2024 has felt a little like the fictional township of Bedford Falls. A small, quaint municipality in which the classic holiday movie, “It’s a Wonderful Life”, takes place. This down-home, tried and true, crockpot of Americana boasts all qualities one might expect including the friendly neighbors, business deals made on a handshake, celebrated high school athletes and downright do-gooders like George Bailey. For those not familiar with the plot, the protagonist, George, spends his life trying to escape his nostalgic hometown to seek adventure. Life manages to continually get in the way, however, and he finds himself handcuffed to Bedford Falls in some form or fashion, while at the same time, always being present to “save the day”. As a young child, he prevents the local pharmacist from accidentally poisoning a customer and rescues his brother from a frozen pond only for his brother to go on to become a revered Medal of Honor winner (just the kind of adventure George is looking for!). George plans and saves for a world tour before attending college but is forced to stay and run the family business, the Bailey Building and Loan, when his father is suddenly stricken by a stroke. Instead of enrolling in college, George generously gives his savings to his brother under the condition that he return to run the family business upon graduation, but alas, the brother reneges and takes another job, leaving George stuck (yet again) in Bedford Falls.
So it goes for the unsung heroes! In this regard, George reminds me of our own Jerome Powell (and not only due to his Jimmy Stewart’esque gray hair and stoic voice). The Fed Chair has had to navigate a difficult path for our economy, providing life support during the pandemic and delivering tough medicine when the good times got a little too good. It’s a balancing act of doing the right thing and keeping the masses copasetic. The dual mandate of the Fed is to keep inflation stable and promote maximum employment. By pulling one lever, the other is automatically tweaked, so it is a fine line that he walks (just as George’s action or non-action affected the people and community he lived in). While the labor market appears healthy (November unemployment came in at 4.2%) and the consumer pulse is strong, inflationary stress persists so the Fed continues to apply pressure through higher rates for longer and a more hawkish rhetoric in their outlook for the future direction (current expectations are for only 2 rate cuts in 2025). Just like George, Powell has not quite reached escape velocity, and therefore we remain in Bedford Falls. Not a bad place to be as it’s not too hot and not too cold, yet there are threats on the horizon that could disturb the peace.
Despite a strong market rally (S&P +26.9% YTD) as year-end approached and which accelerated immediately after the election results (markets like certainty and appreciate a clear and decisive outcome), stocks began to take notice of the 10-year Treasury, which rose nearly 100 basis points in yield from its September lows of 3.62% to 4.56%. This move has mostly been due to concerns over rising government deficits and the potential effect of tariffs on our country’s coffers. The extreme hike in rates has also done nothing to improve the nationwide housing crisis (shelter composes 42% of CPI), as mortgages are based on the 10-year yield. New home buyers are finding the cost of a mortgage unaffordable and higher rates have reduced inventory as no one wants to sell out of a home that was purchased when rates were 2-3%. Higher rates are also exacerbating our fiscal situation as new government debt has to be refinanced at a much higher interest rate.
Furthermore, we still have a looming office real estate crisis, as many commercial loans come due in 2025 and 2026. If rates do not retreat fast enough, many landlords will be forced to invest more equity into their buildings, or alternatively, deliver the keys to the bank. This is not an ideal situation and the regional banks that are the primary holders of this paper do not want to take possession (especially as deposits have dwindled seeking higher rates in money markets). It is starting to have reminiscences of a good old run on the bank at the Bailey Building and Loan!
As we enter 2025, we not only turn the page on a new year, but a change of leadership for our great country. While we are still in the early days, we expect a more business friendly administration, which should help smaller companies. A lighter regulatory environment may also spark more activity in mergers and acquisitions. This, combined with the potential for further rate cuts, could support private asset market returns. Despite the aggressive tariff rhetoric, we believe most of these measures will be used as negotiating tactics versus actual implementation. However, we see a longer-term theme of companies reassessing and reshoring their supply chains. As the AI boom continues, keeping your data (and power sources) close to home will only become more important and emphasize this trend!
Closing Thoughts
While George Bailey may have imagined the grass was greener outside of Bedford Falls, he came to realize that despite the many challenges he had to navigate, every small act of kindness led him to a fulfilling and prosperous life. We too must traverse the complex landscape of global markets and geopolitical turmoil and realize every choice we make has bearing to the outcome of our clients’ success. As we close another chapter, please know it is with our deepest appreciation that you continue to put your trust in us and afford us the opportunity to keep you in greener grass.
Wishing you all the best in this hopeful new year, filled with prosperity and joy.