MARKETS IN A NUTSHELL — FOR DECEMBER 2024

After a year-long party in US equities, the dancefloor lights came on in December — revealing a more cautious mood in global markets. US share and bond markets fell about 2% in the month. The pullback was mirrored worldwide. The exception was Bitcoin, which hosted the afterparty.

The US central bank cut interest rates by another 0.25% but adjusted inflation estimates upward, signalling a slower pace of interest rate cuts in 2025 than previously envisaged. The market was not pleased, prompting the selloffs.

Curiously, the US central bank has cut interest rates by 1% since September, yet the interest yield on US Treasury bonds maturing in 10 years’ time has increased by 1% over the same period. This divergence between short and longer term interest rates could reflect concerns that protectionist policies, tariffs, and restricted immigration may rekindle inflation down the line. Alternatively, rising US government debt levels are prompting bond investors to demand higher yields for greater long-term risk.

The ‘Trump Trade’ unleashed by Trump’s presidential win strengthened the US dollar and pressured other currencies. The rand was not immune, falling 4.5% in December after a strong run earlier in the year. Share market sectors that respond most to moves in long-term interest rates — like utilities companies and listed property — fell most as US borrowing costs rose.

Energy stocks — both traditional and renewable — were also victims of the Trump Trade. They fell on weak oil and gas prices and slowing global demand. The materials sector also took a knock, on softer commodity prices and subdued Chinese growth. Surprisingly, Chinese equities edged higher after Trump suggested smaller-than-expected tariffs on Chinese imports.

Technology stocks proved more resilient, continuing to defy gravity. Many investors now view ‘Big Tech’ — especially the Magnificent Seven group of companies — as the safest bet in any economic scenario. While their businesses are robust, expectations are high and valuations even higher.

Despite December’s dip, the index of the five hundred most valuable companies listed on US stock exchanges gained 23% for the year, nearly matching its 2023 gain. Historically, two consecutive 20%+ annual gains have been rare. In three of the last four occasions, the index fell over the following two years. The exception was in 1998, when the tech bubble only popped in 2000. On that occasion, the index lost 40% in the three years that followed.

While no one can predict the future, it’s a cautionary sign that a change in valuations — how much investors are prepared to pay for future earnings — rather than earnings growth accounted for nearly two-thirds of 2024’s global equity returns. Most of these share market gains originated in the US — largely from the Magnificent Seven group of companies, which gained 60% as a group. About 20% of the US share market returns last year came from chipmaker Nvidia alone.

We share the view of veteran investor Howard Marks of Oaktree Capital in his recent note to investors that ‘there’s no asset so good that it can’t become overpriced and thus dangerous.’ Marks also noted that when US markets have previously traded at today’s lofty valuations, the average annual return over the next 10 years ranged between plus 2% and minus 2% per annum.

As we head into 2025, markets remain priced for perfection against a backdrop of rising government and corporate borrowing costs, trade tensions, and elevated sovereign debt. We remain even more cautious about the levels of US market concentration and steadfast in better diversified global portfolios.