Like the crisp winter air biting at your face when you step outside of a warm home, the economic and political landscape of the United States has shifted dramatically. For some, it’s a welcome breath of fresh air; for others, it’s a bitter chill. With Donald Trump convincingly reclaiming the presidency, the tone in Washington has transformed from caution to action, hesitation to ambition, and from the old guard to a new frontier. Many business leaders who spent years navigating regulatory headwinds now feel a tailwind at their backs.
The stock market took notice, surging in anticipation of policy changes that would remove much of the trepidation many had thought characterized the previous administration’s approach to the economy—concerns over DEI and ESG mandates, heavy-handed regulation, big and active federal government, and increasing taxation on corporations and the wealthy. The pro-business small government pivot isn’t just theoretical; it’s already materializing in ways that will impact economic conditions for months and years ahead.
In addition to deregulation, the administration wasted no time pushing forward with policies aimed at growth: energy production incentives, extended lower tax rates, and the cancellation of the previously planned FLSA limit increase (an expected jump from a $35,568 to a $58,656 limit for annual salary exemption for overtime), a move that emboldens companies to hire rather than scale back on labor costs. Meanwhile, the rollout of the “Deferred Resignation”—aimed at reducing the size of the federal workforce—by the Department of Government Efficiency (AKA “DOGE”) could potentially flood the labor market with experienced workers just as AI-driven productivity gains begin to make their presence felt. More workers and more efficiency will be countered by optimism about hiring to meet the demand of an expanding economy. None of this takes into account the potential impact of tariffs and trade skirmishes, if not outright wars. These are big inputs to the delicate equation of economic acceleration. As with all policy changes, the law of unintended consequences looms large.
Higher growth expectations can come at a cost: rising inflationary pressures and stubbornly high interest rates. If Trump Tariffs 2.0 are long-lived and of meaningful magnitude, import-sensitive prices will surely rise in the near term. The Federal Reserve, already wary of cutting rates too soon, may now feel even more justified in holding rates steady or even tightening them again. The cost of borrowing remains a thorn for homebuyers, commercial real estate developers, and businesses alike, making capital-intensive expansions and personal home purchases less affordable and more challenging. This sets up a battle between market optimism and the realities of credit markets, a tension that will likely define the coming quarters.
How the Markets Fared
With deregulation and tax certainty returning to the headlines, equity markets initially roared ahead in Q4. The S&P 500 and Dow Jones hit new highs, with investors rotating out of defensive positions and into growth and industrial sectors. Companies poised to benefit from renewed energy policies and infrastructure investments saw outsized returns. The tech giants generally saw continued gains as well. Small caps and value stocks, which initially rallied around the election, sold off to finish the quarter generally unchanged. However, international equities, particularly Latin American emerging markets, retreated as tariff policies struck fear in investors and as commodity prices showed renewed volatility.
On the fixed-income side, bond markets struggled despite the Federal Reserve cutting rates a quarter of a point at each of the November and December 2024 policy meetings. However, they did decide to hold rates steady at the most recent January 2025 meeting, giving rise once again to the higher-for-longer narrative. As short-term rates were dropping, the 10-year Treasury yield spiked from 3.8% at the beginning of Q4 to nearly 4.6% at the quarter’s (and year’s) end. This pressured the prices for investment-grade bonds from both U.S. and developed markets, especially those of longer-duration assets, which saw losses proportional to their maturity exposures. High-yield corporate bonds bucked the trend, performing well amid renewed economic optimism, while emerging market debt saw mixed results.
Steady She Grows
Recent data from the Institute for Supply Management (ISM) paints a cautiously optimistic picture of the U.S. economy’s trajectory. The January 2025 Purchasing Managers’ Index® (PMI®) from the Institute of Supply Management® (ISM®) for the manufacturing sector edged into expansion territory at 50.9%, following 26 months of contraction. This uptick suggests a tentative rebound in manufacturing activity, and points to approximately 2.6% in real GDP growth for the coming six months. Though still showing steady expansion, the services PMI® dipped to 52.8% from December’s 54.0% reading, indicating a moderation of growth in service sector, indicating an upcoming increase in real GDP of just 1.6%. These mixed signals from key economic sectors complicate the outlook for gross domestic product (GDP), but compares similarly to the World Bank’s projections that U.S. GDP is set to expand by 2.5% in 2025. ISM’s latest reports underscore these challenges, highlighting the delicate balance policymakers must maintain to foster sustainable economic growth. However, the ISM data is reflective predominantly of the business-to-business environment. Of late, it’s the consumer who has driven all of U.S. GDP growth; in fact, it delivered more than 100%, with a 2.8% contribution to total Q4 GDP of just 2.3% net-net.
