World Market Summary
December is typically a mixed month for market performance and 2024 was no different, but the notorious ‘Santa rally’ failed to materialise. Bond yields rose and stocks fell on the back of the Federal Reserve’s (Fed) meeting, which even saw the price of coal fall as Santa made his rounds.
The month got off to a relatively strong start, with Bitcoin hitting $100,000 and the S&P 500 clinched a 57th all-time high. Broadcom stated its case for modifying the ‘Magnificent 7’ to the ‘Fateful 8’, with very strong Artificial Intelligence (AI) revenue guidance leading the stock valuation over $1 trillion.
The market exuberance quickly collapsed as volumes dwindled, with the Volatility Index (VIX) hitting its highest level since the August sell-off. This sentiment change came as Fed Chair Powell provided hawkish commentary amidst the decision to cut interest rates by a further 0.25%. Future rate cut expectations were reined in because of the largely strong US data and the Fed’s incorporation of “highly conditional estimates” of the potential inflationary impact of Trump policies. We were reminded just how conditional Trump’s policy implications are as he failed to extend the debt ceiling and provided mixed messages on China by inviting President Xi to his inauguration.
The US 10-year Government Bond bridged the gap to the UK 10-year Government Bond to finish 2024 above 4.5% and the dollar rose to its highest level in two years. This led to a further weakening of the yen, which helped the large number of export-driven stocks in the Nikkei, which rose close to 5% to claim the top spot for December amongst the major markets. Meanwhile, the dollar move was more problematic for emerging markets, with the Brazilian market dropping heavily after a currency crisis.
While there are cracks in the US consumer, highlighted by credit card delinquencies hitting their highest level since 2010, the near 7% fiscal deficit makes it easy to see yields rising further from here and asset management firm T Rowe Price anticipate yields rising as high as 6% in 2025.
Given the recent poor manufacturing and Gross Domestic Product (GDP) data out of the UK, it is easier to see the Bank of England (BoE) having to cut rates harder than the Fed, and therefore we continue to see UK Gilts as better value. Adding to the potential double-dip recession on the horizon, the trend of de-listing from the UK continued as the industrial equipment company, Ashtead Group, announced that it would be seeking a US listing.
Europe remained in the doldrums and market performance was further hindered by the continent’s largest company (by market cap), Novo Nordisk. The Danish giant’s drug trial for its latest GLP-1 drug failed to meet the 25% targeted weight loss and consequently saw its share price drop by the same degree.
France commenced the disarray with a no-confidence vote that ousted Prime Minister Barnier, but South Korea shortly took the baton. President Yoon was impeached after declaring martial law and a warrant has since been issued for his arrest. Both markets have struggled to recover since and it could be some time before the cloud of uncertainty clears.
United Kingdom (UK)
Festive cheer was in short supply for the UK markets and macro, with a raft of economic indicators, continued unease post-Budget and news from across the pond which combined to drag markets lower. The FTSE 100 slipped 1.29% and the FTSE 250 eased back 0.55% but both registered gains for 2024 as a whole.
October’s GDP reading offered little comfort to the government with the economy unexpectedly shrinking for a second month in a row falling 0.1% against expectations of 0.1% growth. The weakness was broad-based, with the dominant services sector stagnating and production and construction declining. Data over the coming months will indicate if this was business being put on hold before the Budget in the wake of policy uncertainty. The Office for National Statistics also revised down Q3 GDP from 0.1% to 0% and the latest flash composite Purchasing Managers Index (PMI) for November unexpectedly declined for the first time in 12 months, raising fears that the economy may contract in the final quarter.
With inflation coming in at 2.6% for the month, in line with expectations, the BoE held interest rates at 4.75%. However, three of the nine members did vote for a cut, pointing to a weakening labour market and sluggish demand environment. Other members noted the persistence of inflation and strength in earnings growth as reasons to hold. For 2025, analysts are currently forecasting four rate cuts but a range of possibilities exist in the wake of potential Trump tariffs or changes in global conflicts.
Elsewhere, retail sales picked up again in November, growing 0.2%, but falling short of the 0.5% growth expected. Strong sales from supermarkets helped offset a 4.3% contraction in e-commerce, the largest fall since March 2022. The UK housing market continued to offer strength with house prices rising nearly 5% in 2024 according to Nationwide. Similarly, Halifax noted the average home cost seeing its fifth consecutive monthly increase.
