Q1 2025 Market Perspective

A new year has begun. After the Holidays, we often contemplate all the impactful moments that took place during the year and whether they remain and continue to influence our lives. Thinking of another year ending as great memories flash through our heads can be bittersweet. As the calendar marks the 1st day of the year, it suddenly feels like the reset button has been pushed, and we are ready to embark on a new year full of possibilities, opportunities, and success. Many of us are already thinking ahead and beginning to prepare for what this new year holds. When looking ahead, we need to look

at the past, elections were top of mind for many investors apart from inflation and

interest rates, and as illustrated in the chart, many other important events took place

throughout the year. Despite all

this action, the equity market delivered a great performance, and the S&P finished the year with double-digit returns.

Inflation

After a lengthy battle with inflation, the Fed has done its job of achieving a soft landing.  Over the last six months, we can see that Core inflation has remained stable and ended the year at 3.2% YoY. Meanwhile, Core PCE (Personal Consumption Expenditures), the Fed's preferred inflation measure, reported an increase of 2.8% YoY (Year-over-Year) for November. Moreover, the Fed's goal to maintain maximum employment was also achieved by maintaining unemployment below 5% in 2024. Although the unemployment rate at the beginning of 2024 was 3.7%, it ended the year at 4.1%. The last FOMC (Federal Open Market Committee) summary of economic projections shows that the Fed anticipates another year of continued economic growth with the following forecasts: Unemployment is projected to end 2025 at 4.4%, Core PCE at 2.5% YoY, and expect GDP (Gross Domestic Product) to grow at an annual rate of 2.1%. For this reason, we anticipate that fewer rate cuts will be implemented in the upcoming year, as the federal funds rate forecast shows a level of 3.9% by the end of 2025.

Interest Rates

Due to slowing inflation and a stable economy, the Fed implemented its first rate cutback in September 2024. Since then, we've had three additional rate cuts, bringing down the Federal Funds rate by 100 basis points. This upcoming year may look slightly different as the new president takes office. Other matters must be considered when assessing whether additional rate cuts can be implemented. Although the most recent projection shows the Federal funds rate declining to 3.9% by the end of this year, many other considerations come into play as President Trump implements some of his proposed policies. The outcome of this decision could be a driving force on whether the path of economic growth continues and how the Fed will proceed with changes in monetary policy.

Policy Impact

One of the most significant topics

of discussion is the implementation of tariffs on

imported goods from one of our largest trading partners, China. Donald Trump's proposal includes a universal tariff of up to 20% and a 60% tariff on goods from China. As seen on the chart to the right, the last time we had tariffs, that high was in the 1930s. Implementing tariffs is one of his strategies for negotiating terms that could be favorable to the US. Economists and investors alike are uneasy about the potential economic ramifications if this proposal gets enacted. Many believe that China may retaliate against the US and impose higher tariffs on US exports to China. Others argue we may see an uptick in inflation as the costs of tariffs are transferred to the consumer, but the actual economic impact will be difficult to determine until it all plays out.

CWM Portfolios

Given the ever-changing macro and market environment, we have positioned our client portfolios in a way they can tolerate different market events. By having a diversified portfolio, we are taking a proactive approach rather than waiting for different events to

unfold before taking action. 2024 was another eventful year, and we ended it with great returns. The chart to the right illustrates the actual S&P performance vs what analysts predicted. We were very pessimistic about the market, which is another excellent reminder not to let one event cloud our judgment and make irrational decisions that could derail us from our long-term goals. We will continue to update our portfolios in a way that can capture gains during upward market trends while still protecting them during a downtrend. At this time, we believe a rebalance may be appropriate to reduce overexposure in certain areas of the market.

When it comes to your finances, Corinthian is your partner. We are here as a resource when you have questions. Our focus is to continue supporting you on your financial journey. Don't hesitate to get in touch with your main advisor at (408) 995-0915 for additional information.

Advisory services are offered through Corinthian Wealth Management, Inc., a Registered Investment Advisor.

Sources

• Market Review 2024: Stocks Overcome Uncertainty to Notch Another Strong Year. Perspective by Dimensional. 01/06/2025.

• https://tradingeconomics.com/united-states/core-inflation-rate

• https://tradingeconomics.com/united-states/interest-rate

• Q4 2024 Market Review: Equity and Fixed Income. Dimensional Webcast. 01/6/2025.

• Guide to the Markets. Market Insights by JP Morgan Asset Management. 12/31/2024.

• Summary of Economic Projections. 12/18/2024 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20241218.pdf 

• Goldman Sachs. Market Pulse January 2025. https://am.gs.com/en-us/advisors/insights/article/market-pulse