January 4, 2025
Although the much anticipated “Santa Claus Rally” was MIA for the stock market, it did not stop 2024 from being another impressive year. Global stocks rose by 17.5% in 2024 in dollar terms, marking the second consecutive year of double-digit returns. The continued strength of the US economy helped developed market equities achieve total returns of 19.2%. In 2024, the US economy showed a marked divergence from other major regions with the S&P500 ending the year at +25% performance. Despite concerns during the summer, US economic exceptionalism remained largely intact. In emerging markets, a late surge in Chinese equities, combined with strong performance in India and Taiwan, boosted emerging market equities, which returned 8.1%. In the fixed income sector, bonds were negatively impacted by the shifting interest rate environment, with 10-year yields rising in both the US and Europe. Central banks in developed markets began normalizing policies in 2024, but persistent growth and stubborn inflation led markets to scale back expectations for rapid rate cuts, especially in the US. The combination of a strengthening dollar and rising yields caused global investment-grade bonds to post negative returns of -1.7% for the year while while global government bonds fell by 0.7%. Commodities were held back by weak demand in China and the broad commodity index delivered 5.4%. However, despite the US dollar reaching an all-time high on a nominal trade-weighted basis, gold posted its best performance since 2010 in dollar terms with 27% performance. The election of Mr. Donald Trump gave crypto currencies wings, with Bitcoin hitting a new record, briefly surpassing $100,000.
In December, most major central banks continued to ease policy rates. The US Federal Reserve lowered its target rate to the 4.25-4.50% range and projected two additional rate cuts in 2025, down from the previous forecast of four. In Europe, the Bank of England kept its base rate at 4.75%, following a split decision. In contrast, the European Central Bank showed less concern over inflation risks, reducing the deposit rate to 3%, while the Swiss National Bank made a larger than-expected cut, lowering its main interest rate to 0.50%.
US economic data generally remained upbeat: consumer spending was robust, jobs growth rebounded following weather-related disruptions, and business surveys showed a buoyant services sector. The Composite Purchasing Managers’ Index (PMI) was 54.9. The US economy added 227,000 jobs in November, and gross domestic product (GDP) grew by 3.1% in Q3. The fourth-quarter GDP estimates were tracking above trend, contributing to an overall optimistic year. However, inflation in the US remained persistent, with the headline rate rising to 2.7% (y/y), while core inflation held steady at 3.3%. The annual personal consumption expenditure (PCE) inflation edged higher to 2.4% from 2.3%, although it remained below the expected 2.5%, signaling progress toward the Fed’s 2% target.
Unlike the November FOMC meeting, where Chair Powell had stated that the presidential election would not impact the Fed’s monetary policy decisions, at the December FOMC meeting, the Federal Reserve’s stance turned more hawkish. Chair Powell highlighted a shift toward a stronger focus on balancing inflation and labor, in contrast to earlier concerns over softening economic data (such as labor market weakness). Powell also mentioned that some members were starting to factor in the potential economic effects of the incoming Trump administration, particularly regarding inflation. The Fed’s quarterly Summary of Economic Projections (SEP) in December showed modest adjustments to GDP and unemployment projections for year-end 2025. However, its outlook on inflation and the federal funds rate (FFR) was more significant. The year-end 2025 core PCE inflation forecast rose by 0.3% to 2.5%, marking the largest quarterly increase in over a year. Meanwhile, the FFR projection increased by 0.5%, from 3.4% to 3.9%, suggesting just two 25-basis point rate cuts in 2025, down from the previous projection of four. Overall, the US economy seems to be in a good shape with solid GDP growth (+2.7% YoY), low unemployment (4.1%), rising consumer spending (+3.7%), and decreasing inflation (core-PCE +2.8% YoY), dispelling any lingering recession concerns from the previous year’s rate hikes (+525bps).
Fixed Income:
It was a volatile year for interest rates and the market expectation of timing and depth of the rate cut cycle. At the beginning of 2024, markets anticipated seven 25 basis point rate cuts by the US Fed by year-end. However, over the next four months through early May, a more hawkish shift in expectations reduced that to just one 25 basis point cut. Mid-summer brought softer economic data, prompting a shift back toward a more dovish outlook. By year-end, the Federal Reserve had reduced the overnight federal funds rate by a total of 100 basis points across three meetings: 50 basis points in September, 25 basis points in November, and another 25 basis points in December. Throughout 2024, the short end of the Treasury curve declined, while the middle and long ends—starting with the 3-year and extending to the 30-year—moved higher. Amidst these interest rate moves, the strong performance of risk assets extended into the fixed income markets. High-yield bonds were the top-performing sector for the fourth consecutive year, as a combination of high all-in yields and tightening spreads pushed returns above 8%. In contrast, longer-duration investment-grade credit underperformed due to rising government bond yields. Government bonds were hurt by the evolving interest rate backdrop, with 10-year yields rising to a high of 4.63%, its highest level since May. As a result, global government bonds delivered a return of -3.1% over 2024. Credit spreads on the other hand continued to tighten, reaching levels s they’ve ever been in the last 26 years, leaving little room for further compression.
