It has been a year of record stock market highs, geopolitical tensions, elections, and speculation around interest rates. The December quarter saw three cuts to the cash rate from the Federal Reserve and the election of Donald Trump. Markets finished with a holiday sell-down, providing a quiet end to a dramatic 12 months that was highlighted by the continuing dominance of US shares.
Financial markets were on an unpredictable ride in 2024, driven by escalating tensions in the Middle East, Russia’s war with Ukraine, China’s economic wobbles, and Donald Trump’s sweeping election victory. For the most part, though, they tended to ignore the global uncertainties and continued to trend higher.
A year earlier, equity investors and strategists had braced for a potentially turbulent 2024, worried about the risk of a hard landing (a sharp economic slowdown rather than a gradual one) for the US economy, and interest rate cuts that could come too late to prevent it. Few anticipated that stock markets around the world would be hitting record highs by December.
Australian Market Performance
The chart below shows the daily movement of the ASX 200 Index over the course of 2024. The market finished up 11.4% for the year, but fell 3.3% in December, wiping out the gains made in October and November.
The negative return in the quarter was mainly due to the poor performance of the Materials sector. Iron ore prices tumbled by over 23% in 2024, driven by concerns about weak demand from China’s sluggish construction sector. Consequently, Australia’s big mining stocks returned double-digit negative returns, and the ASX Materials sector finished down nearly 12% for the quarter and 13.7% for the year. Offsetting the poor performance of the miners was Financials, the largest sector in the ASX 200 Index. The big banks returned 5.9% for the quarter and an impressive 33.7% for the year.
The RBA and the Australian Economy
The ASX 200 was touching new highs right up to 10 December, when the RBA held its final meeting of the year, leaving the cash rate unchanged at 4.35 per cent for the ninth consecutive time amid stubborn inflation and faltering economic growth. Just two days later, Australia’s unemployment rate unexpectedly dropped to 3.9%, one of the lowest in the world. Despite slow growth in the economy, the strong labour market had economists revising when Australia might get a rate cut, pushing expectations well into 2025. Waiting for the Australian cash rate to come down felt a bit like waiting for Godot to arrive.
US Markets and the Fed
The US saw three rate cuts through the quarter to boost market sentiment: a 50 basis point (bp) cut in September, followed by 25bp cuts in November and December. These expected cuts, along with the election of Donald Trump and policies that included further tax cuts and deregulation, drove a strong December rally. The S&P 500 Index finished the year close to a record high, with one of the strongest annual gains on record.
The last rate cut in December was accompanied by the Fed signalling it would rein in the number of cuts expected in 2025 to two, indicating greater caution over how quickly borrowing costs could be reduced. The market also viewed Trump’s tariff plans as potentially inflationary, negating the case for further monetary easing. Despite the rate cuts, longer-term bond yields rose in expectation that inflation might remain stubbornly high.
While the US stock market returned a remarkable 25% for the full year, the S&P 500 fell by 2.6% between Christmas and New Year, while the tech-heavy Nasdaq fell by 3.5%. Overall, the index finished up 2.4% for the quarter, a quiet end to a strong year.
The Australian Dollar and Global Markets
The Australian dollar ended the year below 62 US cents, down from 68 cents at the start of the year, as the weak domestic economy, concerns over China’s outlook and a stronger US dollar took their toll. The Aussie finished down 9.2% over the year, but all of that decline came in the last quarter, where the AUD fell by 10.7%.
In Australian dollar terms, the rest of the world doesn’t look that bad. In the chart below, the US is the clear standout, returning over 37% for the year in AUD terms. Once again, the US market was driven by a handful of mega-cap tech stocks on the Nasdaq. The largest of these, Nvidia, was up 280% for the year. But other developed markets also had strong returns, with the broad MSCI World Index up over 30% for the year, and the Emerging Markets index returning 18% for the full year.
Europe’s economy continued to ride the edge between expansion and contraction, with expected growth around 1%, weighed down by the war in Ukraine, high energy prices and close ties to China’s sluggish economy. In response, the European Central Bank (ECB) started cutting interest rates ahead of the US Federal Reserve, hoping to kickstart the eurozone economy.
In China, the government launched a massive stimulus program designed to reverse chronic weakness in the country’s real estate market and slowing industrial production, including interest rate cuts, mortgage rate reductions, and an aid package to help local governments manage growing debt burdens. A cloud hung over China’s role in international trade as the incoming Trump administration vowed to raise tariffs on Chinese imports.
Bonds and Interest Rates
While changes in interest rates were mostly expected by the market, longer-term bond yields were volatile. The December quarter saw a big rise in 10-year government bond yields in the US and Australia. Yields in both countries finished the year slightly up from where they started, so bond returns were fairly muted, returning less than cash for the year. But with 10-year yields around 4%, there remains plenty of room for bonds to provide protection in a balanced portfolio should equities face a significant correction.
Looking Back on 2024
Summing up, despite a holiday slowdown in the last weeks of December, 2024 was an excellent 12 months for Australian and international equities. A diversified, balanced portfolio delivered another year of double-digit returns. As 2024 showed, forecasting what markets will do in the next 12 months is fraught with danger. The best approach remains staying disciplined within a diversified investment strategy designed around your long-term financial goals, guided by an evidence-based investment philosophy rather than short-term forecasts.
If you’d like to discuss how your own portfolio is positioned heading into the next quarter, get in touch with our team.
Dr Steve Garth January 9, 2025
Dr Steve Garth PhD, M.App.Fin., BSc., BA. is the Principal of Principia Investment Consultants and works with Capital Partners assisting with communications.
For nearly two decades, Steve played a key role in helping grow the Australian arm of a global asset manager. During his career, he managed Australian and global equity portfolios, managed the Asia Pacific trading team, and for the last 10 years managed the firm’s fixed interest strategies.
Steve received his PhD in Applied Mathematics from the Australian National University. He also holds a BSc in Mathematics and Physics, a BA with majors in History and Politics, and a Master of Applied Finance.
