A lot of stuff happened in 2024.
While it may be difficult to compile a comprehensive list of all the major events of the year, hopefully we’ll at least be able to remember the lessons we learned from them. Specifically, the lessons we may be able to apply in the future as we try to make sense of what new developments mean for our investments.
Here are some of the lessons TKer learned (or relearned) this year.
Most major news outlets are very good at accurately reporting what they report. But that doesn’t mean what you see reported won’t lead you astray.
In my many years consuming and processing an ungodly amount of news, I’ve noticed three types of accurately reported facts that can be problematic: 1. A source who’s quoted accurately, but the source is wrong; 2. A stat that’s true, but lacks relevant context; and 3. An anecdote that’s real, but the bigger picture reveals something else.
The lesson: All reported information needs context and double-checking.
Aspects of the markets and the economy can be worse and good, simultaneously. They can also be both better and bad. That’s because “worse” and “better” are relative terms, and “good” and “bad” are absolute terms. Kind of like when you’re starting to recover from the flu: Maybe you feel better, but that doesn’t mean you feel good.
In the markets and the economy, this can get confusing when you consider developments in the various metrics investors follow. For instance, size is an absolute. And the relative terms used to describe size include “growing” and “shrinking.” But the concept of growth can also be considered an absolute. And relative terms like “accelerating” and “decelerating” describe it.
Another layer of complexity comes when newly released data is measured against analyst forecasts. A metric can simultaneously be good, growing, and accelerating and yet fall short of analysts’ estimates.
The lesson: Just because a metric has gotten worse or fell short of expectations doesn’t mean it has gotten bad. Be wary of headlines that emphasize relative metrics.
Economic forecasters over-indexing to metrics like the yield curve and the Conference Board’s Leading Economic Index have learned this lesson the hard way: These once reliable predictors of recessions have failed to do so in recent years.
Not everyone was surprised as the overwhelming bulk of other data suggested the economy had a lot of growth left in it.
We’re lucky to have so many angles on the economy. Almost every day, we get periodic updates on things like jobs, manufacturing activity, housing, income, spending, sentiment, and so on. There are many opportunities to confirm or reject the signal of a single metric.
The lesson: Don’t count on the signal of a single metric.
Some people try to make money trading the stock market over short-term periods. Some aim to build wealth by investing in the stock market over long, multi-year timeframes. Many do some combination of both.
When a markets expert starts talking, the first question you should ask is: “What is the timeframe?” Is it one month? One year? Several years? One day?
Why? Because it’s possible that the same person who’ll tell you stocks will fall in the coming weeks will also tell you they expect prices to be higher in the coming years. In fact, I can almost guarantee you that the Wall Street strategists who expect the S&P 500 to fall in the next year will also tell you it’ll be much higher in three to five years.
The lesson: If you’re going to take an expert’s view seriously, make sure you know what timeframe they’re speaking to.
Theoretically, a stock split does not reflect any change in the underlying company’s fundamentals.
However, a stock split might reflect management’s conviction in the fundamental prospects of their company, which could arguably boost the market value in the coming months, quarters, and years. Indeed, history shows that companies that announce a stock split tend to outperform the market.
In 2024, the economy continued to expand, the labor market continued to add jobs, and inflation continued to cool. You can’t dispute these hard data facts.
But business and consumer sentiment was mostly weak during the year. In other words, many people didn’t feel good about the state of things even though their economic situation may have actually improved.
Maybe it was the influence of politicians advancing biased narratives. Maybe it was the effect of slanted news coverage designed to maximize engagement.
The lesson: Investors should focus on tangible developments that affect earnings, which are the most important long-term driver of stock prices. Earnings are driven by what actually occurs in the economy, not by how people feel about the economy.
Economic data can be “full-on Monet”: From a distance, patterns and trends become clear. But up close, it’s a mess.
Analyzing short-term moves in data is treacherous work for anxious investors and traders who are eager to adjust their positions in anticipation of major shifts in the economic narratives.
Unfortunately, the end of a prevailing narrative and the emergence of a new narrative only become clear with months of hindsight. What might initially look like an inflection in a trend is often just noise.
The lesson: Don’t freak out when one month’s worth of data moves in an unexpected direction.
The stock market usually goes up. Historically, prices have been in bull market over 80% of the time. If this is the case, then why does so much news about the stock market seem to be negative?
As we’ve discussed before, negative stories tend to draw more audience interest than positive ones. This includes bearish warnings about what’s to come. Some news outlets capitalize on this behavior by giving outsized coverage to bad news.
But there’s another much simpler explanation: The stock market experiences a lot of down-days. In fact, prices have fallen on 47% of trading days. And most business news outlets cover the stock market daily.
The lesson: The odds of stock prices falling increases when you shorten your timeframe. That’s why daily coverage of the stock market tends to skew negatively.
Consider the impact of rising interest rates. Rising rates are bad, right?
Not if most of your debt is fixed rate and you have cash earning interest income at variable rates. Indeed, many businesses and households saw their net interest expenses fall in recent years as interest rates rose.
The lesson: Most developments come with both positive and negative effects. The balance of those effects isn’t always intuitive.
Investing is complicated, especially as investors are bombarded with information non-stop.
There really are no shortcuts in investing. At the very least, we should always seek context when confronted by new information. Helpful context includes other relevant current data as well as historical analogs.
There were a few notable data points and macroeconomic developments from last week to consider:
Fed cuts rates again, as expected. The Federal Reserve announced its third consecutive interest rate cut. On Wednesday, the Fed lowered its benchmark interest rate target range to 4.25% to 4.5%, down from 4.5% to 4.75%.
