Income diversification for uncertain times

The US economy in 2024 demonstrated resilience, avoiding both hard and soft landings, and maintaining strong consumer strength due to a healthy labor market, wage growth, and high household net worth. Disinflation trends continued from previous years without a resurgence of inflationary pressures, allowing the Federal Reserve to begin normalizing monetary policy by reducing interest rates, which is expected to influence both the economy and financial markets positively.

Interest-rate volatility characterized the fixed income market, with the 10-year US Treasury yield experiencing fluctuations but remaining attractive for income investors. However, declining credit spreads in investment-grade and high-yield corporate bonds have reduced their appeal, while agency mortgage-backed securities present more attractive yields.

US equity markets saw significant gains, primarily driven by mega-cap technology stocks, although a broadening of the market toward the end of 2024 offered more diverse opportunities. The focus on forward valuation levels suggests that while some sectors have seen valuation expansions, others like high-dividend stocks remain reasonably valued, prompting a balanced allocation between equities and fixed income.

Looking into 2025, the US economy's resilient growth, supported by consumer spending and corporate profits, provides a favorable outlook, despite potential policy uncertainties from a new administration. The outlook remains positive, with expanded opportunities in both equities and fixed income, particularly in sectors such as information technology, health care, energy, consumer staples, and industrials.