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 have been on an unpredictable ride this year, 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 ago, equity investors and strategists braced for a potentially turbulent 2024, worried about the risk of a hard landing 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.
The chart below shows the daily movement of the ASX 200 Index over the course of 2024. The market is 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 is mainly due to the poor performance of the Materials sector. Iron ore prices have tumbled by over 23% in 2024, due to concerns about weak demand from China’s sluggish construction sector. Consequently, Australia’s big mining stocks have returned double digit negative returns, and the ASX Materials sector is down by near -12% for the quarter and -13.7% for the year. Offsetting the poor performance of the miners has been 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 ASX 200 was touching new highs right up to the 10th of December when the RBA had their 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 revise when Australia may get a rate cut, pushing the date back well into 2025. Waiting for the Australian cash rate to come down feels a bit like waiting for Godot to arrive…
On the other hand, the US has seen three rate cuts to boost market sentiment. This started with a 50bp cut in September, followed by 25bp cuts in November and December. These expected cuts, and the election of Donald Trump with policies that included further tax cuts and deregulation, saw 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 stating they will rein in the number of cuts expected in 2025 to two, signaling greater caution over how quickly borrowing costs can be reduced. The market also viewed Trump’s tariff plans as potentially inflationary, negating the case for monetary easing and prolonging further rate cuts. Despite the interest rate cuts, longer term bond yields have been rising in expectation that inflation may remain stubbornly high.
While the US stock market returned a remarkable 25% for the full year, between Christmas and New Year the S&P 500 fell by 2.6%, while the tech heavy Nasdaq index fell by 3.5%. Overall, the index is up 2.4% for the quarter, but it was a quiet end to a strong year.
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 is down -9.2% over the year, but all of that has come in the last quarter where the AUD has fallen by -10.7%.
In Aussie 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). Once again, the US market has been driven by a handful of mega cap tech stocks on the Nasdaq. The largest of these, Nvidia, is up 280% for the year. But other developed markets have had strong returns, with the broad MSCI World Index up over 30% for the year, and the Emerging Market index returning 18% for the full year.
Europe’s economy continues 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 this year ahead of the US Federal Reserve (Fed), hoping to kickstart the eurozone economy.
In China, the government has launched a massive stimulus program designed to reverse chronic weakness in the country’s real estate market and slowing industrial production. China’s growth-oriented policies include interest rate cuts, mortgage rate reductions, and an aid package to help local governments deal with growing debt burdens. A cloud hangs over China’s role in international trade as the incoming Trump administration has vowed to raise tariffs on Chinese imports.
While the changes in interest rates have been mostly been expected by the market, longer term bond yields have been volatile. The December quarter has seen a big rise in 10 year government bond yields in the US and Australia. Yields in the US and Australia are slightly up from where they were at the start of the year, so bond returns are fairly muted – returning less than cash for the year. But with 10 year yields around 4% there is plenty of room for bonds to provide protection in a balanced portfolio if equities do have a big correction.
Summing up, despite a holiday slowdown in the last weeks of December it’s been an excellent 12 months in Australian and International equities. A diversified, balanced portfolio has had another year of double digit returns. As 2024 has shown, forecasting what markets will do in the next 12 months is fraught with danger. The best approach is to stay disciplined in a diversified portfolio that has been designed to meet your long-term financial goals.
Dr Steve Garth
January 9th, 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 he 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, a Master of Applied Finance.