In its new Summary of Economic Projections, the Fed signaled it expected to cut rates just twice in 2025. It also raised its forecast for price inflation in 2025 and 2026. These changes are seen as hawkish moves by the central bank.
As we’ve been discussing for most of this year, I think this whole matter of rate cuts is not that big of a deal. Yes, monetary policy matters, and it can move the needle on the economy. But monetary policy decisions are much more consequential, market-moving events during times of stress or crisis in the markets or the economy.
Inflation trends are cool. The personal consumption expenditures (PCE) price index in November was up 2.4% from a year ago, up from October’s 2.3% rate. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 2.8% during the month, near its lowest level since March 2021.
On a month over month basis, the core PCE price index was up 0.1%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 2.5% and 2.4%, respectively.
Inflation rates continue to hover near the Federal Reserve’s target rate of 2%, which has given the central bank the flexibility to cut rates as it addresses other developing issues in the economy.
Consumers are spending. According to BEA data, personal consumption expenditures increased 0.4% month over month in November to a record annual rate of $20.2 trillion.
Adjusted for inflation, real personal consumption expenditures rose by 0.3%.
Shopping rises to new record level. Retail sales increased 0.7% in November to a record $724.6 billion.
Growth was led by cars and parts, online shopping, sporting goods, and building materials. Clothes and grocery saw modest declines.
Card spending data is holding up. From JPMorgan: “As of 10 Dec 2024, our Chase Consumer Card spending data (unadjusted) was 8.0% above the same day last year. Based on the Chase Consumer Card data through 10 Dec 2024, our estimate of the US Census December control measure of retail sales m/m is 1.19%.”
Unemployment claims fall. Initial claims for unemployment benefits fell to 220,000 during the week ending December 14, down from 242,000 the week prior. This metric continues to be at levels historically associated with economic growth.
Gas prices tick higher. From AAA: “After weeks of slowly marching lower, the national average for a gallon of gas reversed course, rising two cents since last week to $3.04. … According to new data from the Energy Information Administration (EIA), gasoline demand rose slightly from 8.81 million b/d last week to 8.92. Meanwhile, total domestic gasoline stocks rose from 219.7 million barrels to 222, while gasoline production decreased last week, averaging 9.9 million barrels daily.”
Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.72%, up from 6.6% last week. From Freddie Mac: “This week, mortgage rates crept up to a similar average as this time in 2023. For the most part, mortgage rates have moved between 6 and 7 percent over the last 12 months. Homebuyers are slowly digesting these higher rates and are gradually willing to move forward with buying a home, resulting in additional purchase activity.”
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million (or 40%) of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
Home sales rise. Sales of previously owned homes increased by 4.8% in November to an annualized rate of 4.15 million units. From NAR chief economist Lawrence Yun: “Home sales momentum is building. More buyers have entered the market as the economy continues to add jobs, housing inventory grows compared to a year ago, and consumers get used to a new normal of mortgage rates between 6% and 7%.“
Home prices rise. Prices for previously owned homes declined from last month’s levels but were above year ago levels. From the NAR: “The median existing-home price for all housing types in November was $406,100, up 4.7% from one year ago ($387,800). All four U.S. regions posted price increases.”
Homebuilder sentiment unchanged. From the NAHB’s Carl Harris: “While builders are expressing concerns that high interest rates, elevated construction costs and a lack of buildable lots continue to act as headwinds, they are also anticipating future regulatory relief in the aftermath of the election. This is reflected in the fact that future sales expectations have increased to a nearly three-year high.”
New home construction starts cool. Housing starts declined 1.8% in November to an annualized rate of 1.29 million units, according to the Census Bureau. Building permits fell 6.1% to an annualized rate of 1.42 million units.
Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy hit a record high of 63.9% on Tuesday last week, up 2.6 points from the previous week and nearly a full point higher than the last record high of 63% in January. Philadelphia and San Jose reached record highs on Tuesday, at 52% and 58.8%, respectively. Austin became the first city to exceed 80% occupancy, reaching 80.3% on Wednesday. The average low was on Friday at 35.5%.”
Industrial activity ticks lower. Industrial production activity in November fell 0.1% from the prior month. Manufacturing output rose 0.2%.
Activity survey looks good. From S&P Global’s December U.S. PMI: “Business is booming in the US services economy, where output is growing at the sharpest rate since the reopening of the economy from COVID lockdowns in 2021. The service sector expansion is helping drive overall growth in the economy to its fastest for nearly three years, consistent with GDP rising at an annualized rate of just over 3% in December. It’s a different picture in manufacturing, however, where output is falling sharply and at an increased rate, in part due to weak export demand.”
Business execs are also bullish on 2025. From ISM: “Economic improvement in the United States will continue in 2025, say the nation’s purchasing and supply management executives in the December 2024 ISM Supply Chain Planning Forecast… Revenues are expected to increase in 17 of 18 manufacturing industries and 16 of 18 services-sector industries. Capital expenditures are expected to increase by 5.2% in the manufacturing sector (after a 5.6% increase in 2024) and increase by 5.1% in the services sector (after a 2.8 % increase in 2024). In 2025, employment is expected to grow by 0.8% in manufacturing and 0.8% in services. After projected growth in manufacturing and services in the first half (H1) of the year, growth in the second half (H2) is projected to accelerate in manufacturing and maintain momentum in the services sector.“
Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 3.1% rate in Q4.
The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
