New year, new issues

Markets enter 2025 on a high note. Last year, equities posted strong gains on the back of solid economic data, and the Federal Reserve cut its federal funds rate by a full percentage point on the back of declining inflation. Similarly, Treasury yields began to normalize, as those on front-end maturities fell (following the fed funds rate), while yields of longer maturity bonds rose. So, shouldn’t 2025 look just like 2024?

Perhaps not. History may rhyme, but it never repeats. Investors climbed the wall of worry last year, but 2025 brings new uncertainties. Although the Fed would like to ease, Chair Powell indicated that policymakers want inflation to decline further. After slow and steady gains, the Fed’s preferred inflation measure, core Personal Consumption Expenditures, reaccelerated in the fourth quarter and reached 2.82% in November, well above the 2% target. The incoming administration is likely to pursue pro-growth fiscal policies that may make reducing inflation more difficult. The economy has continued to expand, in particular adding more jobs, which has boosted consumer confidence. As long as consumers are employed and confident, they tend to spend, which should expand growth. 

The first quarter may continue like the fourth, or it may be a time to pause and reflect on the gains achieved and what is ahead.