As we close 2024 and jump into 2025, the new year marks the start of new goals, new plans, and new dreams. We enter this new season of life with hope and a continued focus on the long term. We continue to examine the data that helps make your financial plan successful!
And, with the presidential election soundly decided, along with a pro-growth vision setting the stage for the next four years, we on the DHT Investment Committee feel encouraged that we are positioned very well for what we hope is a continued expansion of the U.S. Economy and the U.S. Equity Markets.
The focus of this letter centers on the growth and risk factors that remain constant.
This pros and cons list, while simplified, boils down the big topics of this year. These themes over the past year have set the stage for 2025. The U.S. Markets remain strong, and as we enter this new year, the focus remains on U.S. growth. President Trump is entering the White House with a mandate. A large part of that mandate is centered on economic growth. The commitment to extending and expanding tax cuts is crucial to propelling the economy forward for another cycle. The vision for energy and de-regulation aims to spur long term economic growth. These policies on economic expansion are centered on paying down the national debt. They focus on important areas of our economy that must be supported to drive growth forward.
When we look at the close of 2024, we see strong market performance that remains focused on many of the policies mentioned above. 1
You might be wondering what pushed the final rally at the end of the 4th Quarter 2024. One major impact was the conclusive results of the 2024 election. This provided clarity to the markets and to the vision of the next four years. Coupled with cooling inflation and a renewed focus on driving down energy costs, we can all see a world where rates begin to return to a more normal range of 2.5 to 3.5% by year end 2025.
Inflation moderated more than expected, rising by .2% in December. Overall inflation rose 2.9% over the last 12 months.2 We see this trend continuing into 2025, as the Fed has indicated fewer expected rate cuts, and we anticipate reduced energy costs. Why is energy important you might ask? It represents in some studies as much as 40% of total inflation, meaning by reducing energy costs, we reduce overall inflation by as much as 40%. As an example, gasoline has fallen to roughly $3.13 a gallon, which is the lowest price point since June of 2021.
Unemployment remains steady at 4.1% and jobless claims continue to fall, as do claims for unemployment insurance. This paints a strong labor market picture as we enter 2025.
Couple this with an increased housing inventory in November. Over 490,000 new homes were for sale in Q4, representing the highest number of new homes for sale in 17 years.3 Mortgage rates remain the main drag on housing, as the average mortgage rate rests around 6.91 to 7%. This represents a return to the high of July 2024. Furthermore, a strong 10 Year Treasury highlights the “sticking power” of current interest rates.4
We expect rates to moderate by the middle of 2025 and approach 3.5% by year end. This would be a stimulative action for both spending, savings, and mortgage rates. And, with increased housing supply, we should see a moderation of home prices.
As rates come down, this will put pressure on money market options and short-term savings vehicles. Right now, money markets are a great tool to generate interest income and continue to produce over 4 to 4.5%. And with over 6.7 trillion in money market assets, that represents a large amount of dry powder that will need to find a new investment home once rates begin to come down.5 We see this as a continued resource and long-term fuel source for the equity markets as those money market assets enter new investments in 2025.
With that in mind, we remained fully invested in U.S. Equity, and we increased the duration on our bond positions twice in 2024. We have remained overweight U.S. growth since 2017, and that decision has proven extremely successful when comparing the performance of the rest of the world over the same time frame.
Although the committee remains optimistic, we are not blind to the risks that remain present in the economy. The concerns surrounding rising credit card debt – and default rates on those credit debts – remain a major risk to the economy. It represents a potential that the consumer is stretched too thin, which means spending will go down as defaults rise. Consumer spending remains optimistic through 2024 and reached its highest levels since the pandemic.6
A major increase in credit defaults mirrors trends we saw in 2010.7 We continue to monitor this number against savings rates and interest rates. As this data changes, we will adjust to ensure we consider future spending power in 2025.
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And, with the future of our national debt continuing to grow faster than revenues, we are hopeful that DOGE will become more than a social media meme. If we can create real growth, lower rates, and couple that with major spending cuts, we can see the kind of growth that Argentina has experienced in the last year. The idea that cutting government spending doesn’t relate to future growth is false, as they are directly related. President Javier Milei took over in December of 2023 and within one year, the market index increased by over 170%. Corporate earnings increased by over 490% and market caps by over 620%. 9
So, when people discount the potential impact of DOGE, and the vision of a potential Golden Era, the question is, if it can work for one Latin American country in one year, what can the USA do in four years?
This is why we plan, seeking opportunities and mitigating risks. This is why we prepare income and harvest gains. This is why we review your plans and update your personal financial plan each year, so that we can continue to focus on your dreams.
John C. Donohue, III CFP®
Gregory B. Hart
Michael J. Thomson Sr. MBA, CLU, ChFC, RHU, REBC
Brooks D. Shertzer
Office: 410-893-6573
Fax: 410-803-0167
john@dhtfg.com
greg@dhtfg.com
mike@dhtfg.com
brooks@dhtfg.com
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