Market Compass video series

Hello, everyone, and welcome to the December Market Compass, the final compass video for 2024. In this episode, we'll highlight four of our key views from our outlook for 2025. Now, in 2024, the financial markets and economy held up remarkably well despite uncertainty around the economy, elevated interest rates, and the US presidential election. US economic growth remained above trend. Households continued to spend. Inflation rates moderated, and that S&P 500 gained more than 20% for the second consecutive year.

Now, as we look to 2025, we see much of this positive economic momentum continuing, although the pace of economic growth and US stock market gains may cool. We do expect US economic growth to moderate but remain positive, supported by a healthy consumer and resilient labor market. In our view, these solid fundamentals also underpin ongoing US stock market returns, albeit perhaps with more bouts of volatility and more modest gains ahead.

Looking ahead to 2025, we believe the US economy will continue to see positive economic momentum. Consumption in the US held up well in 2024, despite inflation rates above the Fed's target and elevated borrowing costs.

Now, we expect conditions for US households to improve somewhat in the year ahead as the Fed continues to cut rates, albeit perhaps just two or three times in 2025, and inflation continues to moderate and remain contained. Wage growth should also remain above inflation rates, which means consumers can continue to benefit from positive real wages.

So while economic growth could cool a bit in the first half of the year, perhaps to 1 and 1/2% to 2%, we do not expect a downturn or recession. And notably, we do see the potential for US GDP growth to reaccelerate toward the back half of 2025.

Two key reasons could drive this. First, the lower federal funds rate, even if marginally below current levels, should flow through to the real economy by the end of 2025, supporting household and corporate consumption. And second, proposed pro-growth policies, including deregulation and tax cuts, should start to take shape by year end and could also drive consumption as well as positive sentiment in financial markets.

Now, these may be offset by uncertainty around tariffs and trade wars, but we do see this risk contained more to specific industries and global peers. Now, it should not outweigh the broader pro-growth impulses we may see by year end 2025.

The second key view we'll highlight is that we believe the Fed will continue its rate cutting cycle in 2025 to gradually remove its restriction on the economy. With the Fed funds rate now around 4.5%, well above inflation rates of about 2.5%. we believe there is room to bring rates down to a less restrictive policy stance, with policy rates likely settling in the 3 and 1/2% to 4% range.

In general, a neutral Fed funds rate tends to be about 1% above inflation rates. So if we see inflation settling in the 2% to 3% range, this implies that Fed rate cuts should head towards 3.5%.

Keep in mind, though, that there are uncertainties that the Fed will have to navigate. Pro-growth policies and inflationary pressures could cause the Fed to cut rates less than expected, and any deterioration to growth or consumption driven by tariffs could bring the Fed to cut rates more than expected. Overall, though, 2025 is likely to bring a lower interest rate backdrop for consumers and corporations, which should support the ongoing economic expansion.

So after two years of 20%-plus gains in the S&P 500, how do we see 2025 playing out in stock markets? Well, we do expect more bouts of volatility but positive, albeit moderating, gains driven by earnings growth more so than valuation expansion. We also see the scope for market leadership to continue to broaden beyond US mega-cap technology stocks in 2025.

Now, of course, US mega-cap technology stocks have seen strong performance over the past two years, driven by enthusiasm around AI and robust profit growth. But looking ahead to 2025, we believe opportunities are emerging in the cyclical and value-style investments that could lead to broader leadership in the year ahead, and those are for a couple of key reasons.

First, profit growth is expected to be strong not only in mega-cap tech but in cyclical and value style stocks as well. Value-style stocks typically generate nearly 70% of their revenues domestically, versus around 50% for growth style stocks, and a higher share of revenue from domestic sources could make value stocks less sensitive to uncertainty around areas like trade policy.

Domestic stocks may also benefit from that deregulation and those pro-growth policies from the incoming administration. In our view, this creates a favorable backdrop for broad participation in equity markets over the coming year, potentially rewarding those with well-balanced portfolios.

