Winter 2025 Market Perspectives with Brett Carleton
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The team here at Heritage would like to wish you a Happy New Year! As we look back over 2024, the big economic news would have to be the Federal Reserve lowering interest rates for the first time in almost two years, along with the buildout of data centers that will become the backbone of Artificial Intelligence. To put this into perspective, there are over 5,000 of these data centers in the United States, while our closest competitor has approximately 250. With the promise of lower interest rates, both consumers and businesses continue to spend and drive corporate earnings to near-record levels. This led to U.S. equity markets being up over 20% for the second year in a row, a milestone that has not happened for over two decades, despite it being a Presidential election year, which typically brings higher volatility.
As we move into 2025, the Fed will be a big story as they continue to try and normalize monetary policy post-Covid. They are still removing the excess dollars they put into the U.S. economy during the pandemic, and this has the potential to impact both interest rates and the value of the dollar. As we ended the year, the U.S. dollar strengthened against global currencies as the U.S. economy continued to be one of the few bright spots in the global economy. Despite the Fed lowering short-term interest rates, we have seen interest rates in the marketplace go up. There are still concerns that inflation is not back to the Fed’s desired level of 2%, and they may not cut interest rates any further.
January 20th of this year marks the beginning of a new Presidential administration with the promise of extending the 2016 tax cuts along with talk of imposing tariffs. Extending the 2016 tax bill should have a positive impact on the economy as this allows both businesses and individuals to be able to better plan for future expenses. We often hear how some of these large corporations pay little in taxes but what they do not say is how millions of American small businesses are owned by individuals that pay taxes at the highest personal income tax rate. Since the 2016 tax bill was enacted, U.S. income tax receipts as a percentage of GDP have gone up. Our problem here in the U.S. is on the spending side of the ledger.
Tariffs have been a big topic of conversation since the election with the Trump Administration threatening to impose tariffs on specific nations. My hope is this is more of a negotiating tool than a widely used policy. No one benefits from this, as the other nations typically retaliate by taxing U.S. goods entering their markets. As we see what policy, if any, comes out of this talk, we will discuss the implications further.
The U.S. economy continues to show its resilience in the post-Covid world. As nations globally struggle to gain economic footing despite record amounts of government stimulus, the U.S. keeps growing. Employment remains strong, workers have seen real wage growth, have been more productive, are spending more, and are sitting on near-record amounts of cash (bank saving and checking accounts are near $17 trillion, with money market accounts near $7 trillion). Additionally, U.S. household debt is below its long-term average, suggesting continued consumer spending.
As always, I want to reinforce that we have planned for unexpected events and changes within the global economy. No one could have predicted energy prices would be where they are today, with wars raging in the Middle East and Russia, two of the biggest oil-producing regions in the world. The big news of 2025 will more than likely be something not even on the news radar today.
Please share any thoughts, questions, or comments you have.
Brett S Carleton, CFP, ChFC