January Market Update
No Santa Rally
The famed ‘Santa Rally’ - where equity returns in the final weeks before Christmas are thought to be higher than usual - did not materialise in December, with most asset classes in negative territory. Given returns over the year up until that point, perhaps a slight pull back in performance was to be expected. 2024 will nonetheless be remembered as a strong year for markets, with the seemingly unstoppable AI trend fuelling much of the momentum.
A mixed bag for interest rates
Most significantly, December delivered interest rate cuts. The Federal Reserve proceeded on their rate-cutting journey, bringing rates 0.25% lower, and into a 4.25-4.50% window. This reduction was highly anticipated and not particularly impactful, having already been priced into the markets. What did take people by surprise was Jerome Powell’s admission of the committee’s expectation that there will be just two further rate cuts in 2025. This is notably lower than had previously been projected - and lower than the market would like - sending stocks down and bond yields up.
Inflation risk and a robust jobs market caused a reset of 2025 expectations, with the Fed wary of boosting either unnecessarily. The latest inflation reading was 2.7%, compared with a 2% target.
In Europe, a strong economy is not a concern. The European Central Bank cut rates to 3% with a view to reinvigorating growth. As with China, Europe is in wait-and-see mode when it comes to potential Trump tariffs. Upcoming political changes and the ongoing Russia/Ukraine conflict mean caution persists around investing in the region.
In the interest rate holding camp were the UK and Japan. The UK is in a tricky situation. Inflation is still above target at 2.6% and wage growth is ticking along at 5.2%. If wages continue at that level, they have the scope to push inflation in an upwards spiral. All of this points to keeping rates where they are. However, the UK also had a second negative GDP growth month and saw Q3’s figure downgraded - ordinarily rate cuts would be a consideration to give the economy a boost.
Global highlights
China continues to roll out monetary and fiscal support and the 5% growth target for the year looks to be roughly met. The Emerging Markets region as a whole returned over 2% for the month. China was up nearly 4%, while South Korea – dealing with the fallout of a declaration of martial law, mass protests, and an ousted President – fell around 6%.
2024 surprises
With the exception of Europe ex-UK, most major equity markets delivered above average returns for the year, with the US the standout performer. 2024 was undoubtedly an upside surprise for markets given the economic backdrop – and a timely reminder that the best bet is generally to stay invested.
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Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Your capital is at risk and the value of investments, as well as the income from them, can go down as well as up and you may not recover the amount of your original investment.