Finally, the last view we'll highlight is that we see bonds outperforming cash in 2025. Now, in 2024, cash outperformed US investment grade bonds for the third time in the past four years, driven by higher relative yields. However, we do see this trend reversing in 2025 as cash yields have now fallen below bond yields after the Fed has cut interest rates. Many investors have gravitated towards cash and cash-like instruments over the last year, such as money market funds and CDs, as these investments have offered favorable yields.

However, while cash can provide important benefits, holding too much cash or cash-like investments can present risks, such as the potential for lower returns over the long term. For example, since 1981, cash has generated annualized returns of 4.1% compared with 6.8% for US investment-grade bonds. More broadly, 2025 may be a good time to start thinking about moving those cash-like investments to investment grade bonds, especially if you hold outsized cash positions.

Overall, 2025 is poised to continue to be a solid year for investors. We believe the economy continues to grow, the Fed continues to cut rates, and there are opportunities in both stocks and bonds. It's also a good time to connect with your financial advisor to help ensure your portfolios are positioned for success in the new year.

Now, for a full look at our 2025 annual outlook, head to edwardjones.com. Happy holidays, everyone. And we will see you right back here for the next Market Compass in 2025.

After a long political campaign season, the US reached the decisive outcome in the 2024 election. Now that the election dust is settling, investors are shifting their focus to the potential economic and market impacts. Here are five key takeaways to consider.

Leading up to the election, there were concerns that an unclear or a contested outcome could drive equity and bond market volatility higher. However, results arrived faster than anticipated, with President Donald Trump reclaiming the White House and Republicans taking control of the Senate and securing a majority in the House.

Just having an outcome has helped remove one investor worry. Since November 5, the CBOE Volatility Index, or the so-called VIX, has fallen sharply. And stocks experienced their best ever post-election rally. While some initial optimism might fade, and we've seen some of that, history shows that further gains are often the norm. Stocks have been higher one year later in 17 of the past 23 elections, with an average gain of 10%.

A major component of President Trump's economic campaign promises is the extension of the 2017 individual tax cuts, which are set to expire at the end of 2025. Additionally, a Republican administration could aim to cut corporate tax rates from 21% to 15%.

Lower taxes, in combination with deregulation initiatives, could boost economic growth and corporate profits. And that potential lift would come at a time when the economy is already growing at a brisk pace. The potential beneficiaries could be domestic, cyclical, and smaller cap companies. And these are the investments that rose the most in the days following the election.

As with most things, there is a give-and-take. The flip side of any new fiscal initiatives is that they would come at a cost. The extension of the existing tax cuts alone is estimated to increase deficits by nearly $5 trillion through 2034, adding to the government debt, which currently stands at about 100% of gross domestic product, or GDP.

Together with tariffs and an aggressive approach to immigration, this could lead to higher inflation and higher interest rates. Of course, the threat of broad tariffs could be a negotiating tactic. And even if implemented, the US may not feel the direct effect in 2025.

Reflecting these concerns and the potential for faster economic growth, government bond yields have been rising since mid-September, which is when the Federal Reserve started to cut interest rates. Looser fiscal policy next year may lead the Fed to move more slowly than it otherwise would. And the bond market is pricing in a slower rate cutting cycle, projecting three additional rate cuts by the end of next year instead of six that was expected about a month ago. We think there is scope for interest rates to decline further, but possibly towards 3 and 1/2% to 4% rather than the 3% to 3 and 1/2% range we were previously expecting.

At this point, it is unclear how many campaign proposals may result in policy over what time frame and what their impact would be. But we do believe that the fundamental conditions that drive long-term market performance should remain more favorable than hurtful. And it is no coincidence that the S&P has reached 51 record highs this year alone. The economy continues to defy expectations for a slowdown. Corporate profits are on the rise. And the Federal Reserve is cutting interest rates as inflation has moderated.

