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Markets in December
Summary
Global equities declined by -2.29% in December, missing the typical ‘Santa rally’, though 2024 delivered a remarkable 17.8% return, driven by the 'Magnificent Seven‘ which collectively rose 62.7%
These seven companies now account for over a third of the US equity market, which itself makes up more than two-thirds of the global market
US equities outperformed significantly in 2024, delivering 25.7% in sterling terms, compared to 5.6% for the UK, 3.3% for Europe, and 7.1% for emerging markets, with Artificial Intelligence (AI)-related stocks leading the charge
Technology and communication services sectors were the global leaders, delivering 34% and 35% returns respectively, while materials (-6.0%) and energy (3.9%) underperformed
Central banks globally shifted to cutting rates in 2024 after pausing hikes in mid-2023, with uncertainty surrounding the long-run equilibrium interest rate persisting amidst changing fiscal and economic conditions
Bond yields rose in December, capping a year of volatility; UK, US, and German 10-year yields rose 103, 69, and 34 basis points respectively in 2024
Credit markets performed well, with global investment-grade and high-yield spreads tightening to below long-run averages
Key upcoming data released next week includes Euro-area inflation (Tuesday), Federal Open Market Committee (FOMC) minutes (Wednesday), and US employment data (Friday), with unemployment expected to rise to 4.4% amid slowing job growth.
Markets last week
Equities
The typical ‘Santa rally’ didn’t materialise in December as global equities dropped -2.29% in US dollar terms. Despite this 2024 was an exceptional year for equities delivering 17.8%. The ‘Magnificent Seven’ were the overwhelming drivers, collectively delivering a remarkable 62.7%. These seven companies now make up over a third of the US equity market which itself makes up over two thirds of the global market.
Equities peaked at a record high in early December and although the market had shown signs of broadening in 2024 the final month was narrow with the same cohort of large cap momentum stocks outperforming.
For a UK sterling investor the US equity market delivered 25.7% in 2024, the UK returned 5.6%, European equities managed only 3.3% and Emerging markets delivered 7.1%. 2024 will be remembered as both a year of narrow US exceptionalism and a year where AI related stocks dominated.
From a global sector standpoint technology and the technology related communication services sectors reigned supreme delivering returns of 34 and 35% respectively. Financials also performed well delivering 27% while materials (-6.0%), health care (3.2%) and energy (3.9%) were laggards.
Central banks
2024 was the year where central banks were expected to start cutting rates and easing policy and this turned out to be the case. The European Central Bank (ECB), the Federal Reserve (Fed) and the Bank of England, amongst others cut rates as anticipated having been on pause after they finished hiking in mid-2023.
The big question central bankers now face is what is the new equilibrium long-run interest rate i.e. at what point should they stop cutting? In answering this question policy makers will have to contend with the following three key conundrums and consider each of their implications on inflation:
How will respective economies perform in 2025?
What are the implications of fiscal policies?
How will bond vigilantes react to fiscal threats?
There is an unusual amount of uncertainty here as monetary policy expectations have been changing almost as much as base rates themselves. Currently economists see interest rates being cut to circa 3.5% in the UK and the US and to 2.15% in the Eurozone by the end of 2026.
Fixed income
Yields rose in December, capping a year that was characterised by volatile and rising yields. 10-year yields in the UK, US and Germany rose 103, 69 and 34bps respectively over the year. Currently 10-year UK and US treasury yields are both at 4.6%.
Upward pressure on yields towards the end of the year came as economic data and inflation surprised to the upside and as central banks, particularly the Fed, were more hawkish than expected in the final meetings of the year.
Credit markets performed well in 2024 with spreads tightening consistently. Global investment grade spreads are currently at 0.88% vs a long-run average of 1.41% while global high yield spreads are at 3.18% vs a long-run average of 5.44%. In 2024 global high yield credit hedged to sterling returned 10.4% outpacing global bonds which managed 3.04% and UK Gilts which lost -3.32%.
The week ahead
Tuesday: Euro-area inflation
Our thoughts: Inflation is expected to have ticked higher in December thanks to rising fuel costs and base effects – this is not expected to last and is unlikely to worry the ECB Governing council given the general trend of economic weakness and disinflation.
Wednesday: FOMC minutes
Our thoughts: The minutes from the latest FOMC meeting will shed light on how policymakers’ outlooks have changed given the policy agendas of the incoming Trump administration and recent data.
Friday: US employment data
Our thoughts: Unemployment in the US is anticipated to rise to 4.4% as it has become harder for Americans to find new jobs as hiring has dropped. Nonfarm payrolls is expected to show a slowdown in the number of new jobs in December and Bloomberg economists believe that the official data is overestimating the real pace of job growth by between 90k and 100k per month, as a result they expect the unemployment rate to continue to rise in 2025.
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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. Past performance and future forecasts figures are not a reliable indicator of future results.
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