Q1 2025 Economic & Market Chart Book

The Federal Open Market Committee (FOMC) is forecasting 2-3% GDP growth through 2025. Its forecasting accuracy historically has been poor, but it is helpful to know what they think, as it will influence future Fed rate policy.

Source: The FOMC “Summary of Economic Projections,” as of December 18, 2024. There is no guarantee that any projection, forecast, or opinion will be realized. Actual results may vary.

The Atlanta Fed “GDPNow” Forecast indicates 3.1% GDP growth for Q4, 2024. The economy remains more resilient than many analysts expected and is affecting Fed rate policy decisions.

Source: The Atlanta Fed “GDPNow Forecast as of December 24, 2024. There is no guarantee that any projection, forecast, or opinion will be realized. Actual results may vary.

Non-US GDP estimates also remain muted but positive.

Source: Seeking Alpha and Markit, as of December 20, 2024. There is no guarantee that any projection, forecast, or opinion will be realized. Actual results may vary.

This shows US manufacturing and services activity through December 2024. Manufacturing remains in “contraction” territory (<50), but services remain in expansionary territory (>50). A mixed signal on the overall economy, but remember we are primarily a services-driven economy.

Source: Ycharts, 5-year data through December 31, 2024.

Non-US manufacturing remains muted around the world, with a mild recovery in China due to massive economic stimulus.

Euro-Area Manufacturing PMI

China Manufacturing PMI

Japan Manufacturing PMI 

Source for all three charts: Trading Economics, data through December 2024.

This chart measures how actual economic data come in relative to forecasted estimates. The absolute level matters, but the trend line (or momentum) is what we watch. The recent trend (data coming in weaker than forecasted) suggests the economy is perhaps losing steam.

Source: Citigroup and Yardeni Research, as of December 29, 2024. 

US consumers have spent down their COVID dollars but not reduced their overall spending, increasingly relying on credit card debt. This is ultimately unsustainable, as evidenced by rising credit card delinquency and default rates.

Source: St. Louis Fed (FRED), through December 2024.

The labor market shows continued resiliency, which mitigates the Fed’s desire to pursue a more aggressive rate cut regime.

Source: St. Louis Fed (FRED), through December 2024.

Historically, a 5% unemployment rate was considered a “full employment” economy. We remain under that level today, though the trend lines are slightly upward. Another reason the Fed has pulled back from its aggressive rate cut regime.

Source: St. Louis Fed (FRED), through November 2024.

Some “numbers behind the headline numbers”. Job openings, the hires rate, and the quits rate (an indication of employee confidence in leaving their current position) all trending downward – suggesting a softening – but not weakness – in the labor market.

Source: St. Louis Fed (FRED), through October 2024.

Small businesses and US consumers are upbeat ahead of anticipated regulatory and tax relief. They don’t seem overly concerned about the potential inflation and retaliation issues associated with Trump’s stated tariff policies.

Sources: Top chart: The National Federation of Independent Businesses (NFIB) monthly survey, as of 2024. Small businesses generate 50-60% of the US GDP. Bottom Chart: dShort.com. The teal line is a survey conducted by the Conference Board. Both lines are through November 2024.

The dollar has strengthened considerably over the past 3-4 months as the market priced in a less aggressive Fed rate cut regime. This is unhelpful for non-US investments by US investors. 

Source: Ycharts, as of December 31, 2024. You cannot invest in an index and past performance is not guarantee of future results.

US large cap growth stocks led global markets in 2024, driven by the mega-cap tech stocks. China’s recent “moon shot” was driven by massive governmental stimulus, skewing the annual return upward, but was short-lived.

The yield curve has resumed its (normal) upward slope. We believe this will continue as we believe the short-end will continue to fall (albeit more slowly as the Fed slows down rate cuts) and the long end will continue to rise.

Source: Ycharts, as of December 31, 2024. You cannot invest in an index and past performance is no guarantee of future results.

Credit spreads remain at or near 10-year lows. Corporate balance sheets are generally in solid shape, but we believe the pressure on both rates and spreads going forward is upward, and so the total return potential in public bonds is muted.

Source: Ycharts, 10-year data as of December 31, 2024. You cannot invest in an index and past performance is no guarantee of future results.

As with global equities, nothing looks especially “cheap” across the rates and credit spectrum. High yield looks unattractive – we much prefer private credit for investors seeking additional yield.

Source: Eaton Vance, “The Beat” report, as of December 2024. You cannot invest in an index and past performance is no guarantee of future results.

