Quarterly Economic Review: Fourth Quarter 2024

January 23, 2025

January 22, 2025

By

Conway Wealth

Key Takeaways

  • 2024 was the second consecutive year that defied expectations. Growth remained resilient, inflation was manageable, and risk assets performed favorably. Strong results from the past two years have set higher expectations to meet in 2025.
  • The Fed kicked off its easing cycle by cutting its policy rate three times throughout the year, lowering the 5.5% target rate upper bound to 4.5%. It is uncertain how aggressive the Fed will be in lowering rates going forward as we approach a new neutral rate, as inflation has the potential to resurface.
  • U.S. economic growth further decoupled from other major nations globally, driven by a persistently resilient consumer. European and Asian economic momentum subsided based on a variety of factors including political turmoil (ex. Europe) and real estate crisis (ex. China).
  • Strong results across most equity markets pushed valuations higher – especially for U.S. large-caps. Despite some head fakes, trends of outperformance from recent years extended into 2024 including U.S. over international, large over small, and growth over value.
  • Conservative fixed income assets had modestly positive returns as higher yields were partially offset by losses from duration when rates rose. 2024 results are a testament to the importance of higher starting yields and the risk/reward skews favorably for less credit sensitive fixed income.
  • More credit sensitive fixed income assets, such as high yield, delivered impressive returns, benefiting from increasingly tight credit spreads and higher starting yields. On a go forward basis, such narrow spreads present a more limited opportunity set susceptible to downside surprises.
  • Political establishments and macroeconomic trends (ex. globalization, multilateralism) are being tested globally, contributing to increased instability. As the rulebook is partially rewritten, it will contribute to elevated change and create both opportunities and dislocations.
  • Outside of the economy, market dynamics are shifting with the ETF vehicle increasingly becoming the wrapper of choice, even for active strategies. Capital has continued to flow into private market opportunities as the democratization of alternative investments persists. We believe both dynamics are positive for investors and should create compelling investment opportunities in the future.
  • 2023 and 2024 presented a supportive time for markets with positive returns and lower than typical levels of volatility. With an average correction of roughly 14% in the S&P 500 Index since 1980, higher levels of volatility and drawdown are probable going forward. It’s critical to ensure portfolios are appropriately allocated relative to goals and risk tolerances entering the new year.

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Initial 2021 Tax Considerations

With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.

Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.

Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.

Income & Capital Gains Tax Proposals

With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.

Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.

Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.

“Be fearful when others are greedy and greedy when others are fearful.”

Responsive Planning

Given the above proposals, there is great uncertainty surrounding future tax policy. Even if some of the more benign tax provisions now in effect are not repealed, many of them are scheduled to sunset at the end of 2025 already.

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  • Phase out the 20% pass-through deduction on qualified business income for people with annual income exceeding $400,000
  • Eliminate capital gain deferral through like-kind exchanges of business & investment real estate for people whose yearly income exceeds $400,000
  • Increase the highest corporate income tax rate from 21% to 28% and subject corporate book income of $100,000,000 or more to a 15% alternative minimum tax
  • Double the tax rate on global intangible low tax income (GILTI) earned by foreign subsidiaries of American businesses from 10.5% to 21%
  • Impose a 10% surtax for U.S. companies that move manufacturing & service jobs to another country and then provide services or products for sale back to the American market
  • Create an advanceable 10% “Made in America” credit for manufacturers’ revitalizing, re-tooling and hiring costs
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