Economic Commentary

Happy New Year! My colleague Chris Burns and I began 2025 traveling together to deliver our 2024 Year-in-Review and 2025 Outlook seminar. We presented in six Michigan markets including Kalamazoo, Grand Rapids, Petoskey, Traverse City, Midland, and Birmingham before concluding on an unseasonably cool day in Florida that still felt seasonal compared with temperatures back home. It was a pleasure to engage with so many clients and friends. If you were among those in attendance, thank you for joining us. If you were not able to participate this year, a video recording of our Kalamazoo presentation is accessible on our website.

Following two historic years, with the S&P 500 achieving consecutive annual gains of more than 25% for the first time since 1997-1998, equity markets continued their upward trajectory returning 2.8% for the month. In the US, investors weighed a strong labor market, which is generally a positive indicator, with the implication that labor market strength may make Federal Reserve rate cuts less likely. This tension was compounded by volatility driven by evolving developments in the AI space and left equity markets in flux in January.

In the bond market, expectations for 2025 rate cuts now call for one to two 0.25% cuts in the back half of the year. The 10-year treasury rate briefly approached 4.8% in January before retreating to 4.54% by month end. Globally, monetary policy divergence is expected to increase, driven by a stronger U.S. economy and geopolitical uncertainties abroad which could heighten volatility in currency markets and impact trade flows.

Globally, elections were a dominant theme in 2024, with over 60 countries – representing roughly half of the world’s population – heading to the polls. Incumbents fared poorly at the ballot box, leading to notable leadership changes. While the immediate impact of these changes on capital markets is likely to be limited, the long-term impacts bear watching. If 2024 was the year of elections, 2025 will be defined by how campaign promises translate into policy.

In the US, we will be monitoring policy’s potential impact on inflation. The annual CPI inflation rate in the US rose to 2.9% in December 2024. Markets responded positively, with both stocks and bonds rising on the release. While inflation has come down significantly from its peak of 9.1% in 2022, it remains above the Federal Reserve’s 2% target, adding complexity to the economic landscape. Fed policymakers have done a good job reining in inflation without causing major disruptions to the labor market. This last leg of the journey may prove challenging, but the hard work is largely in the rearview mirror.

Credit is due as inflation has moderated while the U.S. economy remains on strong footing with GDP for the fourth quarter of 2024 coming in at 2.3%, missing expectations for 2.5% growth. Economists have lowered their recession estimates to 20% for this year, down from 50% just one-year prior. December saw 256,000 nonfarm payroll additions and a 0.1% reduction in the unemployment rate to 4.1%. Retail sales grew at an annual rate of 3.9% in December, or 1% real growth after accounting for inflation. This continued strength will afford policy makers more flexibility as they aim for a soft-landing.

As always, we look forward to sharing our views as we navigate the first quarter and the balance of 2025. We encourage investors to lean on discipline and the benefit of a long time horizon during periods of uncertainty. On behalf of the entire team, thank you for allowing us to serve on your behalf. Best wishes for the year ahead.