Donald Trump’s election as the 47th president of the United States, along with a Republican sweep in Congress, set the tone for 4Q24. Despite mixed fourth quarter results driven by shifting monetary policies and fiscal uncertainties, 2024 concluded with strong annual returns supported by a resilient U.S. economy, advances in artificial intelligence (AI), and an improved outlook for inflation which gradually became muddled. While U.S. growth remained robust, global markets contended with slowing economic momentum, political strife, geopolitical tensions, and currency volatility. The Federal Reserve delivered a widely debated “hawkish cut,” and investor attention turned toward the potential impacts of the Trump administration’s policies, introducing significant uncertainties for 2025 and beyond.

At the December Federal Open Market Committee meeting, the Fed implemented a 25 basis point rate cut, bringing the federal funds target rate to 4.25%-4.50% and marking the fourth rate reduction in the current easing cycle. The Fed had a cautious tone, reflecting the slower progress in achieving its 2% inflation target, and the decision was not unanimous with Cleveland Fed President Beth Hammack dissenting. The “dot plot” projections signaled two rate cuts in 2025, down from the four estimated in September. The Summary of Economic Projections for Core PCE inflation was revised upward with expectations to remain at 2.5% through 2025 (the previous median expectation was 2.2% for 2025). The 2% target inflation rate was pushed back to 2027 from 2026. Markets were volatile following the decision, with bond yields rising, stocks declining, and the dollar soaring as the anticipated trajectory of interest rates was repriced. As of quarter-end, the markets priced in a high likelihood of 1-2 rate cuts in 2025, according to the CME FedWatch tool.

What Drove the Global Economy in 4Q24

Inflation edged up slightly during the quarter. The Consumer Price Index (CPI) increased 2.7% year-over-year in November from 2.4% in September, whereas core CPI remained steady at 3.3% over the same period. Shelter (+4.7% YOY), representing roughly a third of the CPI basket, continued to account for a significant portion of the increase; however, it was the smallest annual increase since February 2022. The Personal Consumption Expenditures (PCE) price index (+2.4% YOY) came in below expectations in November but was up from 2.1% in September. Core PCE ticked up to 2.8% from 2.7% in September. (For a great explanation of the difference between CPI and PCE, see my colleague Fanglue Zhou’s blog post.)

The labor market showed mixed signals with the unemployment rate (4.2%) slightly increasing in November since October (4.1%). Job openings continued to decline, with the Job Openings and Labor Turnover Survey showing vacancies falling to 7.7 million in November, the lowest since 2021. Non-farm payrolls grew by 227,000 in November, a strong recovery from the 36,000 jobs gained in October, which was influenced by the Boeing strikes and hurricanes. Wage growth experienced a slight decline during the quarter, according to the Atlanta Fed’s Wage Growth Tracker, but remained above its historical 20-year average.

U.S. GDP grew 3.1% in real terms in 3Q, bolstered by an increase in consumer spending growth in both goods and services as well as exports, business investment, and federal government spending. The Philadelphia Fed’s Survey of Professional Forecasters estimates a 2.2% GDP growth rate for 4Q, reflecting broad expectations for the economy to cool. The Conference Board Consumer Confidence Index fell to 104.7 in December as concerns over future business conditions and job security grew. In contrast, the University of Michigan Consumer Sentiment Index showed modest growth, reflecting an improvement in buying conditions.

The U.S. federal budget deficit swelled to $1.8 trillion (approximately 6.4% of GDP) in fiscal year 2024 as elevated borrowing costs due to rising yields further strained the fiscal outlook. Contention over the federal budget led to a heated debate in Congress in the weekend leading into the Christmas holiday. Congress averted a government shutdown, with House Speaker Mike Johnson navigating through pressure from both sides of the aisle, including demands from the president-elect and his ally Elon Musk to remove the debt ceiling or otherwise shut down the government. The stopgap bill funds the government through March 2025 and omitted the president-elect’s debt ceiling demand.

The uncertainty around the direction and scale of the upcoming Trump administration’s economic policy continues to trigger debate and carries risk across global markets. His proposed extension of the Tax Cuts and Jobs Act and efforts to maintain a business-friendly administration have been lauded for their potential to spur growth but criticized for potentially exacerbating the federal deficit. Trump’s proposed universal tariff on all imports and concentrated tariff on Chinese goods have sparked concerns over a potential trade war, supply chain disruptions, and upward pressure on inflation. These are a few of the many unknowns that the markets may have better clarity on after Donald Trump is sworn into office on Jan. 20.

Overseas, the euro zone’s GDP grew 0.4% in 3Q. Ireland (+2.0%) and Spain (+0.8%) generated the strongest growth while Germany (+0.1%) narrowly avoided a recession. Political conflict reared its ugly head in Europe. In Germany, President Frank-Walter Steinmeier ordered parliament dissolved and set elections for February following the collapse of Chancellor Olaf Scholz’s coalition. In France, the prime minister was ousted in a no-confidence vote by opposing party members due to his efforts in pushing through a national budget without a legislative vote. The government collapse left the country without a clear path toward reducing its fiscal deficit (approximately 5.5% of GDP), which newly appointed Prime Minister Francois Bayrou will attempt to address while appeasing a split parliament.

Japan’s GDP grew at 1.2% in 3Q, supported by robust exports and a weaker yen. The Bank of Japan kept its policy rate steady at 0.25% amid concerns over potential deflationary risks. China continued to face economic challenges, with 3Q GDP growth decelerating to 4.6%, falling short of the government’s 5% target. The property sector remained a drag on growth. Exports contracted as global demand softened, further compounding economic woes. The government’s extensive stimulus measures may have yet to take hold but could be offset by tariffs from the U.S. in the near-term.

Closing Thoughts

On New Year’s Eve the New York metropolitan area experienced a strong thunderstorm that eased up right before the Times Square Ball dropped. The flashes lit up the night sky and the booms were strong enough to shake homes, ours included (our nine-month-old didn’t appreciate my wife and I barging into her room with champagne glasses in hand to check on her). Even if you’re not superstitious or one for reading tea leaves, the roaring thunder over Times Square on the night of NYE marked a fitting end to another strong year for investors and perhaps (for those that are superstitious) a sign of what’s to come in 2025 given the myriad of near-term variables. There is a wide degree of potential outcomes related to monetary, fiscal, and trade policy, while politics at home and overseas could highly influence the markets amid the deglobalization trend. Whether storms produce tailwinds in investors’ favor or headwinds in 2025, Callan recommends adhering to a disciplined investment process that includes a well-defined long-term asset-allocation policy. Three cheers to another strong year.