Room to Consume
Strong economic contribution from American consumers continues to defy expectations, driven by a tight labor market and sustained wage growth. The Conference Board’s Consumer Confidence Index jumped to 108.7 in January, up from 99.2 in the previous quarter, reflecting optimism about job stability and future earnings. Retail sales posted another strong quarter, particularly in discretionary sectors, as spending remained resilient despite higher borrowing costs. However, with inflationary pressures still present, consumer sentiment could shift if the Trump campaign promises of lower prices don’t bear out in reality, further eroding households’ purchasing power. When looking at the average household, Americans don’t seem to be overextended. An 11.7% debt service burden is still historically low (if you throw out the stimulus years of COVID). But that’s the average. The rate of default, especially on credit card debt and auto loans, is approaching levels not seen since we were entering (or exiting) the Great Financial Crisis in 2007. There clearly is a subsection of American consumers that is in trouble, and that’s with a strong economy and with jobs aplenty. The ultimate question is, will these defaults spread into a contagion, especially if the economy were to falter?
Inflation: Back from the Dead?
While inflation had been on a downward trajectory, recent data suggests the battle isn’t over yet. Core CPI (ex-food and energy) rose 3.3% year-over-year in December, up slightly from the prior quarter’s 3.2%. The Producer Price Index showed a similar trend, climbing to 2.8%—a warning sign that price pressures may not abate as quickly as markets hope. The Fed now faces a delicate balancing act: cut rates too soon, and inflation could reignite; hold too long, and economic momentum may stall. With tariffs likely to work their way into consumer costs, a print above 4% for core-CPI is a real possibility in the first year of the new administration.
Solid Foundation
The housing market is once again regaining momentum. Existing home sales rose slightly in December to an annualized rate of 4.2 million, up 2.2% from the prior quarter, an unusual rise for this time of year. Inventory levels declined to 3.3 months of supply (down from 3.8 months in November)—well below the six-month threshold that would indicate a balanced market. The surge in activity combined with tight supply drove the median existing-home price for all housing types in December to $404,400, up 6.0% from the same time last year. This strength flies in the face of low affordability due to persistently high mortgage rates, which remain nearly at a decade high. If the economy heats up, then affordability may improve for some buyers. If it cools, then the Fed will likely lower interest rates, thus making mortgages more affordable. Until more supply hits the market, housing prices are in a “heads, owners win; tails, buyers lose” scenario.
Labor Market: JOLTed but Still Strong
We had conjectured that October’s weak jobs report was influenced by both the two catastrophic southeastern hurricanes and the trepidation leading into a contentious presidential election. That appears to have been the case. The December (as well as the November) employment report showed a strong rebound from October’s anemic data. December’s Nonfarm Payrolls increased by a stronger-than-expected 256,000, leading the unemployment rate to dip back to a tight 4.1%. Average hourly earnings growth year-over-year held in at a strong 3.9%. These recent datapoints show that the labor markets will likely continue to be an upward drag on inflation, but one recent trend suggests this pace may moderate as the supply of skilled workers increases. The December JOLTS report showed a meaningful decline in job openings, down to 7.6 million from 8.2 million in November. Though 7.6 million still shows plenty of demand in the labor markets that has yet to be filled, these numbers are at post-COVID-19 lows. With DOGE policies reducing federal employment and AI-driven productivity gains easing labor shortages, the supply side of the labor market could be on the verge of a shift.
For What It’s Worth
U.S. large-cap equities, particularly growth stocks, are trading at stretched valuations that stand in stark contrast to their international counterparts. As of the end of January 2025, the S&P 500’s forward P/E ratio of 21.9x earnings was significantly above its 25-year average of 16.9x, while large-cap growth stocks sat at an eye-watering 29.2x, or 150.9% of their historical norm. For context, the S&P 500’s valuation premium over the MSCI All Country World ex-U.S. index has widened to 37.4%—far above the 20-year average of 17.9%. The disparity is further highlighted by emerging markets, which trade at a modest 12.1x forward earnings, and Europe, ex-UK, at 14.8x.
