Welcome to the world, Generation Beta.
The babies born 2025 through 2039 are the newest generation, coming after Gen Alpha.
They’re the first generation to be born into a world powered with AI, just as Gen Z was the first born into a world with ubiquitous internet.
They’ll soon be rolling their eyes and saying, “OK Millennial,” while we reminisce about chat rooms and cassette tapes.
We’re deep into January, and already the headlines are swirling with predictions about the year ahead — and the future these kids will inherit.
Your investment decisions today will shape not just your trajectory, but theirs. So let’s take stock of where we’ve been – and 2024 was anything but ordinary.
Let’s start with the big picture: 2024 gave us a fascinating economic paradox. Looking at the five major indicators:
✅ The U.S. led global GDP growth
✅ The S&P 500 soared
✅ Inflation cooled to between 2-3 percent
✅ Unemployment stayed near historic lows
❌ Government deficits reached worrying levels
Four out of these five indicators paint a picture of remarkable strength.
Yet throughout the year, there was an intense undercurrent of caution from some of the biggest voices in finance, warning that we weren’t out of the woods.
Why the disconnect? Because 2024 taught us that everything – from market swings to policy decisions – hinges on the slightest of edges.
The Edge Effect
We saw this principle play out in the financial markets in ways that would have been unthinkable a generation ago.
Gambling exploded to unprecedented levels, with sports betting alone reaching $150 billion in revenue — up from just $7 billion in 2018.
Why? Simple: what was once illegal everywhere except Nevada is now permitted in most states.
The cultural shift is stunning: 4 in 10 Americans now place sports bets, but it doesn’t stop there.
We’ve developed an appetite for wagering on the slimmest of margins — the smallest of edges — in everything from up-and-down-ballot elections to the Mike Tyson vs. Jake Paul boxing match.
We know that edges drive everything. And we’re willing to bet on those edges.
Tragically, we also saw the effect of slight edges and tipping points reflected in the physical world.
The “edge effect” was on full display in the Atlantic hurricane season, which proved to be the second most destructive in recorded history, surpassed only by 2017.
The smallest shifts in atmospheric conditions triggered devastating consequences.
The final toll was staggering: $232 billion in damages and 401 lives lost. These are homes destroyed, businesses disrupted, and communities forever changed — all because of tiny variations in weather patterns that could have just as easily moved in a different direction.
Perhaps nothing illustrates this “edge effect” more clearly than what happened in the S&P 500 this year.
Nearly 40 percent of the S&P 500’s rise in value came from just seven companies — Apple, Microsoft, Amazon, Alphabet, Tesla, Meta and Nvidia, collectively known as the “Magnificent Seven.”
Think about that — in an index of 500 companies, just seven drove almost half the gains.
Some analysts are raising red flags about this concentration. After all, isn’t the whole point of an index fund to diversify risk?
But here’s a different perspective: the pattern of a small number of companies driving outsized gains isn’t new.
Indeed, as Michael Kitces explained in our interview in Chicago last summer, the entire purpose of investing in 500 companies is to improve your odds of including those winners in your portfolio.
It’s a feature, not a bug.
These top companies earned their outsized influence through strong business performance, strong earnings, and high expectations of future earnings. They won through countless small advantages that compounded as the digital age accelerated.
Edges added up, until the compounding edge advantages became unstoppable.
When Edge Cases Collide
Here’s a plot twist that captures the year’s strange dynamics:
The Fed started cutting rates in September, dropping from a top rate of 5.5 percent to a top rate of 4.5 percent during the last four months of the year. Hooray!
Yet something unexpected happened: mortgage rates actually went up during that same time.
WHAAAATTTTT?!
|
|
Blame it on the 10-Year Treasury yield.
The 10-year Treasury yield rose from 3.6 percent to 4.6 percent in the same period when the Fed was cutting rates.
Here’s why this is weird:
When the Fed cuts rates, we typically expect mortgage rates to fall. That’s the normal pattern.
But mortgage rates are closely tied to the Treasury yield — and this time, investors told us a different story.
|
|
The Fed cuts rates when they’re feeling confident about inflation being under control. It’s like giving the economy a green light to grow.
(Though “confident” might be overselling it — the Fed also pushed back their 2 percent inflation target from 2026 to 2027 and raised their 2025 personal consumption expenditure index forecast to 2.5 percent.
Translation: they think inflation will keep dropping, just not as quickly as before.)
But bond investors weren’t sharing that optimism. They were worried that inflation might stick around longer than the Fed thought.
And remember — if you’re tying up money into long-term investments, and you’re worried about inflation potentially destroying that value, you demand higher yields to compensate for that risk.
That’s why investors started demanding higher yields on long-term bonds, even as the Fed was cutting short-term rates. It’s a warning signal about inflation, and also about growing U.S. debt and deficits.
Since mortgage rates are tied closely to these 10-year Treasury yields, these went up too.
|
|
This split between official outlook and market sentiment became one of the year’s defining themes.