In our view, the major economic trends that were in place before the election are likely to continue. So you might want to avoid the urge to change strategies or portfolios because of the election. That said, business-friendly policies may provide a tailwind to a theme that we have been highlighting for a while, and that is the broadening of market leadership beyond the mega-cap technology stocks and into cyclical sectors, like industrials and financials.

We favor US mid-cap equities, while we are slightly cautious on international stocks based on their slow economic momentum, now the threat of tariffs, and a stronger US dollar. We expect the bull market to continue into its third year and recommend overweighting equities versus bonds.

But even within fixed income, we see some compelling opportunities to lock in higher yields. After the Fed's November rate cut, yields on quality investment-grade bonds are now higher than cash rates. You may want to consider repositioning from cash and cash-like investments into intermediate and long-term bonds, where appropriate.

For more market insights and strategies to consider that may be appropriate for you, contact your Edward Jones financial advisor.

2024 isn't over yet, but with 10 months under our belt, it's been an eventful year so far. We'd highlight three particular events that have taken shape recently. One, we're approaching the presidential election, two, the feds started cutting interest rates. And three, the stock market is up sharply for a second year in a row. 

Now, none of these are unprecedented, but they are sufficiently infrequent and meaningful to logically prompt investors to ask, what comes next? So let's take a look at each and evaluate prior periods for perspective on how markets have performed following similar instances. 

Let's start with the one that's occupying the headlines, the election. As we move past Election Day and the dust settles on the partisan reactions to the Oval Office's latest occupant, we think the market's focus will return to a more lasting influences of the economy, interest rates, and corporate earnings-- otherwise, known as the fundamentals. This is good news because history teaches us time and again that presidents don't govern longer term market performance. The fundamentals do. So as we advance beyond November 5, here are a few perspectives to remember. 

Historically, market volatility has risen leading up to elections and then subsided afterwards. We think this demonstrates that once the election uncertainties are replaced by a clearer policy outlook-- and by the way, regardless of which political party is setting those policies, the market typically refocuses on the prevailing conditions. Looking back to World War II, stock market volatility has decreased measurably in the month following presidential elections. Now, more recently, the VIX index, which is a measure of stock market volatility, has faded nearly 40% in the 10 days following the 2020 election. 

In terms of performance, stock market has generally done well after elections, so we'd recommend sticking around for this one. Let's start with the short term. Over the past 80 years, in the one month leading up to a presidential election, stock market was positive for that month only slightly more than half of those years-- so basically a coin flip. However, from the election through the end of the year, the market was positive during that period in all but three years. 

And I'd point out for those time frames, if we just single out the 10 best post-election performances, five of those followed Republican wins, five followed, Democrat wins. If we widen the view a little bit, as we should as investors and we look at the market over the year following Election Day, stocks were up in nearly 70% of those years, gaining an average of more than 10% But let's take an even broader perspective and look at the market performance over presidential terms. Over that same 80-year period, the stock market has shown an average gain of 61% during four-year presidential terms. 

Now of note in something that might actually come as a surprise, the stock market has returned 65% since the beginning of President Biden's term. The return under the 2017 to 2020 term under President Trump was 81%, and it was 72% and 71% during President Obama's two terms. Now, what this demonstrates is that there is consistency of stock market growth regardless of the political party occupying the White House. 

Shifting from an event that tends to have a fleeting influence to one that traditionally poses more significant implications for markets, let's take a look at Federal Reserve interest rate cuts. Markets have been fixated on and driven predominantly by the timeline for rate cuts for the better part of the last year. Now that wait is over, with the Fed cutting interest rates in September, kicking off what we anticipate will be an extended period of policy easing. The Fed will likely respond to continued trends of moderating inflation pressures alongside emerging signs of a softening labor market. 

Traditionally, the Fed starts cutting rates in response to an economic downturn, a financial shock, or a crisis. The conditions are somewhat unique this time, as the Fed is not seeking to address a collapsing economy or arrest a seizing financial system. Put differently, the Fed often cuts rates to press on the accelerator, stimulating a sputtering economy, which we don't think we're in the middle of at the moment. We think the upcoming rate-cutting cycle is more about letting off the brake upon which the Fed has had its foot firmly pressed for the past two years. 

