Doc’s Economic Insights

January 2025

Stock market volatility continued during the fourth quarter, with investors balancing better than expected economic activity against the likelihood of fewer and smaller interest rate cuts by the Federal Reserve going forward.  Stocks made steady gains during the first half of October on expectations of strong corporate earnings reports.  While the majority of firms beat published expectations, this was not enough to satisfy investors.  Stocks trended lower during the second half of October and the S&P 500 posted a loss of less than one percent for the month of October overall.  President Trump’s decisive election win on November 5 combined with a Federal Reserve interest rate cut of 0.25% on November 7 triggered a strong stock market rally.  By the November 11 close, the S&P 500 was up more than 5% for the month overall.  On November 15, concerns about potential inflation and rising bond yields triggered a sharp drop in the stock market.  However, stocks rallied back over the remainder of the month to post a gain of more than 5% for November overall.  Stocks traded in a narrow range through the first half of December before falling sharply after the Federal Open Market Committee (FOMC) meeting on December 18.  Although the FOMC’s decision to lower rates by an additional 0.25% was welcome, commentary that suggested the Fed was unlikely to cut rates substantially in 2025 was not.  The S&P 500 declined more than 2% during the month of December but gained 2% for the quarter overall.

Although the financial markets are likely to remain volatile, we remain optimistic about the stock markets’ long-term prospects.  First and foremost, the US economy is healthy and likely to remain so given the high probability of lighter regulation and an extension of the 2017 tax cuts under the Trump administration. However, it should be noted that these positives may be offset by the drag of rising tariffs and associated pressure on supply chains.  Second, stock valuations outside of the technology sector continue to be attractive.  For further details on each of these points, please see below.

The Economy:

• At 4.1% the US unemployment rate remains near historical lows and the economy continues to add new jobs each month – suggesting the labor market remains healthy.
• Although the Federal Reserve is unlikely to reduce the Fed Funds rate significantly during 2025, monetary policy overall remains supportive.
• Corporate earnings are projected to grow by more than 10% during 2025.

 

Investment Valuations:

• Investors continue to reassess the valuations of technology shares.
• Many stocks outside this sector have attractive valuations.
• This is a great environment for active stock managers.

 

 

This report has been generated from information that Arbor Financial believes to be reliable and accurate. We do not represent or warrant the accuracy or completeness of the information contained in this report. As such, all calculations, estimates, and opinions included in this report constitute our best judgment as of this date and may be subject to change.