And it showed up in multiple ways.
We saw the split between the Fed and bond investors, as described above. We also saw the split between economic data (which was positive) and consumer sentiment (which was worried).
According to Gallup, 62 percent of Americans — that’s 158 million people — own stocks in some form (including mutual funds, index funds and ETF’s). Yet despite this widespread participation in a booming market, public sentiment remained remarkably pessimistic.
Your net worth is higher than ever. Yet you’re more financially stressed than ever. Why?
Here’s the disconnect:
While your 401(k) balance might look fantastic on paper (assuming you’re in equities), that’s not the same as feeling financially comfortable day-to-day.
Having strong asset values is fundamentally different from having healthy cash flow.
When your net worth is climbing but your wallet feels squeezed, that psychological tension creates a unique financial stress.
It’s like being house-rich but cash-flow tight — you’re wealthier on paper, but that wealth doesn’t translate to your daily experience of managing money.
This distinction between asset values and cash flow became one of the most important yet overlooked stories of 2024.
It helps explain why we could simultaneously have a huge gain in the S&P 500 and widespread economic anxiety.
Looking at your retirement account balance might make you smile, but that doesn’t make your grocery bill any less shocking.
The Stories Nobody’s Telling You About 2025 👀
The financial media is fixated on tariffs and trade wars; you can read about those anywhere. But what’s flying under the radar? What important stories are being overlooked?
Here are two things that could reshape the financial landscape in 2025 that nobody’s talking about (yet):
First, watch what happens with the Basel III endgame this summer.
These new rules are meant to make banks safer by requiring them to keep more capital on hand. Sounds good in theory, right? Unfortunately, it might actually make the system more fragile by tying up too much liquidity.
What could this mean for your wallet? Higher mortgage costs, pricier small business loans, and banks so busy checking regulatory boxes that they might miss real threats (like cybersecurity).
It’s like requiring a skier to wear so much protective gear that they can’t move gracefully down the slopes.
In September, in response to market pushback, the Fed suggested softening some Basel III endgame provisions. In early 2025, the Fed will start accepting public comment on “significant changes” to its bank stress tests and capital requirements.
Basel III endgame is scheduled to begin taking effect this summer (if it doesn’t get delayed). I suspect the mainstream financial media will start covering it when the weather gets warm.
Second, we’re watching an unprecedented transformation in how federal agencies work.
Two branches of government are now pushing to reduce federal agency power: the Supreme Court’s overturn of the Chevron Deference doctrine, combined with broader executive efforts to weaken agency authority, creates a level of uncertainty we’ve never seen before.
How does this impact your wallet?
Pop quiz: name one of the biggest federal agencies that relates to your money? [Cue game show music.]
That’s right, it’s the Social Security Administration!
Let me be clear: I’m not ringing alarm bells or suggesting your Social Security benefits are under attack. What I am saying is that as someone who avidly analyzes financial trends, I’m watching this development with keen interest.
When two branches of government make concurrent moves that could affect how one of our largest federal agencies operates, it deserves our attention – not our panic, but our attention.
Nobody — not even the experts — can tell you exactly how this will play out. When it comes to an agency that millions of Americans depend on, the only reasonable response is to stay informed and watch closely as these changes unfold throughout 2025.
Building Resilience in an World Driven by Tiny Edges
Here’s something that often gets overlooked in the noise of daily headlines:
While 2024 showed us how small edges create massive changes, it also revealed how we can build resilience against these shifts.
As I mentioned earlier —
This is the world Generation Beta will inherit. They’ll grow up taking AI for granted, just as many of us (ahem, Gen Z) take the internet for granted.
But we’re the ones making investment decisions today that will shape their tomorrow.
The key isn’t trying to predict every edge case or market movement. Instead, focus on building robust strategies that can weather whatever comes next:
- Develop deep expertise in specific markets rather than trying to predict broad trends. Your expertise is your personal edge — in your career, in your technical, creative and people skills, and in your menu of investments. We’ll talk more about this in an upcoming newsletter.
- Stay informed about structural changes (like Basel III and regulatory shifts) without letting fear or market timing drive decisions
- Remember that small, consistent improvements compound over time
The most powerful forces often start with the slightest shifts. We can’t control the edges that shape our economy, but we can position ourselves – and the next generation – to benefit from our own edges.
Until next time,
Paula
P.S. What surprised you most about markets in 2024? What’s on your mind as we enter 2025? Hit reply and let me know.
🎧 Ready to Dive Even Deeper?
In our economic review episode of the Afford Anything podcast, we expand beyond what we covered here to reveal:
- Massive scientific breakthroughs that got buried under headlines
- Why real estate might be your best inflation hedge
- A framework for building resilience in an edge-driven world
- …and insights you won’t find in mainstream financial media.
Listen on Apple Podcasts, Spotify or wherever you get your podcasts.
