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Q4 2024 Commentary and Investment Outlook


As 2024 drew to a conclusion, the Federal Reserve released its last quarterly Summary of Economic Projections (SEP) in which it forecasted economic growth, inflation, unemployment, and interest rates.  We discuss the meeting in greater detail in our monthly December commentary.


Economic data has generally been solid. Q3 GDP was measured at 3.1%,[i] which is higher than long-term averages. Unemployment for November registered 4.2%,[ii] essentially full employment by historical standards. 


The U.S. economy outperformed all G-7 peers in 2024 according to Bloomberg Economics. GDP advancement was primarily attributed to consumer spending, wage growth, and productivity growth. Consumers have proven to be resilient as they continue to spend, even as most have depleted their pandemic-era savings. Higher earners are enjoying the wealth effect of stock market gains and increases in housing prices.  Lower-income earners are also continuing to spend, however, their purchases have been made via credit cards or the usage of borrowed funds. There are some signs that these lower-income earners are stretched as car loan delinquency rates are rising. However, many signs indicate that spending will continue in 2025. In the Federal Reserve’s most recent (SEP), officials revised their projections for GDP to 2.5% from 2.0% and lowered the unemployment rate forecast to 4.2% from 4.4%[iii].  We continue to be optimistic about the economy in general as we enter 2025 as it has shown resilience. 


Inflation data has stubbornly remained elevated as headline CPI and PCE for November were 2.7% and 2.4%, respectively, higher than expected, and off the lows of 2024[iv]. These bounces off the lows have put the Fed in a hawkish posture. Any time the trend is not downward, the Fed must guard against re-inflation risk. The new administration compounds this risk as many policy initiatives on the table may be inflationary, such as the imposition of tariffs. Announced Republican policies on trade tariffs may deter the Fed from cutting rates and could lead to an elevated rate environment, but headlines about policy are unpredictable at best.


Yields rose in the fourth quarter as evidenced by a shift in the Treasury yield curve (Chart 1) across maturities greater than one year. The increase occurred despite two 25 basis point rate cuts by the FOMC to the federal funds target rate range during the quarter.


Source: Bloomberg


Investors were less focused on the rate cuts, and more focused on the economic data and upward revisions to inflation estimates for 2024, 2025, and 2026. The FOMC adjusted its rate expectations to include fewer rate cuts in 2025, and markets began to adjust by driving longer-term yields higher. [v]


The inverted yield curve, which persisted for more than two years, normalized on December 13 as the 3-month Treasury Bill yield dropped below the 10-year U.S. Treasury Note. The yield curve should remain relatively flat but upward sloping in 2025. If the economy remains strong and inflation moderates, the Fed will continue to cut short-term rates, and the curve will continue to steepen. We believe that rate cuts will occur in 2025, but most likely in the latter half of the year.


In 2024, Treasury yields have been volatile. In the first half of the year, the economy grew modestly, while inflation, unemployment, and yields fell. In the latter half of the year, upward revisions to growth and a resurgence of inflation drove yields higher. As the market digests a less dovish Fed, and rates have moved up this quarter, we see tremendous value in U.S. fixed income markets. Our strategies are focused on generating higher risk-adjusted returns, while maintaining sound liquidity and high-quality credit ratings.  We favor our approach for 2025 as it is cautious and prudent by design. We will continue to increase exposure to higher credit quality corporate issuers as we see relative value in the asset class and will maintain a duration equal to our strategies’ benchmarks. Our rate outlook favors a higher-for- longer scenario, with rate cuts occurring in the latter half of 2025. Higher-for-longer rates will provide more income and possibly higher returns in 2025. Over time, more of the total return of our fixed income portfolios will come from the coupon/income component and less from outright price appreciation.


SWS Capital Management’s (SWSCM) philosophy is based on a value-oriented, active management style which emphasizes liquidity and risk management. This philosophy is woven into all our strategies. Security selection, sector allocation, and yield curve positioning are based upon our interest rate forecast as well as our fundamental economic outlook.


As always, we appreciate your business.


SWS Capital Management, LLC


Source: Bloomberg as of 12/31/2024


[1] Bureau of Economic Analysis – Third Quarter Third release

[2] Bureau of Labor Statistics

[3] Federal Reserve

[4] Bureau of Labor Statistics

[5] Federal Reserve SEP





Disclosure

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.  Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Investing involves risk including loss of principal. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.


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