This week on “Inside the Economy,” we break down 2024 market performance, how finances for US households look going into 2025, and the housing market. The S&P 500 Index is in rare air with back-to-back 20%+ returns in 2023 and 2024. Should we expect another 20%+ in 2025? US consumers remain resilient with spending on goods and services finishing strong in 2024. Can US consumers continue to spend at the same rate in 2025? US home affordability remains historically low, and homeownership continues to hover around 62%. High interest rates with long-dated bonds back to their highest level over a year have kept a lid on refinancing and mortgage activity. Where will the US housing market go in 2025? Overall, we continue to see a normalization in the US dollar and interest rates. Tune in to learn more!
Key Takeaways:
- US housing annual growth remains around its long-term average of 4-7%
- 30-year bonds moved back to their highest yield in more than a year, just shy of 5%(YOY)
- • US Debt and the US Dollar continue to climb
Full Transcript:
Welcome to another edition of Inside the Economy!
I’m Larry Howes. Thanks for joining me!
In the new year of 2025. Talk a little bit about 24 and the market performance and where a lot of that came from. Household finances and the housing market, which have been discussed a lot. But as we’re looking into a new year, what we have is the marketplace has adjusted. Interest rates everywhere down here at the bottom are up. Mortgages are up.
After two rate cuts, you really wouldn’t expect the mortgage rates to be up. And the rest of the bond market is adjusting to where interest rates probably are going to be closely tied. We’re not going to have dramatic interest rate cuts in 2025. It’s very unlikely. Let’s go with very unlikely. It’s not justified in some part of the arithmetic of what’s going on in the economy.
There is a reasonable argument that the Fed ought to be raising rates by June to slow the growth down, which isn’t out of control. But it’s moving along. The economy doesn’t need any more stimulus. We’ll get into that. Initial jobless claims down, unemployment still 4.2. That’s just the arithmetic. The ISM, manufacturing slowly coming back up. It doesn’t need to really be above 50 to have a pretty good manufacturing market.
There just aren’t any issues out here. So not a bad year in the stock market. Everybody’s well up. It’s doing fine. We didn’t exactly get a Santa rally. I love that term, Santa rally. We’re starting to see the market adjusting because it’s way ahead of earnings and it’s still ahead of earnings. Even this correction, which sort of hit everybody’s fourth quarter returns a little bit, the yields of the bonds go up. That means their value goes down. So bonds took a hit, 2 or 3% hit.
The equity market is on its way down because it’s ahead of earnings. It’s adjusting. There aren’t any bubbles in the system. It’s just fine. We had two years. 20% returns in the S&P 500. Those are rare. The chances of having another one in 2025 are remote. We’re going to have a different set of issues to deal with. What they are isn’t exactly clear, but we’ll talk about what they’re not going to be.
Fundamentally, consumer is not in a bad way at all. Spending has been resilient on hard goods and services. Been resilient. And we’ve talked about credit card spending is certainly not out of control. It’s cooled again in the fourth quarter. Consumer isn’t out of hand. The consumer is looking at unaffordability in the housing market. All that’s doing is delineating the people that really can’t afford to own their own anyway. The wage and hours side and the 61% of the economy that can or already has bought into or owns homes in the marketplace, there’s a little bit of separation.
Fundamentally that is part of the equation that the affordability prices aren’t going to come down. So income has to come up. People aren’t taking money out of their houses. The refinancing index is low. There’s no reason to think it’s going to improve dramatically. There’s not a lot of place to go and prices are up there, right, kind of where they belong. This is Case Shiller FHFA Federal Housing Finance.
Housing prices are right where they ought to be because that’s where they ought to be growth wise. Historically, housing prices have grown a point and a half above inflation. Well, when you have inflation, our core is 2.8 then the growth of your home should be about 4. It’s right in there. There’s nothing in the system that suggests the price of these houses is going to or needs to come down. What has to happen is median income needs to come up now. Wage and hour side, median salary income has to come up and then you’ll get a little more action in the housing market.
But the competition is the apartment industry. Even in Denver we get several hundred new apartments coming online every month with, I mean the tail of that is long. It goes on for decades. That’s where they’ll live. They won’t be buying single family homes. And there’s a lot of cities out there like Indianapolis, Indiana right now that advertises they got a very low, very competitive apartment market. People are moving there. Okay? That’s what happens.
The long term. Anything above an eight year maturity out to 30 years and treasuries have, the yield’s gone up, the price has gone down. We’re back where we were a year ago after two interest rate cuts. Well that’s the bond market adjusting to where it ought to be. Even though the Fed has been trying to lower rates, the market enjoyed it for a little while and then corrected to where it ought to be. And that’s where we are today.
And you’re going to see in this new administration as they come online, you’re going to hear the word US Debt keeps growing and you’ve heard it a lot already. But again, this is basically the amount of money that’s in the system. US Debt keeps on growing. US Debt handled by the public.
Well, that’s the money the public has in money markets, in banks, in their pension plan, it’s about $30 trillion. The Fed has no interest. The Federal Reserve has no interest and treasury has no interest in getting that back. It’s not owed to them. It’s money that’s already out in the system and there’s a lot of it.
Even as the dollar gets stronger, and we’ll talk about that in a minute. There is a lot of cash and options and availability. The other markets, even the private equity market that we’ve talked about has about $11 trillion in it. There’s also a rapidly growing private debt market, banking market. It’s about $8 trillion, not even represented in the S&P 500 or the rest of these indices. It’s not bad news. There’s a lot of discussion on how important it is to get the dollar strong.
Well, this is back to about 1985. Dollar is actually just returning to where it ought to be in the marketplace and it’s getting there. Interestingly enough, as we start into this new administration going to talk about tariffs and a lot of other things, the conversations, I can’t imagine where they’re going to go.
But basically what we have here, if you’re a student of history, it was Franklin Roosevelt that put tariffs in the system, that blocked a lot of imports to develop spending and manufacturing in the US during the depression. Classic textbook answers to the situation back then. You got to get people to work, you got to get them bringing money home. You build Hoover Dam, you build Civilian Conservation Corps, you know, government spending to get things going. And tariffs are just part of that, though tariffs are basically a tax on the consumer.
Well, we’re going to do that here for a little while, but there’s no underlying problem. The consumer is fine. We’re not lacking for money in the system. We just don’t have any of the fundamental issues other than deficit spending. Deficit spending. The government is spending money the economy doesn’t need. Medicare needs money. Social Security needs money, medicaid needs money. There are some places that need money, but not any more than they absolutely have to have.
The only thing that might be driving future inflation today that would suggest to the Fed they might raise interest rates to try and slow things down, unfortunately, is government spending. And the interest rates aren’t impacted very much on what the government and Congress decide to do. That’s the consumer and business. The consumer and business are just doing fine.
Okay. Well, I appreciate you joining me. This should be a very interesting year. Any questions at all, send them along to info@shjwealthadvisors.com and I’ll be happy to deal with it.
Thanks for joining me!
