Economic & Market Summary
Soft Market Signs
2025 Wealth Management Bulletin
The economic soft-landing scenario is gathering steam based on tame inflation data, a resilient consumer, and a strong labor market.
- Unemployment held steady at 4.1%.
- December jobs number came in at 256,000, well above expectations.
- Inflation continued to come down throughout 2024, but remains sticky at roughly 3% as opposed to the Fed’s 2% target. Core CPI is at 3.2% as of the December reading.
- Consumer spending remained robust – this year had record-breaking sales on both “Black Friday” and “Cyber Monday”.
The risk of recession cannot be completely ruled out as we head into a new presidential administration with tariff and immigration discussions being a potential headwind to the growth of the economy moving forward.
Equity markets continued to rally through most of 2024, returning over 20% for the second year in a row. The S&P500 Index finished the quarter higher despite some pullback in the last week of the year. Two weeks into 2024, the market continues to trade within 5% of all-time highs.
- Diversifying sectors such as small/mid-cap and international are still lagging large cap US stocks, but have more reasonable valuations. -
- Growth continues to outpace value on expected innovations from AI related investments.
- The S&P500 forward PE remains almost 2 standard deviations above the historical norm, at 21.52 as of this writing.
- Those who defend these higher PE ratios point to the fact that the return is being driven by growth stocks, which have higher PE ratios versus value stocks.
- In particular, the Magnificent 7 is the overwhelming source of this skew. They are also the largest contributor to the excess returns over the last 2 years. For example, the S&P500 without the Mag7 only returned 4.1% in 2023 and 6.3% in 2024. These S&P500 ex-Mag7 returns trailed other asset classes, such as small and mid-cap
The Federal Open Market Committee appears to be winding down the rate cutting cycle, with the Fed Funds target rate currently at 4.25-4.5%. The markets are currently pricing in 1 more rate cut in 2025. This is a decrease from the 4 cuts in 2025 expected at the beginning of the quarter, prior to receiving the strong economic data mentioned above.
- As you can see in the chart below, the yield curve has continued to normalize and steepen. This has been driven not just by Fed Rate cuts and lower rates declining, but long rates have moved up almost 100bps over the last year.
- Credit spreads remain narrow meaning lower quality bonds are not paying significant premiums compared to higher quality bonds. For this reason, we continue to focus on high quality bonds in our portfolios. We will look to add exposure to below investment grade bonds if the credit spread widens back to more normal rates, justifying the additional risk.
- We recently added Inflation Protected bonds (TIPS) to our portfolios. The break-even rate on TIPS, which is the inflation rate at which an investor would earn the same return from a TIPS bond as they would from a nominal Treasury bond of the same maturity, is below the current run rate of 3% inflation.
As always, we are available to help you meet your financial goals – reach out to any of our LCNB | Wealth officers for a more detailed discussion.