Despite a lackluster December stock investors enjoyed a strong year, with most indices in the US ending with top performance, driven by strong economic activity, robust corporate earnings growth, optimism over artificial intelligence and easing monetary policy from central banks. The top performers of 2024 included the Nasdaq Composite (+29.6%), Nasdaq-100 (+25.9%), and S&P 500 (+25%), driven by another stellar year from the Magnificent Seven (+67.3%). Over the past two years, the broad S&P 500 delivered a total return of 57.8%, its best two-year performance in over 25 years (since 1998), and the fifth strongest since 1970. The Nasdaq-100 rose 95.3%, marking its fifth-best two-year return since inception (38 years), while the Magnificent Seven Index gained an astounding 246.4%. Smaller-cap stocks also performed well, with the S&P Midcap 400 (+13.9%) and Russell 2000 (+11.5%) posting double-digit gains, though both lagged behind the larger, market-cap weighted indices. In 2024, ten out of the eleven large cap sectors posted gains, with four of them rising over 30%. The strongest performers were Communications (+40.2%), Technology (+36.6%), Financials (+30.5%), and Consumer Discretionary (+30.1%). On the opposite end, the sectors with the smallest gains were Materials (-0.04%), Healthcare (+2.6%), and REITs (+5.2%).
US mega-cap tech stocks once again drove global growth stocks to outperform, marking their second consecutive year of dominance with the “The Magnificent Seven,” contributing 53% of the index’s overall return. While the “Magnificent Seven” artificial intelligence (AI) stocks continued to deliver significant returns, market breadth is broadening as can be seen by the performance of notable thematics like the KBW Bank Index (KBWB ETF, +36.7%), Cloud Computing (SKYY ETF, +35.9%), Software & Services (XSW ETF, +25.8%), Cybersecurity (HACK ETF, +23.5%), and Aerospace & Defense (XAR ETF, +23.3%). Looking at corporate profits, it continued to grow, with S&P 500 earnings expected to rise by 9.4% in 2024 and 14.8% in 2025, according to FactSet. The earnings picture for the year again revealed the favored stocks in 2024 were not just hype. In 2024, the average earnings growth rate of Magnificent 7 stocks was 33.3%, while the rest of the Index averaged just 3.3%. Earnings expectations for 2025 however shows a slowing trend for the Mag 7 stocks but considerable expansion in earnings for the rest of the market. If so, this could provide sustenance to the expectations for a broadening of market returns.
2024 was a year of divergence. In contrast to the stellar performance of the US markets, Europe’s economic momentum sharply declined throughout the year. The manufacturing sector was especially impacted by a mix of high energy costs, restrictive regulations, weak export demand, and government-subsidized competition from China. This divergence was further exacerbated by political instability in both France and Germany, where fiscal challenges and the rise of populist parties eroded political consensus. Europe’s economic struggles and limited exposure to AI hindered its equity performance, and in a year marked by strong equity returns globally, the region underperformed with a return of just 8.1%. UK equities slightly outperformed their continental counterparts, posting returns of 9.5% as the economy recovered from the lows of 2023. This cyclical rebound was initially fueled by optimism following the election, but the autumn budget, which introduced higher-than-expected tax increases, dampened some of that positivity. In Asia, Chinese economic activity remained sluggish as the country struggled with falling property prices and weak consumer confidence. Investors were initially unimpressed by the government’s policy response. However, September’s more unified policy announcements helped reassure markets, and many believed that 2025 would bring the substantial stimulus needed to revive the economy. Chinese equities rallied in the second half of the year, finishing with returns of 19.8% for 2024. Meanwhile, sustained optimism about the end of deflation, a weak yen, and ongoing corporate reforms propelled Japanese equities to returns of 20.5%, making them the second-best performing major equity market of the year.
Metals had a more subdued performance in December, with gold trading sideways as inflation concerns lingered but was offset by a strong US dollar. Silver also showed modest gains, driven by industrial demand. Oil edged higher in December but was down slightly overall in 2024. The standout asset in December was Bitcoin that soared to a record high of over $105,000, spurred by signals from U.S. President-elect Donald Trump suggesting support for pro-cryptocurrency policies. However, by the end of 2024, the value fell back below $93,000, with analysts predicting short-term corrections before a possible new peak. Overall Bitcoin has surged over 190% in 2024. Overall, for 2024, Commodities faced headwinds from weak demand in China, with the broad commodity index posting a modest 5.4% return for 2024. Gold on the other hand had a strong annual performance ending the year with a 27.1% return, its best year since 2010, despite the US dollar rising to an all-time high on a nominal trade-weighted basis.
As the new year rolls on, the market outlook for the upcoming year is typically shaped by predictions regarding growth, inflation, and other economic indicators. However, for 2025, these are overshadowed by one individual — the return of Donald Trump to the White House. Even before he takes office on the 20th ofJanuary, the global markets are already feeling the effect of his policies. His expected pro-business policies are generating optimism, especially with regard to Corporate America and US assets. However, his tough stance on global trade has sparked concern, and his overall unpredictability is leaving the markets a bit uneasy.
Inflation is expected to remain under control, though it’s unlikely to meet target levels as Trump pursues trade barriers and adopts a stringent stance on immigration. Market participants are pricing in between 0 to 2 rate cuts for the year with the pendulum swinging with each incoming macro data and “Trump talks”. In Fixed Income, given the current tight pricing, potential increase in inflation and ongoing concerns over excessive government borrowing, this year may not be smooth sailing for Bonds. However, the starting yields are good, and bonds will continue to be a good source of income albeit with little room for yield compression.
Overall, the consensus outlook for 2025 is positive, fueled by the continued strength of the U.S. consumer, the prospect for further Fed rate cuts, and the confidence in pro-business Trump policies. Undermining this optimism are high valuations and uncertainty over the Trump administration’s actions regarding tariffs and immigration. This warrants for some caution and clients should temper expectations and brace for some potential market volatility.
Bonds continue to yield higher than cash. So, holding cash only as “dry powder” in the portfolio to take advantage of any potential pullback in the markets to accumulate quality assets is advised. Major Central Banks continue to cut rates, reducing the yield on cash.
