2024 Year-End Review & Outlook: US Economy and Global Markets

US Economy

Economic growth for the US is expected to accelerate for 2024, based on TMC Research’s estimates. Using year-to-date numbers through the third quarter, combined with our nowcasting for Q4, points to a second straight year of improvement for the pace of GDP growth.

TMC Research is looking for real (inflation-adjusted) output to rise 4.0% in 2024 over the previous year (see chart). If correct, economic activity will mark the strongest calendar-year expansion since 2021, when the economy posted a dramatic but unsustainable rebound from the pandemic-induced recession in 2020.

Thanks in part to the robust economic momentum in 2024, a solid growth rate looks set to spill over into the kick-off for 2025. The main uncertainty is how the incoming Trump administration will reshuffle the outlook as next year evolves. The optimistic view is that the president-elect’s pro-growth policy priorities will keep the expansion going and perhaps fuel higher growth in the year ahead. Key factors that optimists cite: tax cuts and a lesser regulatory burden for businesses.

Yet other aspects of Trump 2.0 raise concerns in some circles. The possibility of a sharp increase in import tariffs and plans to deport millions of immigrant workers could lift inflation, according to some forecasters. The counter-argument is that Trump’s campaign promises on tariffs and immigrants are merely opening bids with foreign governments to renegotiate policies.

The question, of course, is how foreign leaders and their governments will respond to a more muscular “America First” policy agenda? Although some analysts are confident that when the dust clears the results will strengthen the US economy, there’s a high degree of uncertainty about the possible paths for how the year ahead will unfold.

Inflation

Progress on taming inflation has stalled in recent months, raising new concerns about how fast the Federal Reserve will be able to reduce pricing pressure to its 2% inflation target in 2025.

The year-over-year change in the headline consumer price index (CPI) edged higher for two straight months, rebounding to 2.7% in November. Meanwhile, core CPI has been ticking higher lately, reaching a 3.3% annual pace last month – the highest since April.

Despite reflation risk of late, the Federal Reserve on Dec. 18 cut interest rates for a third time, reducing its target rate by a ¼ point to a 4.25%-to-4.50% range. Additional cuts look unlikely in the near term, however, based on the potential for higher inflation pressures next year due to policy changes in Washington and the recent stalled inflation progress in late-2024.

Interest rates

Treasury yields have traded in a range in 2024. After rising early in the year, the benchmark rate trended lower before bottoming in mid-September. In the fourth quarter, the 10-year yield has rebounded and is currently at 4.39% (Dec. 16), moderately above where it started the year.

The rise in Treasury yields during the fourth quarter reflects so-called sticky inflation in recent months. Market sentiment reflects lower confidence that the Federal Reserve will be able to extend its rate cuts in the near term.

Another factor is rising government debt. Despite ongoing economic growth and solid employment, the deficit deepened in 2024, driving up federal interest payments as a percent of GDP to the highest level in more than two decades. The US debt-to-GDP ratio, for instance, has climbed sharply in recent years. After spiking to over 130% during the pandemic, this ratio has eased but continues to print above 120% -- sharply above its pre-pandemic history. Another worrisome trend is the sharp rise in interest payments on federal debt as a percentage of government spending – a metric that’s risen to roughly 13%, the highest in more than two decades.

Discussions in Washington about reducing the deficit are far and few between, raising concerns that the red ink trend for the government’s ledger will likely continue to deepen in the near term. Recognized or not by politicians, federal debt is on an unsustainable path. The question is whether the bond market, by raising market yields, forces Washington to focus on the problem sooner rather than later?

This much is clear: the longer the deficit problem persists and/or deepens, the greater the risk that Treasury yields will rise. The potential for a 10-year yield above 5%, in other words, increasingly appears to be a non-trivial possibility in 2025, depending on the path for three key variables: how or if Washington addresses the budget deficit, the inflation trend, and the strength (or weakness) of the economy.

Financial Markets

The US stock market continued to dominate the world in terms of performance in 2024. For a second straight year, American shares led global markets by a wide margin, based on a set of exchange traded funds (ETFs).

US stocks have surged roughly 28% so far in 2024 (through Dec. 16). The strong increase follows last year’s robust 26.1% total return.

There’s also growing concern that US equities are highly valued and so expected returns are significantly lower relative to the elevated returns that investors have come to expect in recent years. Optimists cite strong earnings and the potential for productivity-enhancing gains from technology, including artificial intelligence. Nonetheless, the market appears priced for perfection, based on the Cyclically-Adjusted Price-to-Earnings (CAPE) Ratio, which is at 38 for the December estimate -- close to the highest level in decades, according to Professor Robert Shiller’s database. The implication: expected returns for the medium-to-long-term are significantly lower compared with recent history.

As for the 2024 comparison, American equities outperformed other markets, often dramatically so. The one exception: gold, which is essentially neck-and-neck with US stocks year to date. Otherwise, the rest of the field is trailing American equities. Excluding gold, the next-best performer after US shares: stocks in emerging markets, which are up 13% so far in 2024.

The losers in 2024 are concentrated in various categories of foreign bonds and foreign real estate. Meanwhile, US bonds are on track to post a second year of slight to modest gains, albeit at a rate that’s below the annual pace of inflation. An ETF proxy of US Treasuries (IEF) is barely above water this year, rising a slight 0.4% year to date. US inflation-indexed Treasuries (TIP) are doing better with a 2.6% advance. The big winner in bonds, again, is below-investment-grade bonds – so-called junk bonds (JNK), which have rallied more than 8% year to date.

For securitized real estate, there’s been a noticeable divergence between an ongoing rally in US real estate investment trusts (VNQ) vs. a mild loss in foreign property shares (VNQI).

Commodities overall (GSG) have rebounded in 2024 with a moderate increase. A rise in crude oil (USO) is a key reason, although the 28% jump in gold prices (GLD) has been the year’s big winner in the realm of raw materials.