Economy
In November 2024, the U.S. economy continued its steady ascent, displaying a commendable blend of resilience and moderate growth. The Personal Consumption Expenditure (PCE) price index, a favored inflation barometer, ticked up by 2.3% year-over-year—a modest yet notable increase that signals tempered inflationary pressures. Meanwhile, the labor market held firm, with unemployment unwavering at a steady 4.1% and initial jobless claims dipping to a mere 213,000 for the week ending November 23. These figures underscore an employment landscape with fewer disruptions than the October reports and robust hiring trends.
The economy’s vigor was further validated by a revised third-quarter GDP growth rate of 2.8% annually, buoyed by robust consumer spending and a notable uptick in exports. In its November deliberations, the Federal Open Market Committee (FOMC) trimmed the federal funds rate by 25 basis points to a target range of 4.50%-4.75%, reflecting measured progress in taming inflation while balancing broader economic risks. Federal Reserve Chair Jerome Powell, speaking after the decision, struck an optimistic yet cautious tone, emphasizing that the U.S. economy is “navigating a delicate equilibrium.” Powell noted the importance of the stable labor market in sustaining economic momentum and consumer confidence but reiterated the Fed’s unwavering commitment to its 2% inflation target, emphasizing that future rate decisions would remain data-dependent. As a result, another 25 basis point cut in December will depend on further progress on inflation in addition to further improvements in labor market rebalancing.
In general, economic data has surprised to the upside since July. As a result, consensus 4Q24 GDP forecasts have risen 60 bps to 2.4% over the past 3 months, while full-year 2025 has increased 40 bps to 2.1%. The number of anticipated Fed interest rate cuts continues to decline, with the terminal rate now almost 1% higher than before the Fed’s September meeting.
Markets
Equity markets kicked off November with an upbeat reaction to the Presidential election, amid robust economic data and mixed Q3 corporate earnings results. Despite a mid-month pullback, the S&P 500 Index recovered to post its biggest monthly gain of the year, up 6%. Mid and small-cap stocks soared, up 9% and 11%, respectively, showcasing the long-anticipated broadening of the market rally. Despite looming uncertainty over potential tariffs from the new administration and the future trajectory of inflation and Fed rate cuts, a widely watched measure of market volatility, the VIX index, closed the month below 14, its lowest level since July. All large-cap sectors posted gains. Aided by tailwinds, including robust consumer spending and hopes of a potentially beneficial regulatory environment, Consumer Discretionary and Financials were the top performers, up 13% and 10%, respectively.
Despite the strong month for US stocks, the specter of tariffs and trade friction in the next administration severely dampened the appetite for international equities. As a result, developed markets were essentially flat for the month, and emerging market equities declined 3%. We are carefully watching for signs that the Trump administration will follow through on its tariff threats in formulating our strategy for 2025.
One of the big questions investors face now is around the current level of economic growth and equity valuations. A re-acceleration of the economy comes on the back of an exceptional period of GDP growth in the US. GDP growth in 2023 was 2.9%, and we are on pace to see a 2.8% growth rate in 2024. Consensus estimates are for economic growth of around 2.1% for 2025, a slowdown from this year but still solid above-trend growth for the 3rd consecutive year. Investors are justifiably worried that such a trajectory could eventually lead to a resurgence in inflation, a more hawkish Fed, and higher interest rates. The starting point for stocks is also a point of contention. In 2016, under the last Trump administration, the S&P 500 was trading at a next-12-months PE ratio of 18X. Today, it is closer to 22X, near the top end of its historical range. Additionally, market concentration is a distraction for investors this time around as it, too, sits at its highest level in the past 100 years. But despite these risks, if economic growth can sustain around 2-2.5% with declining inflation, too much market concentration is unlikely to be the catalyst to stop the bull market, which could potentially be led by some of the out-of-favor sectors like small caps and cyclical stock sectors.
Wealth Planning
With one month to go until we usher in 2025, this is a good time to review a few important income tax items for next year.
- Special catch-up provisions for 401k and 403b participants between aged 60 to 63. The enhanced catch-up to 2025 will be $11,250. The calculation is the standard catch-up for those over age 50 times 1.5 (=$7,500 * 1.5).
- Certain inherited IRAs (those inherited on or after January 1, 2020) must begin taking required minimum distributions/withdrawals. The IRS has provided relief for beneficiaries in the last few years due to a misinterpretation of these rules by everyone except the IRS. Please note that the inherited IRA needs to be depleted within ten years.
- Under current tax laws, 2025 will be the last tax year for the lower income rates and the $27mm lifetime exemption. However, we expect Congress to extend these due to the fact that Republicans control both the House and the Senate.
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