Resilience and Risk: Navigating the 2025 US Economy

To everyone that hates the month of January, we are almost through! January has a tendency to feel like the longest month of the year; however, with the plethora of information, data, and events for us to mull over and consider for our clients’ portfolios (not to mention keeping up with the unpredictable weather!) this month has flown by for me.

For our clients and for our own sake, we try to make sure we listen to and read as many opinions and data sets as possible so that we can make the best and most informed decisions. One of our firms’ favorite “big brains” is Dr. David Kelly at JP Morgan. He wrote an article in the beginning of the year which perfectly encapsulated the metaphor that is our economy:

As we enter 2025, the American economy is rather like an old school bus – slow but steady, reliable and resilient. It generally moves forward. However, it is not invulnerable. The wheels of the bus are being pulled off the ground by ballooning asset prices. The new driver of the bus may or may not try some dangerous policy maneuvers. The wipers of the bus may be obscuring obstacles in the road ahead. And the people on the bus, instead of spreading out and sitting down, are all standing up, crowded to one side so that if something does go wrong, there could be significant injuries.

Data Points to a Strong US Economy Coming Into 2025

The economic data points at the end of 2024 were as follows:

GDP

While GDP growth did dip in the 4th Quarter for 2024 coming in at 2.3%, below the 2.6% expected growth, overall there were increases in consumer and government spending.

Labor Market

In December 2024, the U.S. economy added 256,000 jobs, sharply beating the expectations of 153,000. Unemployment ticked down from 4.2% to 4.1%.

chart of US non-farm payment employment

Inflation

While the Personal Consumption Expenditure (PCE), the measure of how much U.S. households spend on goods and services, will be released at the end of this week for December 2024, it is expected for inflation to continue its decline and land around 2.5% Year over Year, which is a 0.3% decline from November.

 Personal Consumption Expenditure (PCE) chart

Corporate Profits

Analysts believe that the net profit margins for the S&P 500 will improve through the first half of 2025 and are estimated to be 12.5% for Q1 and 13% for Q2. Most significantly, all 11 S&P 500 sectors are expected to contribute to gains in 2025 compared to only 8 sectors in 2024.

Potential Risks to Consider

While all this information is encouraging, we would be amiss to ignore any potential risks that could arise in the short term. (I should preface this by saying that some degree of risk is always present!)

  • Uncertainty around new proposed policies and the passing of these policies
  • A focus on inflation and the future of interest rates
  • Unexpected external economic vulnerabilities, ranging from geopolitical events to weather events
  • Concentration in the S&P 500, with 10 companies accounting for almost 40% of the market cap
  • The U.S. dollar at its highest level in approximately 40 years, affecting multinational companies’ profits

Due to the concentrated performance mentioned above in U.S. Large Growth stocks, another possible risk could be the extent to which individual investors may be out of balance. JP Morgan notes:

Without rebalancing, a portfolio that had a 60/40 stock-bond allocation at the start of 2019 could have drifted to a 73/27 allocation by the start of this year, with a heavy overweight to U.S. growth stocks.

60/40 portfolio drift chart

Importance of Regular Portfolio Rebalancing

Regular rebalancing can help mitigate the risks and reduce the vulnerability of a portfolio to any short-term shocks of an overly concentrated portfolio or one that is no longer in line with the originally agreed allocation.

After a great past two years in the stock markets, we are encouraging our clients (based on their risk tolerance and timeline) to embrace balance and diversification in an environment where, on opposite sides of the spectrum, we have economic stability and also extremes in stock valuations and concentrations.

Much like an old school bus, regular maintenance on portfolios is necessary to keep things running smoothly and prepare for any bumps in the road ahead.

 

Categories : Financial Planning

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