S&P 500’s forward P/E ratio is now more than one standard deviation above its 30-year average, sitting firmly in overvalued territory. In contrast, international markets remain closer to their historical averages, presenting a more attractive risk–reward dynamic. Investors chasing U.S. growth stocks should be cautious of mean reversion, particularly given the lack of earnings growth to justify such premiums. Meanwhile, undervalued regions like Europe and emerging markets offer compelling opportunities for those willing to look beyond U.S. borders… and have the patience to wait for the cycle to turn.
PieringAhead
In my Fall 2017 market and economic commentary, I noted the parallels between the pro-business, deregulation-focused policies of the first Trump administration and those of the William Harding administration in the early 1920s. Then, as now, an economy emerging from a heavily interventionist period was met with an administration eager to reduce government involvement and cut taxes. The result? A burst of economic growth that led to the Roaring Twenties—until it didn’t.
Harding’s policies fueled rapid expansion but also sowed the seeds of instability, as speculative excesses and loose financial conditions led to an eventual reckoning. Today’s situation is not an exact replica, but the lessons remain relevant. The enthusiasm in markets is warranted, but so is caution. Unchecked growth can bring inflationary risks, just as deregulation can lead to unintended economic distortions.
The Federal Reserve remains a wildcard. The market is betting on cuts, but with economic momentum building, the Fed may find itself in no rush to oblige. Meanwhile, businesses must navigate the push and pull of policy shifts, labor market changes, and technological disruptions from AI. And those disruptions and the winners (and losers) from the rush to build the new AI world are anything but certain. The dawn of the internet age and the rise and fall of the dot-coms taught us that.
The current moment is one of great promise and great uncertainty. The waves ahead may be choppy, but as always, we at North Pier will be watching closely, navigating the currents with a steady hand but ready to change course if the weather turns. .
Winter 24-25 Market & Economic Commentary:
Like the crisp winter air biting at your face when you step outside of a warm home, the economic and political landscape of the United States has shifted dramatically. For some, it’s a welcome breath of fresh air; for others, it’s a bitter chill. With Donald Trump convincingly reclaiming the presidency, the tone in Washington has transformed from caution to action, hesitation to ambition, and from the old guard to a new frontier. Many business leaders who spent years navigating regulatory headwinds now feel a tailwind at their backs.
The stock market took notice, surging in anticipation of policy changes that would remove much of the trepidation many had thought characterized the previous administration’s approach to the economy—concerns over DEI and ESG mandates, heavy-handed regulation, big and active federal government, and increasing taxation on corporations and the wealthy. The pro-business small government pivot isn’t just theoretical; it’s already materializing in ways that will impact economic conditions for months and years ahead.
In addition to deregulation, the administration wasted no time pushing forward with policies aimed at growth: energy production incentives, extended lower tax rates, and the cancellation of the previously planned FLSA limit increase (an expected jump from a $35,568 to a $58,656 limit for annual salary exemption for overtime), a move that emboldens companies to hire rather than scale back on labor costs. Meanwhile, the rollout of the “Deferred Resignation”—aimed at reducing the size of the federal workforce—by the Department of Government Efficiency (AKA “DOGE”) could potentially flood the labor market with experienced workers just as AI-driven productivity gains begin to make their presence felt. More workers and more efficiency will be countered by optimism about hiring to meet the demand of an expanding economy. None of this takes into account the potential impact of tariffs and trade skirmishes, if not outright wars. These are big inputs to the delicate equation of economic acceleration. As with all policy changes, the law of unintended consequences looms large.
Higher growth expectations can come at a cost: rising inflationary pressures and stubbornly high interest rates. If Trump Tariffs 2.0 are long-lived and of meaningful magnitude, import-sensitive prices will surely rise in the near term. The Federal Reserve, already wary of cutting rates too soon, may now feel even more justified in holding rates steady or even tightening them again. The cost of borrowing remains a thorn for homebuyers, commercial real estate developers, and businesses alike, making capital-intensive expansions and personal home purchases less affordable and more challenging. This sets up a battle between market optimism and the realities of credit markets, a tension that will likely define the coming quarters.
