EAFE Index consisted of these 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. 

MSCI Emerging Markets Index: The MSCI EMF Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of April 2002, the MSCI EMF Index consisted of these 26 emerging-market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela. 

Bloomberg Commodity Index: As part of the DJ-UBSCI℠ family, the Bloomberg Commodity Index℠ is calculated on an excess-return basis and the Bloomberg Commodity Index Total Return℠ is based on the BSCI℠. The former reflects the return of underlying commodity futures price movements only, while the latter reflects the return on fully collateralized positions in the underlying commodity futures. 

Wilshire US REIT Index: Introduced in 1991, the Wilshire REIT index is intended to broadly measure the performance of publicly traded real estate equity securities. The index is market-capitalization weighted of publicly traded real estate securities such as real estate investment trusts, real estate operating companies and partnerships. The index is composed of companies whose charters are the equity ownership and operation of commercial real estate. 

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The material is not intended to constitute legal, tax, securities or investment advice, or an opinion regarding the appropriateness of any investment or solicitation of any type. This document was not created with any particular plan in mind. The Standard does not offer tax or legal advice. Employers and plan participants should contact their own legal, financial or tax advisors for advice based on their unique circumstances. 

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