New Year Change
The New Year holiday is a special time to reflect on what has passed and strive for a better future. A nineteenth-century poet, Alfred Tennyson, succinctly described it as a time to “ring out the old, ring in the new” in his poem, “In Memoriam A.H.H.” Investors can likely identify with Tennyson’s trope as the most recent chapter in investment history filled with examples of big tech, inflation, and higher for longer market interest rates draws to an end, preparing the next chapter after it for storytellers of the market.
Last year ended as an extremely productive year for the economy and broad financial markets. Incomes grew in the US yet again, which surely helped sustain the economy. Further, investment returns in the broad equity markets for the year surprised many investors. Last year’s continuation of the bull market resulted in over twenty percent for investors invested in US large caps. 2024 became the second consecutive year in which US equity markets returned more than twenty percent in a single year, a rare feat, happening only on ten other historical occasions dating back to 1870. As a reminder, 2023 generated returns similar to the calendar year 2024.
However, as a prior era slowly winds down, investors are beginning to recalibrate their focus on new changes that can impact markets and the economy. Such changes include new executive leadership at the federal government level and a new lexicon of investor vernacular to consider, such as deregulation, deportations, and trade tariffs. For example, stakeholders interested in the success of the US economy are considering proposals to relax certain bank capital rules, known as Basel III laws, that could potentially unlock US credit and drive economic growth, maybe even lessen market yields because of the increased supply of newly available bank credit.
The interest rates investors can earn on long-term government bonds have become more of an issue lately, as what happens when government interest rates can have profound impacts on the broader financial system. Specifically, long-term rates took a significant step higher last month. In addition, the present path of long-term rates does not compare well with historical paths that long-term rates have traveled after the Federal Reserve cut interest rates. In past rate-cutting cycles from the late 1980s through the end of 2019, long-term government rates are typically lower sixty to seventy days after the Fed’s first rate cut. Moreover, last month’s increased volatility in equity markets may share some direct links with rising government bond yields since a bond’s interest payments over its life offer less uncertainty than the earnings from businesses over an extended number of years.
So far, equity markets and the economy have handled higher interest extremely well since the Federal Reserve began to raise interest rates in March 2022. US stock markets, in particular, have stood resilient in the face of higher borrowing costs due to the health of US balance sheets before interest rates rose. In addition, broad stock markets may have benefited from a lull of new supply of new equities coming to market. The rate cycle that kicked off in 2022 has had a long-lasting and negative effect on the availability of new public stock making it into the markets. As a result, it has forced investors to compete for equities that already exist on equity exchanges because there is little to no new supply available to buy. Some investors attribute the recent rise in equity market concentrations to the fact that there is not enough supply available for investors to purchase.
The US economy has continued to grow more than most seem to have expected. Further, consumer spending accounts for roughly two-thirds of the US economy and continues to surprise on the upside. This is bringing some solid economic momentum into the new year. However, economic and market growth surely won’t materialize without some level of uncertainty and risk. As a result, the New Year represents a good time for investors to address their goals, risks, and overall financial situation so that they can appropriately structure their investment allocations and account for any necessary changes in their financial plan.
