By Rick Schwerd | January 10, 2025
Our investment team remains committed to sharing updates and market insights to keep you informed. Please look for our next update on January 24.
Labor Market Report
Today’s labor market report came in better than expected, with the economy adding 256,000 jobs during December, 100,000 more than anticipated. The unemployment rate ticked down a tenth-of-a-percent to 4.1 percent. It appears the labor market is picking up steam as the number of job openings was also stronger than expected, rising above 8 million for the first time since last May.
A healthy labor market is generally a good thing and helps confirm that the economy remains strong. However, for markets, already nervous about sticky inflation and subsequently higher interest rates, the strong employment data was not well received. Equity markets sold off and the benchmark 10-Year U.S. Treasury jumped to 4.79 percent, its highest level since October 2023. At this time, higher inflation and interest rates are our biggest concern as we enter 2025.
One positive labor market data point was average hourly earnings, which came out at 3.9 percent, down slightly from November. This is a solid level, but not considered inflationary.
Soft End to 2024, Mixed Start to 2025
Equity markets had a disappointing end to the year, giving back a good portion of the post-election gains. Ongoing concerns regarding over-extended valuations, stubborn inflation, higher interest rates, slow international growth, potential trade wars and continued large budget deficits were all contributing factors.
The S&P 500 still secured a 23-percent return in 2024. That marked the index’s second straight 20-plus percent yearly gain, its first time doing so since the late 1990s when it experienced nearly five straight years of 20-plus percent gains. The NASDAQ recorded its sixth year of 20 percent or higher returns out of the last eight as technology stocks continue to lead equity markets.
Markets have bounced around since year-end, though they are selling off a bit this Friday morning, following the strong labor market report. We mentioned some of the market headwinds above; however, there remains a good deal of tailwinds in the economy that are supporting markets. Technology, in the forms of artificial intelligence and robotics, are helping to drive strong productivity. The consumer is healthy, as we remain near full employment and Consumer Net Worth continues to make new highs. An improved regulatory environment and tax policy should also act as tailwinds. Given the factors mentioned, we expect a more volatile year for equity markets, with positive but lower returns than the previous two years.
Fixed Income Outlook
With business news a bit quiet as we start the New Year, we’re taking the opportunity to do a deeper dive into our views and overall outlook on fixed income markets. As we have detailed in previous updates, the Federal Reserve began cutting rates in September and have now dropped rates a full percentage point to its current effective rate of 4.33 percent. The Fed Funds rate is the most important determinant of money market rates, short-term and variable rate loans and credit card interest rates to name a few.
Prior to the recent cuts, the effective Fed Funds Rate was 5.33 percent, the highest level since 2001. We now expect the Fed to cut rates by a quarter-point a couple more times over the course of the year. Stubbornly elevated inflation and uncertainties regarding pending Trump administration policies are likely to keep the Fed on hold during at least the next two meetings and possibly more. It remains difficult to predict where interest rates will end up in the next 12 to 18 months; however, we are confident, outside of an unexpected event, that we are not going to return to the days of near zero-percent short-term rates anytime soon.
Intermediate and long-term interest rates are less affected by the Fed Funds rate and more determined by market views on future inflation and growth rates. U.S. Treasury yields are considered the “risk-free rate” as the potential for the U.S. government to not make timely principal and interest payments is exceedingly low. Other fixed income securities, such as investment grade corporate bonds, high-yield bonds, government agency securities, etc., trade at a spread to U.S. Treasury rates. Fixed mortgage rates are also largely determined by Treasury yields.
Interestingly, since the Fed began cutting the Fed Funds level, intermediate and long-term rates have been increasing. The benchmark 10-Year U.S. Treasury is up approximately 1 full percentage point since the end of September. With inflation proving to be stickier than expected and growth remaining stronger than previously anticipated, it makes sense that intermediate and long-term rates have moved higher.
We expect 10-Year Treasury yields to remain in a range roughly between 4 and 5 percent over the course of the year. This provides attractive yields for individuals investing in intermediate and long-term fixed income securities. However, for those waiting for mortgage rates to drop, this year may prove a disappointment.
As always, if you have any questions or concerns regarding markets or your financial planning needs, please reach out to us at (518) 415-4401.
About the Author: With almost three decades of financial industry experience, Rick serves as a Senior Investment Officer at Arrow Bank, formerly named Glens Falls National Bank. He oversees individual and corporate retirement plans, personal trusts, investment management accounts, foundations and not-for-profit relationships. He is also co-portfolio manager of the proprietary North Country Large Cap Equity Fund.