How the Markets Fared
With deregulation and tax certainty returning to the headlines, equity markets initially roared ahead in Q4. The S&P 500 and Dow Jones hit new highs, with investors rotating out of defensive positions and into growth and industrial sectors. Companies poised to benefit from renewed energy policies and infrastructure investments saw outsized returns. The tech giants generally saw continued gains as well. Small caps and value stocks, which initially rallied around the election, sold off to finish the quarter generally unchanged. However, international equities, particularly Latin American emerging markets, retreated as tariff policies struck fear in investors and as commodity prices showed renewed volatility.
On the fixed-income side, bond markets struggled despite the Federal Reserve cutting rates a quarter of a point at each of the November and December 2024 policy meetings. However, they did decide to hold rates steady at the most recent January 2025 meeting, giving rise once again to the higher-for-longer narrative. As short-term rates were dropping, the 10-year Treasury yield spiked from 3.8% at the beginning of Q4 to nearly 4.6% at the quarter’s (and year’s) end. This pressured the prices for investment-grade bonds from both U.S. and developed markets, especially those of longer-duration assets, which saw losses proportional to their maturity exposures. High-yield corporate bonds bucked the trend, performing well amid renewed economic optimism, while emerging market debt saw mixed results.
Steady She Grows
Recent data from the Institute for Supply Management (ISM) paints a cautiously optimistic picture of the U.S. economy’s trajectory. The January 2025 Purchasing Managers’ Index® (PMI®) from the Institute of Supply Management® (ISM®) for the manufacturing sector edged into expansion territory at 50.9%, following 26 months of contraction. This uptick suggests a tentative rebound in manufacturing activity, and points to approximately 2.6% in real GDP growth for the coming six months. Though still showing steady expansion, the services PMI® dipped to 52.8% from December’s 54.0% reading, indicating a moderation of growth in service sector, indicating an upcoming increase in real GDP of just 1.6%. These mixed signals from key economic sectors complicate the outlook for gross domestic product (GDP), but compares similarly to the World Bank’s projections that U.S. GDP is set to expand by 2.5% in 2025. ISM’s latest reports underscore these challenges, highlighting the delicate balance policymakers must maintain to foster sustainable economic growth. However, the ISM data is reflective predominantly of the business-to-business environment. Of late, it’s the consumer who has driven all of U.S. GDP growth; in fact, it delivered more than 100%, with a 2.8% contribution to total Q4 GDP of just 2.3% net-net.
Room to Consume
Strong economic contribution from American consumers continues to defy expectations, driven by a tight labor market and sustained wage growth. The Conference Board’s Consumer Confidence Index jumped to 108.7 in January, up from 99.2 in the previous quarter, reflecting optimism about job stability and future earnings. Retail sales posted another strong quarter, particularly in discretionary sectors, as spending remained resilient despite higher borrowing costs. However, with inflationary pressures still present, consumer sentiment could shift if the Trump campaign promises of lower prices don’t bear out in reality, further eroding households’ purchasing power. When looking at the average household, Americans don’t seem to be overextended. An 11.7% debt service burden is still historically low (if you throw out the stimulus years of COVID). But that’s the average. The rate of default, especially on credit card debt and auto loans, is approaching levels not seen since we were entering (or exiting) the Great Financial Crisis in 2007. There clearly is a subsection of American consumers that is in trouble, and that’s with a strong economy and with jobs aplenty. The ultimate question is, will these defaults spread into a contagion, especially if the economy were to falter?
Inflation: Back from the Dead?
While inflation had been on a downward trajectory, recent data suggests the battle isn’t over yet. Core CPI (ex-food and energy) rose 3.3% year-over-year in December, up slightly from the prior quarter’s 3.2%. The Producer Price Index showed a similar trend, climbing to 2.8%—a warning sign that price pressures may not abate as quickly as markets hope. The Fed now faces a delicate balancing act: cut rates too soon, and inflation could reignite; hold too long, and economic momentum may stall. With tariffs likely to work their way into consumer costs, a print above 4% for core-CPI is a real possibility in the first year of the new administration.
