Market Update – January 2025
December 2024 Commentary
In December markets capped off a strong year, the S&P/ASX 200 fell by 3.1% during the month. Almost all sectors ended the month weaker – rate sensitive sectors such as REITS (-6.93%) and IT (-4.4%) fell while Consumer Staples (+0.5%) and Energy (+0.3%) were the sole positive sectors. Over the year, the ASX 200 returned 11.4%, sector performance was divergent. The Information Technology (IT) sector was the best performing sector, returning 49.5% during the year driven by continued earnings growth in companies like Xero (XRO) and Wisetech Global (WTC). Conversely, the Energy sector was the worst performing, falling by 18.8%, as energy commodities like coal and oil fell during the year.
Australian macroeconomic conditions began to show signs of weakening during the latter half of 2024 though Real GDP rose by 0.3% in Q3, driven by strong public sector demand, which kept GDP growth positive for the last three quarters. This data, along with other data released between meetings were covered in the RBA’s monetary policy decision meeting on the 9th and 10th of December. The board held the cash rate at 4.35% but noted that in their view, the level of excess demand in the Australian economy was beginning to fall and if inflation were to continue a sustainable path towards the target 2-3% band it would be appropriate to begin lowering the target cash rate. This statement aligns with our view that a large portion of growth in the Australian economy is driven by government spending on schemes such as cost of living relief and the NDIS program. With an election coming up, we expect that government expenditure will be a key topic of debate, and we could see a pullback in spending, which slows economic growth and inflation, opening the way for the RBA to lower interest rates.
In the US, persistently high borrowing costs and risks involved with a change in government caused little worry for investors in 2024. The S&P 500 fell -2.49% in December to end the year with a 23.31% return, backing up a 24.2% return in 2023. This is only the 5th time since 1963 that the S&P 500 has returned more than 20% in back-to-back years. Technology has again been a major driver of returns for the US market with Communication services (+38.9%) and IT (+35.7%) contributing significantly to returns.
Economic growth in the US has been consistently strong during the past year, defying expectations of many market participants who forecasted a recession given the high costs of borrowing. Economic data released in December showed economic growth remaining resilient. While inflation continued to trend towards the Federal Reserve’s target of 2% it has remained between 2.6% and 2.8% since the beginning of 2024. The Federal Reserve reduced the Target Fed Funds range by 25 basis points in their December meeting to 4.25% – 4.50%. In remarks delivered after the change was announced, Chairman Jerome Powell indicated that the pace of future cuts would be slower than the 100 basis points of cuts delivered in 2024. Strong economic growth and a resilient labour market gives the Fed the ability to deliver future cuts at a slower pace to ensure that inflation does not spike again. The Summary of Economic Projections (SEP), released alongside the funds rate decision indicated that the Governors anticipated a further 50 basis points of cuts would be delivered in 2025, 50 basis points less than estimated in the previous release.
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