CIO's Market Watch – December 2024

December wasn’t a month for being jolly

Let’s start at home by having a look at the UK economy. If you have read anything I’ve written in the last four months or so, it hasn’t been optimistic on the outlook for the UK economy. I really am not one for saying “I told you so”, because it always comes back to haunt you and, in this case, there is no gratification to be gained from doing so.

The economic growth data, as expressed by Gross Domestic Product (GDP, the total value of goods and services produced) for the third quarter of 2024 showed the economy had grown by 0.0%, in other words, it hadn’t grown. This is somewhat historic, however, more recent data has looked even less promising than that. Retail sales in November were worse than anticipated and businesses have been cutting staff by the most since the midst of COVID as their confidence and spending plans fall sharply. Meanwhile, inflation has remained more prevalent than expected. All of this does not add up to much of a positive outlook for the economy for 2025.

For the world economy, the key is the US, and it remained in better shape than here, with the strong labour market keeping consumer confidence elevated. The focus was on news coming out of the Trump camp on cabinet appointments and possible policy measures. Key questions include the extent to which trade tariffs will be implemented and what the approach to business regulation and taxes will be in practice. As time passes, it does seem that policy will be more moderate than anticipated at the time of the election and it should be expected that it will be positive for the US economy.

Elsewhere, Europe is struggling, particularly Germany, not helped by political turmoil, a feature that has been mirrored in France and China, which has implemented its plans to provide support for its economy. It was not a year-end filled with positive news.

Are the central banks around the world helping out?

Yes, and no!

The US Federal Reserve Bank (Fed) cut interest rates by 0.25% in December but suggested that as the economy was doing well and inflation was a little higher than hoped, that they would fall modestly through 2025, perhaps taking into account an anticipated boost from the incoming President’s policies.

Meanwhile, the European Central Bank (ECB) also cut rates by 0.25%, as economic growth is difficult, whilst inflation is less of a problem. This combination would allow for more cuts through 2025.

However, the Bank of England (BoE) decided not join the Christmas party and left the base rate unchanged. Clearly the spectre of inflation was the major concern rather than a stagnating economy. It did, however, suggest that there was room for manoeuvre through 2025 if required.

I think that last point is important, not just for the BoE, but also for the Fed and ECB, which both have plenty of capacity to cut interest rates further to provide support for their economies if required, which it may well be.

It was quite a month for equity markets and they still surprise

What was a profitable year for equity investors ended with December being less so. The UK fell on the concerns over the economy that I mentioned above, although interestingly smaller companies’ share prices did better than large and medium sized ones, which indicates that investors are broadening their horizons away from what they have been focusing on for a number of years now.

Overall Europe was higher, with France leading the way, despite political problems. Meanwhile, Hong Kong rose on the implementation of China’s policy measures and Japan ended the year strongly.

However, just as the year was all about the US, so was December. The chart below shows the 2024 returns from the S&P 500 Index, which is considered to be the main indicator of the US equity market, and the giant companies that have become known as the Magnificent 7; Apple, Amazon, Alphabet (Google), Meta, Nvidia and Tesla, which are the 7 largest constituents of the S&P 500 Index.

S&P 500 Index and Bloomberg Magnificent 7 Index in 2024, rebased to 100

Source: Bloomberg data, 02.01.2024 – 31.12.2024. Rebased to 100 on 02.01.2024. The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

I won’t go into too much detail on this, as you will probably have had your fill of reading and hearing about this phenomenon. However, the “narrowness” of what has been driving the whole US equity market higher through 2024, i.e. 7 giant companies, became even more pronounced in December as they, yet again, outperformed. This was due to a number of factors, including investors’ ongoing buying of investment products that track indices, uncertainty over the economic outlook and faltering interest rate cut hopes, and the excitement over companies involved in Artificial Intelligence (AI). In December Tesla’s share price continued its dramatic climb resulting from Elon Musk’s involvement with the incoming Trump administration.

It is, however, reasonable to argue that there has been some broadening out of what is driving market indices higher. The AI frenzy has moved on from Nvidia to other AI related companies. For example, Broadcom, like Nvidia, develops semiconductors that are used in AI and it has experienced an explosion in demand for its products. Its share price was up nearly 40% in December alone, pushing it well through the magical USD 1 trillion in terms of market capitalisation (size) and making it the 8th largest company in the US. Some broadening out!

My only point here is that I find it very difficult to argue anything other than that these companies are expensive or very expensive relative to the rest of the index. Given their combined size and dominance in the overall equity market, there is, in my view, significant risk to markets as a result. Of course, there are many who think differently and they have been correct. These companies’ share prices may continue to rise, they are good companies, with good products, but each of them do face challenges as well as the valuation issue.

New Year coming #2

Last month I expressed hope that 2025 might be free from events that have caused economic and financial market strife over the last four years, starting with COVID. I fear that an unorderly unwind of the Magnificent 7’s pre-eminence could be one that hurts in 2025. It may well not happen though.

Very importantly, there is a long list of other investments that do not carry the same risks, and which look attractive across a range of asset classes, including equities and bonds. As ever, it remains important to have a diversified portfolio of investments.