Consistent Growth Continues
With an anticipated gross domestic product (GDP) growth rate of 2.4% for the fourth quarter of 2024 the annual rate will register a very respectable 2.7% for the year. Since the pandemic recovery year of 2021 when GDP grew 6.1%, the United States economy has demonstrated a high level of consistency with growth of 2.5% in 2022, 2.9% in 2023 and the aforementioned 2.7% anticipated for 2024. We have frequently discussed over the past couple of years the process of normalization the economy has been traveling through and the growth figures provided above lend credibility to that thesis. Over this time frame, we have also emphasized the lack of a significant threat of recession. With a strong labor market, growing wages, and ongoing strength in consumer spending, it was hard to develop a case where recession was a high probability outcome.
On the employment front, stability continues to be the key characteristic. The unemployment rate, currently at 4.2%, has maintained readings in a range of 4.1% to 4.3% over the second half of 2024. We have also seen moderate results from the reports for initial and continuing claims for unemployment which are both below the levels seen before the onset of the pandemic. And job openings remain healthy as evidenced by the most recent Job Openings and Labor Turnover Survey (JOLTS) reports which came in at 8.1 million. While this represents a meaningful decline from the peak reading of 12.2 million registered in March 2022, it is still higher than any month prior to the onset of the pandemic earlier this decade.
Additional support for the economy in the fourth quarter came from the Federal Reserve, which after its initial cut in the Fed Funds rate in September, followed up with additional reductions in November and December.
On a global basis the United States economy also stands out in terms of the level of growth, as well as the consistency it has exhibited. For example, the European Central Bank forecasts a level of only 0.2% fourth quarter GDP growth for Europe.
First Quarter and Beyond
As we enter 2025 our base case for the United States economy is that it will continue to experience positive growth albeit at a more modest pace than that seen in 2024. First quarter growth is expected to take a similar path with GDP projected to increase by 1.9% according to the survey of economists conducted by Bloomberg. Inflation is expected to show incremental improvement, and the unemployment rate is anticipated to show little change in the first three months of 2025.
A critical variable that could alter the trajectory of economic growth next year, as well as our ensuing assessment of the investment landscape is the implementation of significant policy changes once the new administration takes office in Washington D.C. this month. The content of these prospective policy changes, the magnitude of the changes, and the impact they have on the economy and corporate earnings will be monitored very closely.
Asset Allocation Overview
United States financial assets experienced a divergence in performance during the fourth quarter with equities and fixed income going down different paths. Unlike the third quarter where both United States bonds and stocks moved higher only equities continued to generate positive returns in the final three months of 2024. Large cap stocks were the primary driver of performance as the Russell 1000 Index returned 2.8% while mid cap and small stocks registered returns that were less than 1.0%. In contrast to the modest positive returns from equities, fixed income experienced a decline for the period as the ICE BofA U.S. Govt/Corp/Mtg Index returned -3.1% for the quarter. Like fixed income, foreign equities experienced a performance reversal in the fourth quarter. This included both developed and emerging markets. This development was a dramatic turnaround from third quarter returns as the MSCI Emerging Market Index, which returned 8.7% for the three months ending September 30, realized a return of -7.8% for the final quarter of 2024. Developed markets, as measured by the MSCI EAFE Index had a similar experience transitioning from a 7.3% third quarter return to a -8.1% performance in the fourth.
Throughout the fourth quarter we maintained our neutral positioning across our seven investment objectives. As we presented in the above paragraph some segments of global equity markets, like international markets, have experienced large swings in performance over short-term time periods. Small domestic stocks have had a similar experience with the Russell 2000 Index returning 0.3% in the fourth quarter after generating a return of 9.3% in the third quarter. Rather than try to capture these brief bursts of excess returns and experiencing the ensuing reversals we have maintained our neutral status. This is in keeping with the tenet of our investment philosophy which calls for a long-term perspective in guiding our investment decisions. At some point in the future more enduring periods of strength may develop for specific asset classes which will lead us to move away from our neutral posture. Our Asset Allocation Committee consistently evaluates the outlook across the investment spectrum to determine the appropriate allocations across our seven investment objectives. In addition to this ongoing evaluation of the asset classes comprising our strategic benchmarks we also evaluate potential opportunities that could be provided by alternative asset classes.
As we close this segment of our Quarterly Insight, we want to encourage investors to periodically review their stated investment objectives to ensure they continue to reflect their goals, risk tolerance, and time horizon.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.