My expectations for the past year were featured in an article I released last January (“Some investment “thoughts” to start off the new year”), which has information on actual 2023 returns and – at the time – my expectations for 2024. In this article, I will look back at the year, focusing on:
a cursory overview of the U.S. economy and global financial markets in 2024, including the key drivers;
what I expected for 2024 last year at this time versus what actually came to pass; and
my expectations for the coming year broadly speaking
What drove markets in 2024
As with most financial market pundits, some of my guesses were right and some were wrong. I was generally in line with the Street though, which was expecting flat to slightly better US stock performance and lower interest rates, although I was not as optimistic as many investors who were expecting up to six reductions in the Federal Funds rate in 2024. I also (incorrectly) expected the U.S. economy to slow markedly and inflation to fall steadily. In reality, the U.S. economy remained remarkably resilient throughout the year, so much so that the Federal Reserve did not reduce the Fed Funds rate for the first time until September. U.S. joblessness worsened but not significantly, U.S. economic growth remained solid, and inflation fell albeit more slowly as the year wore on. As a result, U.S. corporate earnings remained strong throughout the year, providing a solid foundation for stock prices to push higher, ultimately culminating in another year of 20%+ increases in U.S. equity prices.
The secondary effect of the resilient U.S. economy was unexpected volatility in UST yields. The year started with pressure increasing gradually on yields during the first five months of the year. Yields then began to drift lower through the summer until mid-September. However, following the Fed’s decision to lower the Fed Funds rate by 50bps at the September FOMC meeting, yields started heading higher again (perhaps counter-intuitively), and gapped up further after the election of President-elect Donald Trump in early November. As we near year-end, intermediate- and long-term UST yields are now around 70bps higher than at the beginning of the year, leading to losses on the year for investors in intermediate and long-term USTs. One other thing to note regarding the UST market is that the yield curve normalised in late August, meaning that the inverted yield curve (2y-10y) that had characterised the UST market since July 2022 – believed in economic circles to be a sign of a pending recession (that never came) – gave way to a more normal upward-sloping yield curve.
The tertiary effect of exceptional U.S. economic performance was that U.S. assets performed much better than assets in international markets. I correctly predicted that rate cuts would come first in Europe, then the U.K. and lastly the U.S., a different order than most pundits were expecting at the beginning of the year. The combination of a “higher for longer” approach by the Fed coupled with resilient U.S. economic performance caused the U.S. Dollar to reverse course in late September, and to move sharply higher against Sterling and the Euro throughout the autumn. Although it increased its policy rate for the first time in 17 years in March, the Bank of Japan’s follow-through was virtually non-existent (aside from one more rate increase in July), causing the Yen to also reverse course in mid-September and weaken sharply against the U.S. Dollar through the remainder of the year. A weak Yen helped boost Japanese stocks, but questions remain as to when the BoJ will fall in line with its G7 peers as far as monetary policy. China was another market that could not be ignored, since it is the world’s second largest economy. China’s economy was struggling (vis-à-vis historical growth) and its stock market was in a performance funk for much of the first three quarters, only reacting finally to a series of government measures announced in late September to address underlying property market problems and stimulate growth. When and how much these pro-growth policies will help the Chinese economy remains to be seen, but investors are clearly encouraged, at least if measured by the performance of Chinese stocks since the stimulus measures were announced.
For those of you that read my blog, you should know that I never do wholesale portfolio rebalancing because I have convictions around my investments (even the wrong ones at times, unfortunately), and in any event, market-timing is a loser’s game. I will write more about my own portfolio performance in 4Q2024 shortly, but the reality is I have gradually shifted towards a more conservative mix of stocks in my equity portfolio, perhaps regrettably given that go-go names and Mag 7 stocks have continued to out-perform. (You can find my most recent update for 3Q2024 here; 4Q2024 update to follow).
What did I expect in 2024; what did I get right and wrong?
I will state the obvious which I have many times in the past – we are all guessing as far as the future direction of markets. Of course, there is educated guessing and there are 50/50 coin tosses, so the object of the game is to lean into the former by developing an outlook based on the way you believe things will unfold in the coming year, knowing what you know now. Keep in mind that Street analysts are paid to be optimistic and often to promote capital markets activity, so right or wrong, I consider them biased. In fact, Street firms and most well-known investor pundits are no better than average in my opinion, although some occasionally serve up good nuggets of information. That’s the way I see it, and these views provide context for my 2024 “guesses”.
As mentioned already, the U.S. economy did much better in 2024 that most market pundits and Street firms were expecting. I was in line generally with others on expectations of slower U.S. economic outlook, but the U.S. economy proved much more resilient that most had anticipated. Naturally, this meant that risk assets performed better during the year than many pundits expected.
