Q4 2024 – market and economic insight

The final quarter of the year brought the much-anticipated US election, resulting in an outcome many had expected at the start of 2024. With confirmation that Donald Trump will be returning to the White House, this time with tech entrepreneurs by his side, US equity markets continued to climb.

The election also bolstered the US dollar, which strengthened significantly against the pound. In bond markets, the long-awaited "Fed pivot" sparked a reaction contrary to many investors’ expectations, with longer-dated bond yields rising.

Fixed income

The debate over the health of the US jobs market took another turn, as data once again looked positive, albeit uneven. This prompted some to question the necessity of a prolonged series of interest rate cuts in the coming year and the relative tightness of Federal Reserve policy. After inflation briefly returned to near-target levels over the summer, a subsequent rise above 2.5% raised additional questions. Following an initial rate cut in September, the Federal Open Market Committee (FOMC) implemented two more standard 25 basis point cuts in the quarter.

The US yield curve flattened, with the short end reflecting the near-term rate-cutting agenda, while the long end moved higher, posing challenges for longer-duration positioning.

Yields in the UK followed a similar pattern, capping off a volatile year for government bond markets.

Corporate bonds outperformed, as credit spreads narrowed further, leading many to question how much tighter they could realistically get, given that many are at or below post-Financial Crisis lows.

Source: AJ Bell, 01/01/24 to 31/12/24. Total returns represent those in GBP terms.

Equities

US equities were once again standout performers for the quarter, with returns for UK-based investors further boosted by a stronger US dollar. The return of Trump and the prospect of deregulation, especially benefiting technology companies, generated a wave of optimism and renewed confidence in "US exceptionalism."

Other major markets lagged over 2024 as a whole, with China being a notable exception. Throughout the fourth quarter, the Chinese government and policymakers frequently made statements about supporting the economy and markets. However, after an initial bounce in late September, investor enthusiasm waned as they awaited substantive measures.

Elsewhere, Japanese equities recovered respectably from summer volatility, delivering returns more in line with historical averages. The UK experienced a turbulent year but ultimately delivered solid returns. Europe, however, faced challenges due to renewed political uncertainty in Germany, the prospect of Trump-imposed tariffs, soft end markets in China, and disappointing corporate results.

Source: AJ Bell, 01/01/24 to 31/12/24. Total returns represent those in GBP terms.

Alternatives

Concerns about government debt sustainability and central banks' ability to control inflation persisted over the past couple of years, with gold performing well again in 2024.

More cyclical commodities like copper and oil experienced greater volatility as demand outlooks fluctuated. UK-listed property companies (REITs) faced difficulties as domestic economic growth slowed in late 2024, and the outlook for financing and valuations deteriorated with rising bond yields.

Source: AJ Bell, 01/01/24 to 31/12/24. Total returns, where applicable, represent those in GBP terms.

Outlook

Despite frequent concerns about politics and potential recessions, markets remained resilient in 2024. While 2025 appears to present fewer political obstacles at first glance, markets are often more affected by unexpected events than by anticipated ones.

As the year progresses, the focus is likely to be on the new US administration and its trade policies. However, the ability of major tech company CEOs to maintain favourable relations with Trump may be even more significant, given the high concentration within the US equity market.

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