December 2024 Letter

If one theme encapsulates 2024, it’s the underappreciated strength of the U.S. economy. The economy managed to maintain a “Goldilocks” state—not too hot, not too cold. Key economic indicators tell the story:

• Real GDP Growth: The U.S. economy expanded at a steady pace, with quarterly growth ranging from 1.6% in Q1 to a robust 3.0% in Q2, ending the year on solid footing at 2.8% in Q3.
• Inflation Moderation: The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, showed that inflation remained anchored and declining towards the Fed’s targets.
• Labor Market Strength: Unemployment hovered around historically low levels, from 3.9% in Q1 to 4.1% by Q3. This tight labor market supported consumer spending and economic growth.
• Interest Rates: Treasury bond yields remained relatively stable, with the 10-year yield moving from 4.16% in Q1 to 3.95% in Q3.

This combination of steady growth, cooling inflation, and a strong labor market created a favorable backdrop for investors, even as political and global uncertainties swirled.

Monetary Policy: A Shift in Direction

One of the year’s most notable developments was the Federal Reserve’s pivot from tightening monetary policy to easing it. After a series of aggressive rate hikes in 2022 and 2023, the Fed shifted gears in September 2024 with a 50-basis point rate cut, followed by another 25-basis point cut in November. Markets welcomed these moves, as lower interest rates often support economic activity and boost investor sentiment.

As we look ahead, the Fed’s path will remain highly influential. While inflation appears to be moderating and contained for now, any signs of renewed pressures could lead to a pause in further rate cuts. For now, the central bank has signaled its intention to proceed cautiously, prioritizing economic stability.

Technology and Innovation in the Economy

One of the standout themes of 2024 was the continued dominance of technology and innovation in driving economic growth and market performance. The U.S. remains a global leader in this space, with advancements across various sectors shaping the future:

• Artificial Intelligence (AI): The integration of AI into industries ranging from healthcare to logistics accelerated in 2024. This transformative technology not only boosted productivity but also created new opportunities for investors, particularly in companies leading the AI revolution.
• Clean Energy Revolution: Renewable energy investments surged as governments and corporations prioritized sustainability. Innovations in solar, wind, and battery technology further enhanced the economic viability of clean energy solutions and storage, making it a key area of growth.
• Healthcare Breakthroughs: Biotechnology and pharmaceutical companies delivered groundbreaking advancements in treatments, with gene editing and precision medicine gaining traction. These innovations not only improved lives but also created strong returns for investors in the sector.
• Resilient Infrastructure: The digital infrastructure supporting our connected world—cloud computing, cybersecurity, and 5G networks—continued to expand, underscoring its critical role in a tech-driven economy.

Investing in innovation is not without its risks, but it remains a crucial driver of long-term growth. Maintaining exposure to high-quality, innovative companies ensures that your portfolio is aligned with the evolving economy, capturing opportunities in some of the fastest-growing sectors.

The Election and Its Impact

The U.S. presidential election was called quickly, which we would argue was a positive. Not because of the election results, but rather because markets don’t like uncertainty. With 50.3% of the popular vote going to President-elect Trump and 48.1% cast for Vice President Harris, the fact remains that the country is roughly split along party lines. That means many readers likely feel excited about the result of the election, while many feel disappointed. As an investor, you should feel neither. The emotional weight of the moment can lead to bad decisions in either direction. An investor could have avoided stocks during President Trump’s first term or during the last four years under President Biden, and for the same reason—because they strongly disliked the leader and his policies. But that would have been a mistake. Stocks have risen substantially over the past eight years and traded near all-time highs in the days leading up to the 2024 election. Thinking even more specifically, President Biden has been one of the least friendly presidents to the fossil fuel industry from a policy perspective, but the U.S. produced a historic amount of oil in 2023, and the Energy sector has been a strong performer during his tenure. President-elect Trump was a China hawk when he was in office, but Chinese stocks went up significantly while he was president.

In our view, the stock market’s rally in the days following the election was less about pricing-in exorbitant earnings and economic growth in the future, and more about the removal of uncertainty. The fact that the election result was clear and decisive removed this potential negative. In the coming months, there will be ample time to assess what policy changes get enacted and what their impact on the economy could be. But it’s too early for that now, and we think making investment decisions or positioning a portfolio based on what could happen is a sentiment trap.

At the end of the day, investors must remember that the U.S. and global economy are extremely complex, with many different forces and trends determining the direction of the business cycle. Politics is just one piece of it. Economic cycles do not fit neatly into four or even eight-year boxes, depending on what party is in power.  The card below demonstrates clearly that we should not let political preferences determine how and when we invest:

‍

The emotional gravity of an election may make it feel as though the economy’s fate hangs in the balance, but I believe this mindset puts far too much emphasis on political figures and far too little emphasis on innovation, earnings, investment, and small business growth.