United States (US)
The US stock market wasn’t in the gift-giving mood as the post-election rally came to an abrupt end with the DOW Jones recording its worst monthly drop since September 2022, shedding 5.3% whilst the S&P 500 fell 2.4%. As investors have become accustomed to over the past few years, technology continued to outperform, with the NASDAQ gaining 0.5%, capping off a remarkable year which saw the index gain over 25%, again driven by the ‘Magnificent 7’ and AI enthusiasm.
Dominating markets again was the outlook for interest rates with the Federal Reserve significantly dampening expectations on the pace of rate cuts for 2025. The December cut of 0.25% was overshadowed by the post-meeting press conference in which Fed Chair Jerome Powell struck a cautious tone on inflation and signalled an expectation of two cuts rather than four for 2025. In better news, the core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation measure, came in slightly below forecast at 2.8%.
The Fed also revised up their growth forecasts for the US economy which is now projected to grow 2.1% in 2025 and the rate of unemployment also likely to be lower than previously envisaged. According to revised Commerce Department estimates for the third quarter of 2024, economic growth came in strongly ahead of forecast registering growth of 3.1%. This was fuelled by continued strength in consumer spending and an uptick in exports.
Elsewhere, strength was underlined in US service PMI which grew at its fastest pace since the Covid-19 re-opening in October 2021. Manufacturing data was, however, softer as export demand waned. Retail sales topped estimates rising 0.7% in November due to stronger auto sales and potentially purchases prior to possible tariffs. Finally, employment data painted a more mixed picture with job creating data slightly better but unemployment rate ticked up from 4.1% to 4.2%.
Europe
European stocks underperformed towards the end of the year due to concerns over potential US tariffs under the incoming Trump administration and heightened political instability in France and Germany. French political instability intensified after a vote of no-confidence ousted Prime Minister Michel Barnier, marking the first such event in over six decades. President Emmanuel Macron acted swiftly to restore stability, appointing François Bayrou, a centrist and former justice minister, as Barnier’s replacement. This move helped ease market jitters and mitigate the blowoutin government bond spreads. However, France faces a prolonged period of uncertainty, as new parliamentary elections cannot be called until July. Meanwhile, in Germany, Chancellor Olaf Scholz lost a vote of confidence in his coalition government, prompting an early federal election scheduled for 23 February 2025.
Economic data in Europe painted a picture of a slowing economy. Industrial output fell short of expectations, and factory orders continued to decline. The Eurozone Manufacturing PMI edged down, signalling ongoing contraction. Weak demand led to workforce reductions, particularly in Germany and France, as manufacturers remained cautious about future activity. PMI surveys also highlighted weaker employment prospects and rising pricing pressures. Meanwhile, a rebound in the services sector partially offset the overall decline, with services PMI’s across the Eurozone remaining in expansion except for France.
Emerging Markets and Asia
Chinese stocks rose as recent stimulus measures began to show results, with improved consumer confidence, a rebound in residential real estate metrics, and a World Bank upgrade of China’s 2024 GDP forecast to 4.9%. However, economic recovery remains uneven, as retail sales fell well short of expectations, and the Chinese Caixin Manufacturing PMI missed estimates. To bolster growth, authorities announced 3 trillion yuan ($411 billion) in special treasury bonds next year, triple earlier estimates, and pledged a more proactive fiscal policy with a higher deficit in 2025.
Brazilian assets fell sharply after dollar strength and the announcement of a fiscal package caused a currency crisis amidst concerns over fiscal sustainability. Economic and labour market strength has coincided with rising inflation expectations for 2024 and 2025. In response, the Central Bank of Brazil raised the Selic interest rate by 100 basis points and signalled similar hikes at the next two meetings. These moves have intensified fears of a vicious cycle of rising rates, widening deficits, and escalating debt, which pressured the currency and borrowing costs.
In South Korea, lingering political uncertainty weighed on markets following the surprise imposition and withdrawal of martial law. High public discontent increases the likelihood of an opposition victory in the next election, which could bring more expansionary fiscal policies.
Japanese equities posted strong local currency gains as exporters rallied on the Bank of Japan’s (BOJ) dovish stance. However, yen depreciation erased much of these gains for sterling investors. While the BoJ held rates steady at the December meeting, inflation’s rise to a three-month high has intensified pressure for policy tightening. Delays could risk painful corrections, particularly given Japan’s elevated debt burden.