We expect this rate cutting cycle to proceed gradually, and barring a sharp or unexpected change in the path of inflation or unemployment, we think the Fed will make incremental cuts to its policy rate, seeking to further reduce the rate of inflation and also provide some support to the economy. Here's the good news. 

Interest rate cuts have historically been favorable for the markets, and we don't think this time is an exception. We'd note that rate cuts have been widely and eagerly anticipated at this stage. A portion of that benefit has already been pulled forward into the stock market, and that's demonstrated by the more than 40% increase that we've seen just since interest rates peaked in October of '23. We don't, however, think the benefits of lower rates have been fully exhausted. As an example, this table shows the broader performance of equities in the one and two years following the commencement of rate cuts. 

The 2001 and 2007 experiences, which included influences such as the dotcom bubble burst, 9/11, and the global financial crisis, produced weakness that extended well beyond the start of rate cutting cycles. However, we think history is on investors' side when it comes to post rate cut returns. Even including 2001 and 2007, though, the stock market rose by an average of 6% in the one year following the first rate cut and gained an average of 24% two years after. And when rate cuts weren't accompanied by recession, which we don't anticipate this time either, returns were notably higher. 

And finally, with the current bull market celebrating its second birthday last month, let's look at how markets have performed after similar strong periods. As of late October, the S&P 500 was up more than 22%. If it holds on to this gain for the remainder of 2024, this will be the second consecutive year with a return of 20% or more. There's plenty of year left, and by no means is there an assurance that this gain will be upheld. But let's presume for a second that I haven't jinxed it, and let's look back at similar market periods to see what they might tell us about the potential encore to this run. 

Since 1950, there have been five previous instances in which the stock market followed a 20% or more annual gain with another 20% year. Two of those came in the early and mid 1950s. The next came in 1975-76, then again in 1982 and '83, followed by the tech bubble phase in the late 1990s. 

Outside of those periods, there were an additional 14 years in which the market gained 20% or more, but then failed to repeat that feat the following year. So in total, when the stock market rose by 20% in a single calendar year, the average return in the following year was a healthy 12%, and the average return in the year following two consecutive years of 20% gains was-- wait for it-- also 12%, although that figure is admittedly boosted by the prolific gains that we saw in the late 1990s. So while 20% yearly gains are actually quite common, with nearly 40% of years from 1950 to 2023 having a return above that 20%, back-to-back rallies of that magnitude are actually quite rare, which should add some appreciation to the rally that we've seen in 2023 and 2024. 

Now, while there's nothing special about the 20% mark, we view it generally as a mark of a particularly strong annual performance. There have been nine years since 1950, in which the stock market has gained between 15% and 20%, which is also strong returns. The ultimate determinant of 2025 performance will, in our view, be driven largely by the fundamental backdrop, namely economic growth, Fed policy, and the trend in corporate profits. 

Now it may be a stretch for the stock market to make a three peat with another 20% gain next year, and we doubt the year ahead will progress without some setbacks. But fundamental conditions do, in our view, make the case for investors to remain broadly optimistic. For more market insights and to consider strategies appropriate for your financial strategy and portfolio, contact your Edward Jones financial advisor.

Hello, everyone, and welcome to the September Market Compass. This has been a big month for the markets and economy, perhaps even a historic one, as the Federal Reserve finally began its rate-cutting cycle, lowering interest rates for the first time since March of 2020. Now, at its September 18 meeting, the Fed cut the federal funds rate by 0.5% to between 4.75% and 5%.

And it indicated it likely has begun a multi-year rate-cutting cycle that could bring policy rates close to 3%. So what does this rate cutting cycle mean for markets and the economy? We discuss the implications on the broader economy, stock markets, and bond markets in this month's Market Compass.