Solid Foundation
The housing market is once again regaining momentum. Existing home sales rose slightly in December to an annualized rate of 4.2 million, up 2.2% from the prior quarter, an unusual rise for this time of year. Inventory levels declined to 3.3 months of supply (down from 3.8 months in November)—well below the six-month threshold that would indicate a balanced market. The surge in activity combined with tight supply drove the median existing-home price for all housing types in December to $404,400, up 6.0% from the same time last year. This strength flies in the face of low affordability due to persistently high mortgage rates, which remain nearly at a decade high. If the economy heats up, then affordability may improve for some buyers. If it cools, then the Fed will likely lower interest rates, thus making mortgages more affordable. Until more supply hits the market, housing prices are in a “heads, owners win; tails, buyers lose” scenario.
Labor Market: JOLTed but Still Strong
We had conjectured that October’s weak jobs report was influenced by both the two catastrophic southeastern hurricanes and the trepidation leading into a contentious presidential election. That appears to have been the case. The December (as well as the November) employment report showed a strong rebound from October’s anemic data. December’s Nonfarm Payrolls increased by a stronger-than-expected 256,000, leading the unemployment rate to dip back to a tight 4.1%. Average hourly earnings growth year-over-year held in at a strong 3.9%. These recent datapoints show that the labor markets will likely continue to be an upward drag on inflation, but one recent trend suggests this pace may moderate as the supply of skilled workers increases. The December JOLTS report showed a meaningful decline in job openings, down to 7.6 million from 8.2 million in November. Though 7.6 million still shows plenty of demand in the labor markets that has yet to be filled, these numbers are at post-COVID-19 lows. With DOGE policies reducing federal employment and AI-driven productivity gains easing labor shortages, the supply side of the labor market could be on the verge of a shift.
For What It’s Worth
U.S. large-cap equities, particularly growth stocks, are trading at stretched valuations that stand in stark contrast to their international counterparts. As of the end of January 2025, the S&P 500’s forward P/E ratio of 21.9x earnings was significantly above its 25-year average of 16.9x, while large-cap growth stocks sat at an eye-watering 29.2x, or 150.9% of their historical norm. For context, the S&P 500’s valuation premium over the MSCI All Country World ex-U.S. index has widened to 37.4%—far above the 20-year average of 17.9%. The disparity is further highlighted by emerging markets, which trade at a modest 12.1x forward earnings, and Europe, ex-UK, at 14.8x.
S&P 500’s forward P/E ratio is now more than one standard deviation above its 30-year average, sitting firmly in overvalued territory. In contrast, international markets remain closer to their historical averages, presenting a more attractive risk–reward dynamic. Investors chasing U.S. growth stocks should be cautious of mean reversion, particularly given the lack of earnings growth to justify such premiums. Meanwhile, undervalued regions like Europe and emerging markets offer compelling opportunities for those willing to look beyond U.S. borders… and have the patience to wait for the cycle to turn.
PieringAhead
In my Fall 2017 market and economic commentary, I noted the parallels between the pro-business, deregulation-focused policies of the first Trump administration and those of the William Harding administration in the early 1920s. Then, as now, an economy emerging from a heavily interventionist period was met with an administration eager to reduce government involvement and cut taxes. The result? A burst of economic growth that led to the Roaring Twenties—until it didn’t.
Harding’s policies fueled rapid expansion but also sowed the seeds of instability, as speculative excesses and loose financial conditions led to an eventual reckoning. Today’s situation is not an exact replica, but the lessons remain relevant. The enthusiasm in markets is warranted, but so is caution. Unchecked growth can bring inflationary risks, just as deregulation can lead to unintended economic distortions.
The Federal Reserve remains a wildcard. The market is betting on cuts, but with economic momentum building, the Fed may find itself in no rush to oblige. Meanwhile, businesses must navigate the push and pull of policy shifts, labor market changes, and technological disruptions from AI. And those disruptions and the winners (and losers) from the rush to build the new AI world are anything but certain. The dawn of the internet age and the rise and fall of the dot-coms taught us that.
The current moment is one of great promise and great uncertainty. The waves ahead may be choppy, but as always, we at North Pier will be watching closely, navigating the currents with a steady hand but ready to change course if the weather turns. .
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