Rates and Credit Summary

• Given the current levels of real rates and credit spreads, investors can once again generate real income from their bond portfolios.
• Corporate balance sheets are generally in solid shape, so coupons (at least on investment grade bonds) should be reasonably safe, although delinquency and default rates are picking up.
• That said, we believe the pressure on both rates and spreads is upward from current levels, and so we do not love the total return potential available in most public income sectors.
• We see no reason to overly extend duration and continue to recommend a balanced approach between short-dated and longer duration exposures, and to maintain a duration profile that is lower than the aggregate index.
• For investors seeking higher yield from their income allocations, we much prefer private credit for those investors who can access that space.

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Many commodities were hurt by the decreased demand from China, due to its stagnant economy. That may change if the current massive stimulus programs there are effective. The exception was “softs” (coffee, sugar, cocoa, and cotton). Gold and precious metals were on a tear over much of 2024 due to rising global political tensions.

Source: Ycharts, YTD as of October 3, 2024. You cannot invest in an index and past performance is no guarantee of future results.

Many diversifying strategies (alternatives) perform best when both interest rates and volatility are rising. After extreme complacency through most of 2024, we may be seeing a trending rise in volatility, along with rising rates. Given equity and bond valuations, we believe investors should be considering lower correlated investment strategies.

Source: Ycharts, as of December 31, 2024. You cannot invest in an index and past performance is no guarantee of future results.

Hedge funds are generating positive performances and serving their primary role as diversifiers / lower correlated strategies to public equity and income.

Source: FEG, through December 2024. You cannot invest in an index and past performance is no guarantee of future results.

Just as with traditional equities and income, it is smart to diversify across alternative strategies as well, either using a “core-satellite” approach or via a multi-strategy solution (the light green/teal boxes below).

Source: Eaton Vance “The Beat” report, as of December 2024. You cannot invest in an index and past performance is no guarantee of future results.

We continue to like private equity for those investors who can access it. We are especially interested in sports investments, secondaries, energy infrastructure, and direct investment opportunities at the current time. Below highlights some of discounts available in the secondaries market.

Source: JP Morgan “Guide to Alternatives”, as of November 30, 2024. Private investments may carry additional liquidity and leverage risks and are often limited to more sophisticated investors accordingly. Past performance is no guarantee of future results.

Private credit has seen massive inflows since the evolution of the “evergreen” facility. If we are correct in our view that we are somewhere between an “expansionary” and “cooling” economic regime, this would appear to be an attractive time to access this market.

Source: JP Morgan “Guide to Alternatives”, as of November 30, 2024. Private investments may carry additional liquidity and leverage risks and are often limited to more sophisticated investors accordingly. You cannot invest in an index and past performance is no guarantee of future results.

Real Assets, Alternatives and Private Markets Summary

• While we are neutral on the overall commodity market and are not allocating there presently, we do like specific sectors such as MLPs.
• Given market valuations in the public markets, we like the private markets for those investors who can access them.
• With private equity, we are focusing on sports investing, secondaries, energy infrastructure, and direct investment opportunities.
• Within private credit, we still like “traditional” direct and PE-sponsored opportunities, but are also looking at more niche strategies that may be less “crowded”.

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The Certuity Asset Allocation Guidelines, as of December 2024. Valuations are expensive across the globe, but we are not necessarily bearish on future market movements, unless we see a disruptive geo-political event.

Source: Certuity, as of December 2024. Evaluations are subject to change as market conditions change. This is for illustration purposes only and does not represent investment advice. All evaluations are on a relative and not absolute basis. Red = a negative relative evaluation; gray = a neutral relative evaluation; green = a positive relative evaluation. You cannot invest in an index, and past performance is no guarantee future results.

Our Current Model Portfolio Guidelines

• Despite elevated valuations, we prefer public equities over public bonds.
• Earnings will become increasingly important to maintain valuations, as much of the recent market rally has been driven by multiples expansion – a trend we don’t believe can continue indefinitely.
• Despite relative underperformance, we believe longer-term and disciplined investors should consider allocating to US large cap value, US SMID cap, and non-US stocks.
• Coupons are generally safe and generating positive real return for investors, but we don’t like the total return outlook for public bonds. We much prefer private credit for those investors who can access it and are seeking enhanced yield.
• We like MLPs but are otherwise neutral on the broader real asset sector.
• We believe there continue to be interesting opportunities in the private markets for those investors who can access them, specifically in sports investing, secondaries, energy infrastructure, and direct investments.

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