At the September Federal Open Market Committee meeting, the Fed took the first step to move interest rates lower, in large part, because both sides of its dual mandate, inflation, and the labor market are now in focus. Chair Jerome Powell indicated the Fed has more confidence that inflation is moving in the right direction, but the labor market has shown clear signs of cooling.

While it doesn't see an outright downturn or recession on the horizon, the Fed now prefers to support the economy and labor market with less restrictive interest rates. So what is the path of policy rates from here? Well, the Fed also released what's known as the dot plot. It's a best guess from all its voting members on the path of the Fed funds rate going forward.

This dot plot indicates that most members of the FOMC see interest rates heading towards 3% by the end of 2026 or another nearly 2 percentage points lower from here. Now, also keep in mind that the Fed is not the only major global central bank cutting interest rates. We know central banks around the world, including the Bank of Canada, European Central Bank, and the Bank of England, are embarking on rate-cutting cycles as well.

Perhaps the only major central bank raising rates this year is the Bank of Japan, as they seek to break their decades-long cycle of deflation and weak growth. Now, lower interest rates globally do have an impact to economic growth and consumption. Now, on one hand, we know that lower rates can support economic growth. They bring down borrowing costs for consumers in areas such as mortgages, credit cards, and auto loans.

Similarly, for corporations, the cost of borrowing is lower to spend on projects or invest in growing the business. Now, these lower rates can help support consumption and economic growth broadly. On the other hand, for savers, lower rates mean the interest paid on savings accounts is lower. For investors with outsized positions in cash or cash-like instruments, such as CDs or money market funds, now may be a good time to start thinking about gradually investing these cash-like positions in more traditional asset classes, such as stocks and bonds.

Speaking of stocks and bonds, how should we think about these investments now that the Fed has begun to cut interest rates? Well, with stocks, there are three key takeaways. First, history tells us if the Fed is cutting rates and the economy is not falling into an imminent recession, stocks are well supported. Now, we can see in this chart, however, if the economy is in a recession, stock markets tend to sell off after the Fed cuts rates.

Now, in the current environment, we believe the most likely outcome is that economic growth cools but does not fall into negative growth or recession. Thus, while markets may not move in a straight line higher from here, we do believe the underpinnings of the bull market expansion are intact for now. Second, when the Fed starts cutting rates, market valuations tend to be supportive. We see valuation metrics, such as the price-to-earnings multiples, expand.

Market returns are driven by earnings growth and valuation expansion, both of which may move higher as the Fed cuts rates. Now, for this cycle, we believe that those sectors that have the most scope for valuation expansion, including cyclical and defensive sectors, may play some catch-up as the Fed cuts rates. And third and finally, some asset classes and sectors tend to perform well when the Fed starts cutting rates and there is no recession.

Historically, US large and mid-cap equities tend to do well in this backdrop, as do US and international bond markets, particularly emerging market debt, all of which are supported by lower rates. Now, from a sector perspective, cyclical parts of the market, such as financials and industrials, as well as some defensive areas, such as health care and utilities, can do well alongside your technology and growth markets.

Overall, keep in mind that Fed rate cuts should be a positive, albeit well-known catalyst for financial markets, especially if the economy avoids a recession. Now, we believe that over time, lower rates, easing inflation, and an economy that is cooling but still positive should support the bull market and the ongoing broadening of market leadership. However, keep in mind, stocks have already had a nice run this year. The S&P 500 is up nearly 18%.

And we are entering a seasonally choppier September and October period and heading towards that US election day. So in the weeks ahead, we may continue to face bouts of volatility, which, of course, are normal in any given year. But we believe investors can lean into any market corrections as opportunities to rebalance, diversify, and add quality investments at lower prices. Consider US mid and large-cap stocks, growth and value sectors, and domestic and international bond markets.

At the end of the day, diversification remains a cornerstone for investment portfolios, and especially so as the Fed cuts rates. So with that, I thank you for your time. And we'll see you right back here next month on the Market Compass.