Insights on International Markets

While much of 2024’s economic narrative centered on the U.S., global markets also played a significant role in shaping the investment landscape. Key international trends provided both challenges and opportunities for investors:

• Emerging Markets Resilience: Despite headwinds from higher U.S. interest rates earlier in the year, several emerging markets demonstrated surprising resilience, buoyed by strong domestic demand and favorable export conditions. Economies like India and Brazil saw steady growth, with technology and renewable energy sectors leading the way.
• Geopolitical Risks: Geopolitical tensions, including conflicts and trade disputes, continued to impact global markets. However, regions like Europe benefited from easing energy prices and improving industrial activity, recovering from a challenging 2023.
• Diversification Opportunities: International markets often provide a counterbalance to U.S. equity performance, offering diversification benefits. While the U.S. remains a leader in innovation and market growth, exposure to global markets remains an essential component of long-term investment strategies.

As we look to 2025, understanding global trends will be vital for identifying opportunities and managing risks in diversified portfolios. Staying attuned to international developments ensures that your investments remain well-positioned to capitalize on growth wherever it occurs.

Remaining Hurdles

The term “soft landing” has been a recurring theme throughout 2024, and by most accounts, the Federal Reserve appears to have achieved it. However, it’s worth considering whether the Fed’s deft control of monetary policy and interest rates was the sole driver of this outcome. While the Fed’s actions undoubtedly played a significant role, fiscal policy and robust government spending were pivotal in steering the economy away from a recession.

The numbers are telling: the U.S. budget deficit over the past 12 months exceeded $2.2 trillion, while GDP grew by approximately $1.8 trillion. Simple math suggests that without this government borrowing and spending, the economy would have contracted by roughly $400 billion—a textbook Keynesian example of using deficits to smooth out economic cycles. In times of need, borrowing can stabilize economic activity, but the flipside of this approach is clear: the growing national debt remains a pressing medium to long-term hurdle.

‍

The National Debt: A Double-Edged Sword

The U.S. is now at a critical juncture, with the accumulated debt standing at unprecedented levels. Treasury Secretary Janet Yellen, a seasoned economist and former Federal Reserve Chair, recently voiced concerns about the sustainability of these deficits at a December 10, 2024, Wall Street Journal conference. She emphasized the urgency of reducing the annual deficit to ensure that spiraling interest payments do not crowd out essential government functions such as defense, Social Security, and Medicare.

Growing debt awareness has fueled bipartisan support for fiscal reforms, and one potential solution has emerged in the form of the newly created (and controversial) Department of Government Efficiency (“DOGE”). DOGE aims to identify and eliminate wasteful spending—a commendable goal, but one that faces significant political and practical challenges. While introducing business principles to government operations has seemingly widespread appeal, entrenched programs are tough to take funding from.

The real test will be whether this effort can stabilize the debt-to-GDP ratio, ensuring that debt grows no faster than the economy itself.  I believe the main driver of the fiscal challenges is a demographic shift that cannot be easily solved with a businessman’s efficiency. The largest generation in U.S. history—the Baby Boomers—has now moved fully into retirement. This transition has shifted millions of Americans from contributing to Social Security and Medicare through payroll taxes to drawing benefits from these programs. This demographic reality is a primary driver of the growing fiscal imbalance, as entitlement programs now account for an increasingly larger share of the federal budget. Addressing these challenges will require not only short-term measures to curb waste and inefficiency but also long-term structural reforms to entitlement programs. These are politically fraught but essential to ensuring fiscal sustainability for future generations.

Despite the magnitude of the hurdles, I remain cautiously optimistic. DOGE’s success in finding and cutting wasteful spending could provide much-needed momentum for broader reforms. However, the ultimate solution will likely require difficult decisions that go beyond eliminating inefficiencies. Lawmakers will need to confront the structural drivers of the deficit while balancing the political and economic trade-offs.

As we look ahead, the intersection of fiscal and monetary policy will remain a critical factor for economic stability. The U.S. has proven time and again its capacity for innovation, resilience, and adaptability. These strengths will be crucial as we navigate the complexities of rising debt, an aging population, and the need for continued economic growth.

Final Thoughts on 2024

2024 reminded us of the importance of staying disciplined, tuning out the noise, and trusting in a sound financial plan. The U.S. economy’s resilience and the adaptability of markets underscore the value of a long-term perspective.

A buffered index annuity salesman called me a few weeks ago and caught me in a debate minded mood.  In these types of expensive fee products, you are protected partially on the downside (e.g. first 10% loss in the pegged index is all absorbed by the insurance company), but capped completely on the upside (e.g., max return 15% annualized).  That would have been a bad deal for an investor looking at the impressive 25% gains in the popular S&P500 index in both 2023 and year-to-date 2024.  Having long-term exposure to the most innovative market in the world is the important thing, more than protecting your first 10% of loss in a year.  I was glad I had some great data points to argue that point.

Looking Ahead to 2025

As we close the book on 2024, I encourage you to focus on the bigger picture: markets will inevitably experience ups and downs in the coming years, but the foundation of your financial plan—designed with your goals and risk tolerance in mind—remains steadfast.

In the year ahead, we will continue to monitor key trends, including:

• Inflation and its impact on purchasing power;
• Interest rate movements and their implications for fixed-income investments;
• Earnings growth and opportunities in domestic and global markets.

Additionally, I remain committed to providing proactive guidance on tax planning, retirement strategies, and other key areas of your financial life.

Thank you for the trust you place in me and my team. It is an honor to be your partner in achieving your financial goals. As always, please do not hesitate to reach out with any questions.

Wishing you and your family a prosperous and joyful 2025.

‍