Looking back at the end of 2023 few market pundits predicted any positive reruns for the US markets. Yet the U.S. stock market experienced a remarkable surge in 2024, with the S&P 500 achieving a total return of almost 25%, marking its best two-year performance since 1997-1998 (according to the Financial Times). This impressive growth can be attributed to several key factors, including favorable interest rates, bond yields, inflation trends, and the political landscape shaped by President Donald Trump's policies.
Interest Rates and Bond Yields
After the most aggressive series of interest rate increases in history, (implemented to offset Washinton's freewheeling spending spree), in the fall of 2024 the Federal Reserve initiated a series of interest rate cuts, providing a significant boost to the economy and investor confidence. These reductions led to a decline in bond yields, making equities more attractive and driving substantial inflows into the stock market. The year started with the Fed Funds rate above 5.25% and the 10-year Treasury note, a critical economic indicator, hovering around 4%. This rate rose during the year to above 4.5% as the administration in Washington continued to spend money that it did not have and talk about raising corporate tax rates.
Inflation
Throughout 2024, inflation remained relatively subdued, allowing the Federal Reserve to maintain its accommodative monetary policy. This environment fostered consumer spending and corporate investment, contributing to robust earnings growth across various sectors. The combination of controlled inflation and supportive fiscal policies created a conducive atmosphere for sustained market expansion and allowed the Federal Reserve to cut the Fed Funds rate several times lowering it to close the year at 4.5%.
Political Landscape
The re-election of President Donald Trump in November 2024 played a pivotal role in shaping market dynamics. The Dow Jones Industrial Average rose by 1508 points the day after Election Day, as investors made bets on what Donald Trump’s return to the White House will mean for the economy and the world. The more widely followed S&P 500 soared 2.5% for its best day in nearly two years. Aside from bitcoin, stocks of banks and smaller winners were also perceived to be big winners. The bump has since been tempered as the pundits worry that Trump’s policies could also send inflation higher. It's important to note that making stock market 'bets' based on politics has historically not been efficient. Yet investors responded positively to the continuity of pro-business policies, including tax reforms and deregulation efforts aimed at stimulating economic growth. According to US Bank, the incoming administration's commitment to extending the Tax Cut and Jobs Act (TCJA) provided additional incentives for corporate investment and profitability. Trump's victory, as well as the fact that the republicans were to hold the House and the Senate, gave market participants the comfort to move some of the trillions of dollars that had been sitting on the 'sidelines' into the stock market.
Outlook for 2025
Looking ahead, some market pundits advise caution, anticipating a potential 10%-15% correction in 2025 due to policy uncertainties and global economic challenges. However, the factors mentioned above including an opportunity to reduce regulatory red tape and the new administration's economic policies are expected to support continued corporate and economic growth, with projections suggesting the S&P 500 (currently around 5,832) could reach between 6,000 and 7,000 points by YE 2025. Those targets suggest returns between 4% and 20% this year.
In conclusion, the U.S. stock market's exceptional performance in 2024 reflects a confluence of favorable interest rates, manageable inflation, and supportive political policies under incoming President Donald Trump's leadership. While challenges may arise in the coming year, lower interest rates combined with the economic strategies implemented thus far and the opportunity to right size Washinton have established a robust platform for sustained growth and investor confidence.
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