Inflation, Interest Rates, and Market Performance: What You Need to Know for 2025

Amy: 00:01:00

Welcome to Money Roots, the podcast where personal finance gets personal.

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Each week, Amy and her guests dig deep into the world of finance, making it more approachable and understandable for everyone.

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No matter where you are on your financial journey, from savings and investments to budgeting and planning, we'll bring you practical advice, inspiring stories, and expert insights.

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We believe that everyone has the potential to grow a healthy financial future, and we're here to help you nurture it.

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So whether you're a financial guru or just starting to plant the seeds of your financial knowledge, this is the place for you.

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Get ready to uncover the tools and strategies that can help you thrive financially.

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So, without further ado, let's dive into today's episode of Money Roots.

Carrie: 00:01:49

So welcome to today's podcast.

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As a follow up to our last podcast that Amy and I completed, we wanted to talk about the market again.

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So last week it was Amy, Amy Arvine, and myself.

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And I'm Carrie Bean.

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I'm the Chief Investment Officer and one of the certified financial planners at Rooted Planning Group.

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that we're in as we approach: 2025

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There are a few numbers coming out in the next few weeks and I wanted to discuss those segments with you as well as the overall market.

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And then within each segment, we want to talk about and provide some action steps for you going forward.

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So the first segment is inflation and the Consumer Price Index.

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And the Consumer Price Index Report for November is coming out next week, December 11th.

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And as a reminder, the Consumer Price Index, or CPI for short, is a commonly cited measure of inflation.

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It uses a basket of goods and services to track price changes.

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And these can be items such as groceries, gas, clothing, etc.

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And in order to measure the underlying trend in inflation, one thing that economists will do is they'll talk about the core cpi.

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And the core CPI excludes items such as food and energy.

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The reason they do this is those items are kind of affected by weather and or political events.

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And with the core CPI inflation number, you can get a more stable of the underlying trends.

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So if you hear CPI or core cpi, that's sort of the differences.

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That core CPI can exclude some things to kind of give us a broader or a better picture.

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So looking at that, again, the number will come out next week.

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But there are signs that inflation continues to subside and that price pressures could gradually return to the Fed's target market of 2%.

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Inflation rates have improved dramatically over the past year.

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So we're hoping to continue that trend.

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me goes on and as we approach: 2025

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Your action item for thinking about inflation in the consumer price index is to take a look at your spending habits.

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Are there areas where inflation is pinching your wallet like groceries or rent?

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And if there are, take a look at your budget and adjust your cash flow so that your financial plan stays on track.

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So moving on to the second segment that we want to talk about is interest rates and the Fed's upcoming meeting.

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So that meeting, the Federal Reserve meets December 17th and 18th.

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And as a reminder, the Fed funds rate is the interest rate.

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The banks charge each other to borrow money overnight.

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Whenever the interest rate, whenever the rates rise, it makes items more, it makes money more expensive to borrow, which decreases the money supply and increases short term interest rates.

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So when it's lowered, it has the opposite effect.

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But right now the federal funds rate sits at 4.58% and this is down from 5.33% last year.

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While there is no way to know for certain what the Fed will do at the upcoming meeting, there is some prediction that the Reserve will cut interest rates for a third time this year.

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Recent inflation data showing the economy growing at a solid pace have raised some doubts that the Fed will bring down, will bring down rates as previously, as quickly as previously indicated.

Carrie: 00:05:44

So I know previously, you know, there were talks of more interest rates cuts, but it's kind of looking like, you know, obviously there's not going to be as, as many as everyone had had hoped Originally since September, the projections were showing four interest rates cut cuts for this year or interest rates cuts going into next year.

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But right now the market's projecting roughly around two cuts for next year.

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And again, we don't know.

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These are just projections.

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One thing economists agree on is the current rapid pace will not continue.

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sight and thoughts going into: 2025

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So your action item, if you have cash sitting around in a savings account that isn't earning very much interest, again, it's a time to check out some high yield savings accounts.

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And they're, you know, offering much better returns than historically they have in the recent history.

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And you could take advantage of that interest rate environment right now.

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Moving on to segment three and talking about the market performance and returns.

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November was a great month.

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s the best month we've had in: 2024

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The S&P 500, Dow Jones and the Nasdaq record reported 5%, 6% and 7.5%.

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Some notes the tech related stocks led that recent rally, but performance more recently broadened in many other parts of the market.