US stocks – I expected U.S. stocks would register modest gains in 2024, but that other (geographic) markets would be more attractive because the U.S. economy would be slowing, earnings would come under pressure, and valuations would appear increasingly stretched. There would also be risks in the autumn associated with a contentious U.S. election, which in fact came and went peacefully. The combination of ongoing U.S. economic strength and strong corporate earnings caused investors to become increasingly emboldened, a feeling which was turbo-charged following the election, pushing U.S. stocks to another year of returns in excess of 20%.
International stocks – I expected Japanese stocks would not be able to replicate their 2023 returns (of 28.2%) and advocated lightening on Japanese stocks and increasing exposure to China. This looked very wrong for much or the year, until the Chinese government announced its first round of stimulus plans in late September, which lit a rocket under Chinese stocks. Although the performance of Chinese stocks since then has been solid, Japanese stocks have also put together another solid year, up 20.4% as we approach year-end. European stocks, which I also favoured in terms of a modest rotation, were hurt in the second half of the year by sluggish growth in the common currency zone and political disfunction in the bloc’s two largest member-states, Germany and France. The STOXX 600 has gained only 5.9% YtD, well off the pace of U.S., Japanese and Chinese stocks (albeit better than U.K stocks).
Bond yields – I thought yields across the UST curve would fall, but not with enough conviction to strap on duration. As mentioned, yields were volatile all year but are ending the year around 70bps higher than at the beginning of the year. I also wrote extensively about my concerns with other drivers of the UST market, including growing U.S. deficits and general Congressional dysfunction. The decision to avoid duration and stay short was correct, noting for the record that I generally avoid duration anyway except in the most obvious circumstances. Total returns on intermediate- and long-duration UST bond indices will be negative for 2024, a poor performance.
Corporate credit – I advocated less risk in corporate bonds, meaning I favoured investment grade-rated bonds and leveraged loans (high yield secured loans, “top of the capital structure”). I also wrote about targeted maturity bond ETFs with shorter maturity profiles, an investment I favoured in case interest rates did not decrease as expected, which came to pass.
Currencies – I expected the Yen to strengthen vis-à-vis the U.S. Dollar, and the U.S. Dollar to strengthen vis-à-vis Sterling and the Euro. The former looked to be right until the BoJ started dragging its feet, causing Yen strength to dissipate and give way to Yen weakness since the summer. The greenback did strengthen vis-à-vis Sterling and the Euro as I anticipated, for reasons I mentioned early last year.
I will look at full year returns of the various indices and assets classes tracked by EMC once the year finishes, and will release them in my blog.
The year ahead
Every forecaster on the Street is projecting another year of gains in the S&P 500, aside from one (Stifel). The Street consensus seems to be around +10% for the benchmark index for 2025. Although the U.S. economy looks to be in good shape at the moment, I think economic performance could be hurt by resurgent inflation under the incoming Trump Administration if his cabinet and Congress are unable to keep him in check. In addition, valuations are more stretched than last year at this time, and I suspect simple fatigue at some point might eventually tire even buy-the-dip investors. I expect the S&P 500 to be flat to slightly down on the year.
I expect the UST yield curve to become steeper, with the Fed remaining accommodative but only gradually, while fiscal stimulus measures and potential effects on the U.S. labour market through tighter immigration policies will keep pressure on wages, and hence, prices. In essence, cautionary monetary policy (albeit easing) will be working in tandem with fiscal stimulus measures expected under the incoming Trump Administration. Such a fiscal approach is ill-advised at this point of the cycle, and is likely to lead to persistent inflation and higher long-term yields even as short term yields decline albeit only slowly (resulting in a steeper yield curve).
As with stocks, I can’t imagine credit spreads continuing to grind tighter so am slightly bearish on corporate credit. I recommend staying in short-dated corporate bonds or short-dated (2-3 years) targeted maturity ETFs, and in floating-rate leveraged loans for current yield unless credit starts to crack under economic pressure.
As far as international equities, I would not ignore China or Europe, with the latter experiencing a rough patch at the moment for reasons already mentioned. The ECB will continue to reduce rates sequentially in upcoming meetings, while China will continue to employ steadily more aggressive measures to keep its economic growth from faltering further. I feel the same about Japan as I did last year at this time (and similar to U.S. equities), which is they can’t continue going higher at this pace, especially with the BoJ in an increasingly difficult position and the Yen near record lows. As for the U.K., the economy is at risk of a bout of stagflation, which could hurt domestic stocks. However, I suspect the core of the FTSE 100 – oil companies, commodity companies and banks – will provide some buoyancy to this high dividend yielding market. My view of U.K. stocks is the same as it is every year – meh.
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