The Recession That Never Came - 2024 Review

There is an old saying on Wall Street that ‘bull markets climb a wall of worry.’ 2024 fit this to a T, with global equities rallying over 18% in the face of numerous investor concerns. Ongoing wars in Ukraine and the Middle East, a Federal Reserve balancing act between inflation and recession, a troubled commercial real estate market that limped along, a potential AI-driven tech bubble (if it’s a bubble, it hasn’t popped yet), a fiery U.S. presidential election, and the latest threat of widespread trade tariffs…to name a few. It is remarkable that equities had such a strong year, and yet there is a reason that old saying about the ‘wall of worry’ has withstood the test of time. When fundamental conditions are improving, supporting corporate earnings and valuations, little else matters to markets.

The U.S. economy has grown faster than the rest of the world in recent years, inflation has declined more quickly, and employment has held firm. We can point to several structural advantages that set the U.S. apart (innovation, consumerism, immigration, education, resource independence, robust institutions). These are the critical building blocks to what you might refer to as another form of AI: American Ingenuity. For the twelve months of 2024, however, it was Artificial Intelligence that propelled large tech stocks higher, causing the U.S. stock market (+23.6%) to significantly outpace foreign developed (+5.0%) and emerging (+7.1%) markets. The market caps of the Magnificent Seven stocks (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla) are now measured in trillions of dollars, and the U.S. stock market has grown more valuable than all other stock markets combined.

The case for owning foreign equities may be more challenged now than ever. The deglobalization and onshoring trend, fueled by COVID, China’s anticompetitive tactics, and Russia’s invasion of Ukraine, continue to advance as countries and corporations alike seek resource independence and supply chain resiliency. Technology continues to create efficiencies, improve productivity, and chip away at the cost savings traditionally gained by outsourcing operations. Investing in foreign stocks entails additional risks and, more importantly, lacks the innovation powering future technologies happening primarily here in the U.S.

Source: Bloomberg LP

Since the election in November, risk assets and bond yields have both jogged higher in anticipation of continued economic strength, corporate earnings growth, and stickier inflation. Though the outlook for equities remains constructive, we expect to see heightened volatility as the Trump administration’s policies are refined and put into motion. Tax cuts and deregulation, broadly speaking, have the support of business leaders and investors. Tariffs, or taxes imposed on imported goods, paid by U.S. corporations, and generally passed onto consumers in the form of higher prices, are far less popular. These measures, put together, would stimulate the economy and increase inflation at a time when the reverse may be preferred. It is our hope that these policy proposals are rightsized as they make their way through Congress.

Cryptocurrencies at large have also marched higher. Trump is expected to ease regulation and has even floated the idea of a national Bitcoin stockpile, akin to our strategic oil reserve. If enacted, this could create another material source of demand for the digital token. Additionally, it appears unlikely that our national debt burden will be meaningfully addressed with spending cuts. More likely, we will attempt to outgrow the problem until the next economic downturn brings the relief of lower interest rates. Keep in mind that the U.S. is not the only country with an uncomfortable debt load. Our economic situation remains envy-inducing.

Source: Bloomberg LP

In fixed income, the 10-year Treasury yielded 4.3% at the start of November, and has backed up to 4.6%, a high not seen since April 2024. For other interest rate sensitive asset classes, this is also unwelcome news, though real estate may now be on the mend. With credit spreads abnormally tight, meaning bond buyers do not get paid much more for assuming credit risk, we continue to seek interesting opportunities in the asset-backed and business development segments of the market. Municipal bonds, in most cases, remain attractive and offer better opportunities with higher interest rates.

U.S. equity investors are optimistic, but we well know this can change quickly. Allocating a portion of one’s portfolio to investments with greater predictability is still worthwhile, and valuing a long-term perspective over a short-term one is always advisable.

Thank you for reading, and please reach out to continue the conversation. Happy New Year!

EPIQ Partners