As 2025 begins , investors will be looking at AI , deregulation and the bond market .
COVER STORY
Change In Washington And The Workplace
As 2025 begins , investors will be looking at AI , deregulation and the bond market .
BY EVAN SIMONOFF
T
HIS IS SUPPOSED TO BE THE YEAR when the Federal Reserve sticks the soft landing . Yet , as so often happens , the actual story is deviating from the script . For two years both the economy and the financial market defied widespread expectations of a recession during the Fed tightening cycle that began in 2022 , with GDP rising 3.0 % in 2023 and an estimated 2.8 % to 3.0 % last year .
For nearly three years , traditional economic indicators have pointed to a recession that ’ s failed to arrive . Indeed , GDP growth in eight of the last nine quarters through September 30 , 2024 , exceeded 2 %, even as aggressive monetary policy brought inflation down from 9 % in 2022 to just under 3.0 %. Employment and economic growth numbers have easily beaten the 2009-2020 period , an era of ultra-low interest rates when the rules of the game were jettisoned .
A Different Rate-Cutting Cycle
America began 2025 facing political change in Washington , D . C ., and a potentially far-reaching transformation in the workplace . The change in government is an unfolding reality . In the private sector , artificial intelligence threatens to upend the highend service industries in the same ways robotics are disrupting manufacturing .
Equity returns in this decade have seen sharp swings , with a powerful bias to the upside . In 2020 , the S & P 500 rose 16.3 %, followed by 26.9 % in 2021 . After the Federal Reserve began aggressive tightening in 2022 , the benchmark index saw a 19.4 % decline , followed by back-to-back 24.2 % and 23.3 % advances over the last two years .
Bonds , in contrast , have suffered a terrible decade , and asset managers like Vanguard , Goldman Sachs and others think they could be set up to beat stocks in the next 10 years . That remains to be seen .
Bond markets often drive both equities and the economy , yet the dynamics have been quite different this time around . In the U . S ., yields on 10-year Treasury bonds climbed almost 1.2 % after the Federal Reserve started cutting interest rates in September .
That hadn ’ t occurred in any previous Fed ratecutting cycle over the last 40 years — long-term bond yields have typically followed the fed funds rate down . The big selloff in Treasurys this time reflects bond investors ’ growing unease about financing
IMAGERY VIA GETTY IMAGES JANUARY / FEBRUARY 2025 | FINANCIAL ADVISOR MAGAZINE | 33