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The Year in Review 2024 has been a wild ride for the bond market and economy as a whole. As the two are inextricably linked, it’s impossible to see the full picture without evaluating what’s been going on with both. Since we’ve now entered December, it seems appropriate to review how the landscape has changed this year as we budget and plan for the year ahead.
Rates Interest rates have been on a roller coaster for the better part of the past year. At the beginning of the year, the 10-year Treasury rate was 3.92%. At the end of November, the rate was 4.30%. However, as you can see in the chart below, this was not a straight-line increase of 38 basis points over 11 months. In anticipation of the Fed easing in September, bonds rallied. What’s happened since has given investors another bite at the apple.
2024 saw the Federal Reserve cut their overnight rate by 75 basis points. First by 50 basis points in September, then by an additional 25 in October. Right now, it seems to be a coin flip whether or not they cut another 25 before the year ends as a stronger than expected economy propels forward. The neutral rate has settled around 3.50% (top line Fed Funds is currently 4.75%).
Economy
Soft landing? No landing? At the start of the year, these outcomes seemed somewhat optimistic from an economic perspective. A resilient consumer and continued GDP growth have changed that narrative. However, the Fed has decided to enter an easing cycle anyway. Many assumed it would take some economic pressure (i.e. weakening) to cause the Fed to act. This wasn’t the case, and played a part in pushing bond yields higher (see above chart).
Inflation & Unemployment Often referred to as the Fed’s dual mandate, the goal is to keep inflation at bay while maintaining maximum employment. For the time being, it seems like this has more or less happened. Year over year inflation has decreased from 3.1% to 2.6% from January to now. Unemployment has ticked up from 3.7% to 4.1%, but not a significant shift. As always, these number will continue to be closely monitored but the balancing act appears to be in check as it stands.
Much of what happened this year didn’t unfold as expected. We also know that markets, like economies, operate in cycles. If you had to guess, based on the information laid out above, where do you think we are in the cycle? Time will ultimately tell, but the present opportunity to add meaningful investment yield still exists. Thank you for reading the Pro Shop in 2024, we hope to see you again in 2025  |
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