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Market Update | December

Stock markets in December felt as if they were readjusting for the year ahead rather than celebrating the previous 11 months. Whilst, sadly, we did not witness the annual ‘Santa Rally’ we usually experience in the month of Christmas, 2024 as a whole was a strong year to be invested.

Global Equities declined by 2.4% (in USD terms) over the month of December, fuelled by a rethink of the interest rate trajectory in 2025. Comments made by The Federal Reserve indicated we should expect interest rates to fall at a much slower pace than expected, with markets now pricing in two rate cuts over 2025 rather than the previous four. This raised investor concerns that the longer interest rates stay at their current levels, the greater the chance of an economic downturn.

However, these comments should not have come as a surprise to markets in our opinion, given the strength of the US economy and Donald Trump’s pending inauguration. Whilst inflation has fallen from the double-digit highs of a couple of years ago, forecasts for 2025 indicate that much of the world will remain above the 2% ‘target level’. In the US, for example, the current Consumer Price Index rose higher for the second month in a row to 2.7%; up from 2.6% in October and 2.4% in September.

Undoubtedly, we will also see a shift in US policy implemented by Trump’s administration and there are concerns this will have a reflationary effect. Whilst nothing is confirmed at this stage, Trump is a firm believer in implementing trade tariffs in order to protect America’s interests, which could ultimately add costs for the end consumer and will add inflationary pressures into the system. He has also talked about a sweeping mass deportation programme which could push down labour supply and increase the cost base for businesses.

The Bank of England also took a turn in playing Scrooge and held interest rates at 4.75% in December. UK inflation increased too in November, up to 2.6% (2.5% as of December 2024), which is worrying given the sluggish growth and pending increase in National Insurance Contributions come April. Conversely, the European Central Bank cut its deposit rate by 0.25%, seemingly less concerned with inflation risk.

With a new outlook on interest rates, Government Bond yields increased steadily over December and ended higher than they were in January 2024. This directly correlates to the cost at which Governments can borrow capital to support their annual budgets, hence the increased pressure we are seeing on Rachel Reeves this month.

We saw significant political instability around the world in December. In Germany, new elections will be held in February following the collapse of Chancellor Olaf Scholz’s three-party governing coalition. France’s Prime Minister Michel Barnier also resigned following a failed attempt to pass the budget. Canada’s Finance Minister resigned over Trump’s trade tariff threats, and if that was not enough, we even saw Martial Law briefly declared in South Korea for the first time since becoming a democracy in 1987, by their president, only to be overthrown and now impeached.

Political instability is one of several risks we must be aware of, along with geopolitical risks, as wars have continued in Europe and the Middle East. Interest rates and inflation will continue to be a key focus of stock markets in 2025, but at present it is difficult to look past 20th January when Trump enters office. Much like Trump’s first term, we anticipate uncertainty and a fluid investing landscape giving way to volatility. This is not to say we have a negative outlook for the next 12 months, as Trump is pro-business, anti-regulation and wishes to cut taxation – all of which should support the economy and boost growth.

Undoubtedly, it will be a fascinating 12 months and we look forward to keeping you informed of further developments.

If you would like to discuss any of the issues covered in this update or explore your own investment opportunities, please do not hesitate to get in touch with a MacDonald Partnership Independent Financial Adviser on 01463 242 242. 

Author: Douglas Sims, Integrity365

Published: 17th Jan 2025

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