After an eventful 2024 that saw three rate cuts and a presidential election among its numerous economic developments, it’s the time of year when we consider what the next 12 months could bring. From interest rates to inflation to the equity markets, let’s look ahead to 2025 – while also looking back to the 1920s.

What Can We Learn From the 1920s?

The decade of the 1920s was characterized by economic prosperity, rousing optimism and cultural shifts. During that time, the U.S. economy accelerated on the heels of the second industrial revolution in part due to an increasing use of factories to improve efficiencies. By the late 1920s, 65% of households were serviced by electricity, up from about 20% 10 years earlier. With households’ access to electricity, refrigerators, washing machines, vacuums and radios followed.

A booming stock market also characterized the 1920s. Many investors figured it was a never-ending story. Stock prices reached elevated heights as the Dow Jones Industrial Average delivered 14% annualized returns from the start of the decade to the peak in August 1929. From the Dow’s low in the middle of 1921, the annualized return through August 1929 was 24%.

At its peak during the 1920s, the Dow reached $380 in August 1929. By July 1932 it had fallen to $42, which amounted to an annualized loss of 54%. Imagine investing $380 and watching the market value fall to $42 in less than three years!

Since January 1, 1900 until today, the annualized return on the Dow is 7%. If we exclude the last 15 years of elevated returns and go back to March 2009 during the Great Financial Crisis, the long-term return on the Dow drops to just 6%. (We are using the Dow because we can get information all the way back to the start of the 1900s.) The returns highlighted in previous paragraphs show some of the successes and agonies that occurred over the long term.

Why am I using this example? Consider this: In more recent years, the Dow saw its low in March 2020 sink to 18,590, and in late November was up over 44,000. That is a 21.6% annualized return, but the decade of the 2020s isn’t even half over yet. We do not know where interest rates will be a year from now. We also do not know whether the stock market will be up or down a year from now. What we do know is, just like what occurred in the 1920s, the market does not sustain 20% returns, and there will be a lull or correction at some point.

Looking Ahead to 2025 

We don’t know what the economic and market indicators will look like a year from now, but as I always say, we can use the (imperfect) data available to us to make forecasts about a range of potential outcomes. With that in mind, here is a list of my top 10 predictions for what could happen in 2025. 

1. The yield curve will return to “normally sloped,” where short-term interest rates are lower than longer-term interest rates. 
2. The era of ultra-low – and in some cases negative – interest rates is gone. The ultra-low interest rate environment that lasted from the Great Financial Crisis until 2021 was an aberration, and it will not return short of some huge disaster. Don’t hold your breath waiting for those 3% mortgage rates to return anytime soon. 
3. Speaking of mortgage rates: they will remain mostly between 6% and 7%, and the cost of housing will remain a heavy burden for first-time homebuyers because of interest costs and the underlying price of a home. Perhaps there may be some sort of expansion of homebuying assistance programs, but such programs would come with even more upward pressure on home prices if building did not increase proportionately. Tony Weick, president of Bell Bank Mortgage, shares his annual mortgage outlook in a separate article. 
4. Inflation will have a hard time returning to the Federal Reserve’s 2% target level. There are various measures for inflation and some could show it near 2%, but consumers will likely continue to have a “price” experience that exceeds the reported inflation rate. 
5. As I hinted at earlier, the equity market returns seen in 2024 will not be repeated in 2025. Consistent with the outline for long-term return averages, the stock market will need to take a breather. Valuations are better in developed foreign markets, but we still give the nod to the U.S. for the best expected return performance in 2025. 
6. It will take companies longer than expected to profit from artificial intelligence (AI). Until then, we will have to continue relying on a different form of AI – actual intelligence – to navigate the markets, the economy and asset allocation. 
7. Federal debt levels will continue to push higher along with the interest costs of supporting it. The increasing federal debt will make frequent headlines, but the political resolve to address it will be nowhere to be found. As Winston Churchill supposedly once said, “You can count on Americans to do the right thing after they have exhausted all other possibilities.” 
8. The demand for electricity from AI, crypto blockchain and the electrification of automobiles will be so great that it will take all existing generating resources to provide it and then some. This will make global carbon initiatives difficult to meet over the next three to five years. 
9. Bonds will be in a better position to deliver returns in the range of 3.5% to 5.5% following the last five years of dismal performance (Bell’s 5yr 401K bond model had annualized returns of 0.76%, compared to the popular Bloomberg Aggregate Bond Index, which had an annualized loss of -0.24%). 
10.  The Minnesota Vikings will win the Super Bowl! This last forecast is to remind you, as I like to say, that “those that forecast don’t know, those that know don’t forecast.”

Putting this all together, we expect the economy to continue growing in 2025. Consumers will become a bit guarded as interest rates take more of their earnings and the job market cools. AI will continue to be a buzzword, but its effects on the equity market will be more muted than in 2024, with stock returns expected to be closer to long-term averages. Bond interest income will be half to three-fifths of the return in the equity market. Expect inflation to remain part of the landscape, settling in around the 3% area. The Fed will look to continue reducing short-term interest rates, but perhaps less than the market currently expects. Our estimate is in the range of 3.5% to 3.75%.

When I started my investment management career in 1985, I had no idea I would be preparing an annual economic outlook 40 years later. The biggest compliment given to an investment management firm is to recognize them as still in business, which means they have competed among the best of them. Thank you for the opportunity to remain in business with you as our clients! Best wishes for a great 2025!

This article was published in the Q1 2025 issue of the Bell Wealth newsletter.