2024 was another good year for tech stocks and equities overall
The year-to-date returns (as at 4 December 2024) show strong equity returns. This was led by the ‘Magnificent Seven’ of US mega-cap technology-led stocks driving equity outperformance. By contrast government bond returns were either side of zero. A dull year for bonds overall had a few exceptions, such as High Yield with their equity-linked performance characteristics.
This year’s chart is incredibly similar to the Closing Bell 2023 chart. A year of recovery in 2023 has been followed by another year of economic growth and equity gains in 2024, led by the US outperforming both expectations and the rest of the world.
Market Performance, year to date 2024
Source: Columbia Threadneedle Investments and Bloombers as a 4 December 2024. IG = Investment Grade, HY= High Yield, TIPS = Treasury Inflation protected Securities.
For this Closing Bell I review and mark my predictions from my Opening Bell at the start of 2024.
- US has enjoyed ‘immaculate disinflation’; UK and Europe to follow suit – 10/10 well done
- European growth to recover slowly in 2024 – 2/10 what recovery?
- UK set for better growth and much lower inflation – 9/10 yes, so far so good
- Lower interest rates make bonds attractive, equity outlook has improved and gold should shine – 5/10 equities yes, gold well done, bonds are no, no, no
That’s two correct and two could do better.
While I will save my specific predictions for my Opening Bell of January 2025, a review of economies and markets shows that most of these trends remain intact.
The stage is set for continued US outperformance, supported by rate cuts
US ‘immaculate disinflation’ is back on course. Falling inflation is leading to declining wage increases, even as real incomes rise. Declining inflation has also allowed the US Federal Reserve to cut rates, which will support growth in 2025.
The election of Donald Trump as President with Republican control of Congress dominates the news from the US, especially given his radical agenda. Our review of the likely impact on the US economy and markets suggests that the tax-cutting and deregulation will be positive for US corporate profits and that tariffs are likely to have a lower impact on inflation than feared.
The high and rising US national debt and budget deficits will be a major constraint on the new administration’s freedom of action. It is also a key risk for the economy and markets, especially as it is not an issue that the Republicans are focussed on.
Recession fears look overblown: Lending standards easing
US lending standards for small firms and US real GDP
Souce: Macrobond Senior Loan Officier Survey, as of 04 December 2024.
Eurozone economy to see slow steady recovery
The eurozone economy has disappointed expectations this year and continues to look quite soggy. This is because of the serious structural problems in Germany, which remain unaddressed by the government, stemming from its previous over-reliance on cheap Russian gas, automotives and exports to China.
But it’s not all about manufacturing or Germany. While these structural problems will remain a drag, we will have a stronger consumer in 2025, which should keep Europe out of recession. Employment has remained high and wage growth is still strong, so real incomes are rising. With consumers gaining confidence, we already see them starting to spend.
The European Central Bank is aggressively, at least for them, cutting interest rates. It is downplaying the significance of current high wage growth because it recognises the risks from the significant drag of structural issues on the economy.
Consumers in Europe are beginning to spend again
Eurozone retail sales volume, seasonally adjusted
Souce: Columbia Threadneedle Investments, Bloomberg and Macrobondas of 04 December 2024.
UK Budget to slow the pace of rate cuts while doing little to boost longer-term growth
While the UK’s version of ‘immaculate disinflation’ was marred by a technical recession at the end of 2023, employment continued to rise and 2024 has seen falling inflation, rising growth and interest rate cuts.
However, a combination of rising fuel prices and a poorly received Budget has hit sentiment, and the consumer remains reluctant to spend. That is not enough to derail growth, but the more the UK economy splutters along, the more the failings of a tax-and-spend Budget become apparent. The shift of more resources into low productivity public spending just bolsters inflation and acts to reduce the pace of interest rate cuts by the Bank of England.
Reforms are desperately needed to reduce the drag on productivity and boost longer-term growth before these problems become overwhelming structural issues.
Record UK savings at recession - like levels
Souce: Columbia Threadneedle Investments and Bloomberg as at 30 September 2024. Horizontal lines show
Falling inflation an rates support equities - but there's a lot priced in
Falling global inflation and interest rates make equities attractive, especially in the US, but there’s a lot priced in. However, we are still positive on equities because history shows that expensive equities generally keep on getting more expensive. It is only in a broad market correction that these valuation discrepancies are resolved. Broad market corrections tend to be triggered by rising inflation, recession or a bond market crash. However, we don’t see either rising inflation or a recession on the horizon.
While government bond yields are higher than previously very-depressed levels, they come with significant risks. We like High Yield bonds even though the credit-risk yield-premium has narrowed, since that narrowing has been exaggerated by the declining duration of the market, which cuts default risk.
US equities are expensive for good reasons
US Equity Risk Premium (S&P 500 Earnings yield vs US 10y)
Souce: Macrobondas of 04 December 2024.