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Another thing to kind of keep in mind is US Stock valuations are above average due to the strong market rally over the past year and a half.

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Some notes from Morningstar regarding that.

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When we think about stock valuations and you know, what does that mean?

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So as of October 31st, the price to fair value metric of the US stock market was 1.02, representing a 2% premium to our fair value estimates.

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Just kind of meaning that you know, the valuation is a tad bit higher than you know what they're saying is the fair value.

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So it is kind of selling at a premium.

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Since the end of: 2010

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So that's something to keep in mind.

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Also, as the market valuation remains above fair value, we don't foresee much near term appreciation potential at the index level.

Carrie: 00:08:18

However, market dynamics are such that the market may be able to stay overvalued until earnings catch up to valuations.

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With that in mind, we advocate to remain market weight US equities at your target allocation, of course, based on your risk tolerance and investment objectives.

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If you don't know your risk tolerance or you don't know or you don't have any investment objectives, be a great time to maybe think about those things.

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But overall the stock market has performed extremely well since the Great Depression, which is nearly a century long period.

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Another thing to keep in mind is there will always be ups and downs and problems along the way.

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But throughout the 20th and early 21st century, you know, things are, you know, tend to trend upwards and we think you should focus on the long term in order to benefit from that growth.

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Your action item from this segment is review your portfolio allocation.

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And what does that really mean?

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It just means how are you invested?

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What are you invested in?

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How much of your portfolio is in stocks or equities, and how much of your portfolio is in fixed income such as bonds or CDs.

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So look at that and does that allocation align with your objectives and your tolerance?

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Are you overexposed to tech stocks after this year's rally?

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You know, quite a few people have been are you overexposed in another area?

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So your action item, consider rebalancing to align with your risk tolerance and goals.

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And if you don't know what your risk tolerance and goals are, that will be your action item.

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Learn those and include those.

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And finally, in sec in this last segment, let's talk about volatility and risk.

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So there are, you know, despite recent market gains, there are still risks that could shake things up.

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Some of these we've mentioned, you know, the Fed policy.

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If the Fed surprises markets with another rate hike versus lowering interest rates, we could see some turbulence.

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Another thing to keep in mind is the economic data I mentioned some of the reports, you know, such as CPI and the Fed funds and things like that.

Carrie: 00:10:32

But there's also job reports that could, you know, these reports could throw a curveball as well.

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And always geopolitical events, conflicts abroad could affect energy prices and market sentiment.

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So things to keep in mind, and again, no one can predict these things are when any of them are going to happen.

Carrie: 00:10:51

And volatility, it does feel unsettling.

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But it also is a chance for disciplined investors to stay focused on your strategy rather than to react emotionally.

Carrie: 00:11:02

And I feel like we say that over and over and over.

Carrie: 00:11:06

But it is very important to look at the facts and think, you know, what is your horizon?

Carrie: 00:11:13

If it is long term, you know, think through that.

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If your horizon is short term, then maybe you need to focus on a short term strategy that's a little bit different.

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If you do have more of a short term strategy, volatility, you know, can affect your portfolio a lot differently.

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So keep that in mind also.

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So your action item from this segment is to make sure your emergency fund is in good shape.

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So having three to six months of living expenses in an easily accessible account can give you peace of mind and prevent you from having to sell investments during a volatile, volatile time.

Carrie: 00:11:52

So with that in mind, you know, that particular sense was about, you know, investments.

Carrie: 00:11:57

But we do think everyone should have a three to six month emergency fund and access to cash when things come up.

Carrie: 00:12:05

There are surprises, but it's no surprise that there are surprises.

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Life happens all the time.

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So the action item is just to be prepared.

Carrie: 00:12:15

I hope you found that helpful.

Carrie: 00:12:18

Continuing on, talking about our market and take some of those action items and put them in place.

Amy: 00:12:25

You've been listening to Money Roots, your go to podcast for making personal finance accessible and approachable.

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Thanks for joining us today.

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Amy and her guests have enjoyed guiding you through the roots of your financial journey.

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Remember, whether you're planting new seeds of financial knowledge or nurturing the growth of your existing financial plans, Money Roots is here to support you every step of the way.

Amy: 00:12:50

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Amy: 00:13:03

A big thank you to the sponsor, Rooted Planning Group, for making this show possible.

Amy: 00:13:08

At Rooted Planning Group, they're committed to helping you cultivate a thriving financial future.

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Until next time, keep growing your money roots.