As we inch closer to the end of 2024, we all deserve to stop and take a deep breath. For many, this year has been filled with stress and anxiety. I think most of us are ready to close our eyes and wake up in 2025. When brainstorming ideas for this end-of-year blog, we began to summarize 2024 but quickly realized that we were ready to look ahead to the future. Therefore, in the spirit of optimism wrapped in pragmatism, I bring you my thoughts on what we might see after January 1st.
There are two ways we can look at 2025. We could talk about the current trends in the economy and markets as we try to imagine what it would look like if they continued. We could also talk about potential changes to our government and trade policies which could catalyze new trends. Since I’m a glutton for punishment, I’ve accepted the challenge of trying to do both without this blog turning into a manifesto.
A great place to start when looking at our current economic situation is with the “Big 3” of inflation, employment, and economic growth (GDP). The labor market is currently showing some small signs of weakness, but overall the job market is in a much better place than most economists had previously predicted. The economy is growing at a very healthy rate, with the overall growth in 2024 expected to be slightly less than 3%, which is excellent historically. Finally, inflation is the monster that won’t go away. We’ve seen considerable improvement in the fight against rising prices, but progress seems to have stalled out in the last 5 months, and concern is growing that we may see a resurgence of inflation in 2025.
We can’t talk about inflation without talking about interest rates. We’ve seen interest rate cuts from the Federal Reserve and many other central banks worldwide. Although we will have cut the Fed’s target interest rate from 5.25% to 4.25% in 2024, future cuts may be hard to come by without renewed declines in core inflation rates. Inflation is like a snowball rolling down the hill, getting bigger and bigger if you let it gather momentum. The Federal Reserve has already seen what happens if you don’t stop the process early; they won’t repeat that mistake. The current trend suggests stable interest rates in 2025, but this could change with significant economic or trade policy changes.
The stock market had an excellent year, with all the major indices reaching record highs. It wasn’t all gains all the time, but the good days far outweighed the bad ones. Heading into 2025, technology and semiconductor stocks look poised to continue their outstanding performance, but it’s not entirely clear that the rest of the market is as safe a bet. Price valuations relative to actual financial performance, such as earnings and revenues, are dangerously high, and there are some significant downside risks. Undoubtedly, there is plenty of potential for the US economy and American businesses to continue growing into 2025. Still, similar to an overly inflated balloon, it may not take much to pop investors’ enthusiasm for risk.
This leads us to the second part of the blog, where we learn how to stop worrying and love the tariff. The incoming Trump Administration 2.0 has laid out some policy guidance that we can only assume will become actual policy eventually, potentially within their first 100 days. The most significant topics have been tariffs and immigration policy, but Bitcoin has been trying to make Cryptocurrency policy a third pillar. It would also be reasonable to think that tax policy and deregulation could be a big focus in the first 100 days of the new administration.
Tax policy will need to be a focus in 2025 because the current Tax Cuts and Jobs Act (TCJA) of 2017 sunsets at the end of 2025. This would have big implications for households and corporations, as well as those with a sizeable estate who are counting on the enlarged lifetime exemption within the TCJA. This will be a top congressional priority, but the nearly 50/50 split in the House of Representatives could make it a longer and more painful negotiation.
The current nominees for the Trump Cabinet and positions of leadership suggest that disruption of the status quo is the goal, and most analysts believe that the banking and energy sectors will likely benefit more from deregulation than other sectors. This is also where the excitement about Bitcoin begins. The potential for less stringent regulation and an administration that is seen as crypto-friendly are big reasons for the increased media attention and the skyrocketing price of Bitcoin. Analysts still stress caution surrounding this exceptionally volatile sector, but the future may include a new perspective and legitimacy for crypto.
Immigration policy in the US has been stagnant and broken for decades. We don’t know what this policy will look like four years from now, but it seems that the short-term Band-Aid will include significant deportations. This will likely lead to higher prices for products that rely heavily on immigrant labor, such as food and housing. Still, the economic impact of removing workers and consumers from an economy is difficult to fully capture. These deportations will likely lead to opportunities for some, but have the potential for significant shifts in supply and demand which could create substantial volatility in the goods/services and labor markets.
This brings us to tariffs and trade policy. We will likely see either targeted or blanket tariffs implemented in 2025, which most economists predict will lead to trade conflicts and higher prices for consumers. It’s also possible that this could result in the reshoring of some manufacturing and create additional jobs in specific industries. As an economist, I see tariffs and protectionism as an economic nuclear bomb where everybody loses, but there is a reason why they have existed for hundreds of years, and both political parties have used them in their own ways. The big question isn’t whether we will see tariffs in the next four years; it’s whether we will wield them like a scalpel or a sledgehammer.
Since this is our last blog of 2024, I want to thank you for joining us this year as we explored so many financial and economic topics. It has been a wild year, but we look forward to continuing this journey with you. We have some great ideas for 2025, and there’s no doubt that the news will provide us with plenty to talk about, so come back and join us after the New Year and we’ll take it on together.
*Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Past performance is no guarantee of future performance. Any information is for illustrative purposes only, and is not intended to serve as investment advice or as a recommendation since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.*