Fixed Income
In December, developed markets saw bear steepening in their yield curves, led by a hawkish rate cut from the Federal Reserve. The Fed cut rates by 0.25%, as widely anticipated, but delivered more hawkish inflation and interest rate forecasts. Hopes for significant rate cuts in 2025 were dampened as officials projected only two cuts in 2025, down from the four forecasted three months earlier. Defaults on US credit card loans have reached their highest level since the Global Financial Crisis, reflecting growing financial stress among lower-income households after prolonged periods of high inflation. However, additional inflationary pressures from US tariffs are constraining the potential for more aggressive rate cuts. Expectations could shift if hiring slows or layoffs increase significantly, leading to a sharp rise in unemployment. Reflecting these dynamics, US Treasuries saw the 10-year Government Bond yield rise by 0.4%, while the 2-year Government Bond yield increased by less than 0.1%.
Across the Atlantic, the BoE held rates steady at 4.75% in a six-to-three vote, citing persistent inflationary pressures despite weak economic growth. UK Gilts continued to underperform, approaching levels last seen during the Truss crisis in 2022. Higher borrowing costs are worsening the UK’s fiscal outlook, fuelling concerns about the Labour government’s perceived lack of a coherent economic strategy. The Europe Central Bank (ECB) cut its policy rate by 0.25% to 3%, signalling a shift toward further easing by removing references to the requirement of restrictive monetary policy in its statement. Markets expect the ECB to cut rates by another 1.25% in 2025, bringing the rate down to 1.75%. However, looming US tariffs on European exports could push the ECB to deliver deeper cuts. Meanwhile, the Swiss National Bank surprised markets with a 0.5% rate cut, its largest since January 2015.
Moving further east, the Bank of Japan (BoJ) left its policy rate unchanged at 0.25%, citing uncertainty around the 2025 wage negotiations and the potential impact of US policy shifts under President-elect Trump. The yen faced renewed selling pressure as investors reacted to these uncertainties, alongside concerns that the BoJ may be falling behind the curve.
Alternatives
Oil ticked up close to 2% over the month to finish the year with little changed from where it started. The positive move in the oil price came after China’s factory activity expanded for a third consecutive month and President Xi stated that the country remains on track to meet its 5% GDP growth target. China continues to be the largest importer of ‘black gold’ and consequently greater optimism about the economic recovery from China continues to generate upward pressure on the oil price. However, the extent of any bull run continues to be tested by the five million barrels of excess supply that OPEC+ continues to occupy, alongside the potential for Trump to instigate an end to the war in Ukraine.
Bitcoin or ‘digital gold’ took the spotlight away from its physical counterpart in December as it hit the $100,000 level for the first time. Gold surpassed $2,750 early in the month before offsetting these gains to drop back close to $2,600 after the Federal Reserve guided for fewer rate cuts in 2025. Given that gold provides no yield, there is a higher opportunity cost from holding it in a higher interest rate environment. However, there remains ample interest given its attractive characteristics as a lowly correlated, geopolitical and inflation hedge. More recently, central banks have also been utilising it as an alternative store of capital outside of the dollar. The precious metal finished the month down 2%, but has still managed to outperform the S&P 500 in 2024 with an impressive 26.6% gain.
Properties
UK house prices finished 2024 on a strong note, rising 4.7% compared to December 2023. Housing market activity steadily increased throughout the year, with monthly mortgage approvals for house purchases consistently rising, surpassing pre-pandemic levels by year-end. While prices remained just below the all-time high seen in the summer of 2022, they stayed elevated relative to average earnings. This was further exacerbated by record rental growth, which hindered savings and borrowing costs that remained well above historical levels.
Looking ahead, forward-looking indicators suggest that house price inflation will likely continue to accelerate in 2025. However, borrowing costs are expected to keep demand in check, as the overnight swaps market on which mortgages are priced has remained volatile since the October Budget and November’s US election.
As the economy continues to recover, we anticipate a gradual improvement in affordability, driven by a combination of modestly lower interest rates and earnings growth outpacing house price increases. We also expect housing market activity to gradually strengthen, with a potential surge in transactions in the first three months of 2025, as upcoming stamp duty changes may prompt buyers to bring forward their purchases to avoid the additional tax.
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Important Information
All Index data figures are sourced by Morningstar and correct as at 31 December 2024, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.