The Fourth Quarter of 2024

‘TINA’

Aka, ‘There Is No Alternative’ to equities. While December was a bumpy ride for equities and bonds alike, last year was a year when equities delivered for investors much like they did in 2023. Developed market equities delivered double digit returns with the US equity market up 25% and mega tech companies leading the way – Tesla, Meta, Netflix, Amazon, Alphabet and Apple all appreciated by more than 30%. They were the major contributors to performance in Q4 too, aided by the artificial intelligence momentum.

Bonds, as measured by the Bloomberg Global Aggregate index, delivered a small negative return over 2024 due to concerns in Q4 about the stalling of lower inflation, especially in the US and UK but also in the Eurozone.

The key event for financial markets in Q4 2024 was the election victory that brought Donald Trump back to the White House as US President-Elect. His promises of illegal immigrant deportations, tax cuts and tariffs (seemingly the favourite word in his dictionary) caused concerns over how to finance his desired tax cuts and the inflationary impact of a combination of tariffs and a shrinking labour force, with bond markets taking it on the chin as yields rose (higher yields mean lower prices).

However, there had been enough inflation improvement for the US Federal Reserve to cut interest rates at its December meeting by 0.25%, following its 0.50% reduction in September. Consequently, long term bond yields rose while short term yields were anchored (often referred to as the ‘yield curve steepening’) by the prospect of further official rate cuts in 2025, albeit not to the same degree as had been previously anticipated. UK bond markets suffered a similar fate due to budget deficit financing concerns. From their low point in September 2024, ten year government bond yields in the US and UK rose at the year end from 3.45% and 3.65% respectively to just below 4.60%.

Back to equities and the place to be invested in Q4 and 2024 was US equities. Japan was the lesser spoken about success story, although the weakness and volatility of the Japanese yen took the shine off Japanese equity returns. While US equities and a small cohort of large tech companies stole the headlines, Japanese equities were also a good place to be invested. The Japanese TOPIX equity index was up 15.5% in 2024 in local currency (yen). The Japanese equity market continues to benefit from a focus on corporate governance improvement and return to shareholders. For example, many people will know of job-seeking businesses, Indeed and Glassdoor, both of which are part of Recruit Holdings, a Japanese company trading on the Tokyo Stock Exchange. Recruit’s share price rose over 90% in 2024.

Commodities were heavily influenced by the perceived lack of demand from a struggling Chinese economy, but positively impacted by the performance of gold which was up 27% in 2024. The ongoing conflict in the Middle East and Ukraine had little impact on financial markets although was obviously a help to gold.

The policy of central banks in developed markets to normalise interest rates was the catalyst for positive returns for much of 2024, but uncertainty about the path and magnitude of official interest rate changes affected fourth quarter returns.

The Bank of England chose not to follow US, Canadian and Eurozone counterparts, preferring to leave base rates unchanged at the final Monetary Policy Committee meeting of 2024.

The much anticipated US economic recession never materialised in 2024 with economic growth annualising at 2.6% for the first three quarters of the year (Q4’s growth is not yet available). The contrast in economic output in the US and the absence of it in much of the rest of the world helped to support US equities and the US dollar. The following graph from Marquee Finance by Sagar shows the appreciation of the US dollar index (DXY) from the end of October, just before the US Presidential election on November 5th, to the end of 2024.