Equities
Global equities (-1.6%) fell in December, closing the year with a substantial year-to-date return of 20.7%. Market sentiment was tempered by mixed economic data and hawkish signals from the US Federal Reserve (Fed), which unnerved global markets and curbed US-investor enthusiasm for the pro-business policies of the incoming US administration. The Fed and European Central Bank (ECB) simultaneously lowered interest rates by 25 basis points (bps). However, their forward guidance diverged significantly; the Fed’s Summary of Economic Projections indicated a slower pace of easing in 2025, amid a cautious stance on inflation, while ECB President Christine Lagarde signaled a dovish outlook as economic growth and inflation projections continued to weaken. Several other central banks followed suit, reducing policy rates, including Canada, Switzerland, and Mexico, while Brazil ratcheted rates higher for the second consecutive month, by 100 bps. The Bank of Japan (BOJ) and Bank of England (BOE) held rates steady. In France, François Bayrou was named the new prime minister after a no-confidence motion ousted Prime Minister Michel Barnier just three months into his new administration. The South Korean National Assembly passed a bill to impeach President Yoon Suk Yeol following his declaration of martial law earlier in the month which was rescinded only hours later. In Syria, Bashar al-Assad’s regime collapsed after rebels captured the capital of Damascus.
US
US equities (-2.4%) ended lower but registered a stellar 25.0% return in 2024. Sizable gains from some mega-cap technology companies led growth stocks to outperform their value counterparts by a wide margin in December, while small-cap stocks significantly underperformed. As anticipated, the Fed lowered interest rates by 25 bps. However, volatility spiked, and stocks registered their biggest decline in months after the Fed’s Summary of Economic Projections revealed a markedly more gradual and shallower path of interest-rate cuts in the coming years. This was due to concerns about upside inflation risks amid a resilient economy and uncertainty about the impact of tariffs and other policies promised by President-elect Donald Trump. The Fed’s median projection signals 50 bps of rate cuts in 2025, significantly less than the 100 bps projected in September. The Fed also upgraded its inflation expectations over the next two years. The Senate passed a funding bill to avoid a government shutdown, but the measure did not address Trump’s demand for a suspension of the debt limit. According to FactSet, fourth-quarter earnings for companies in the S&P 500 Index are projected to grow 11.9% year over year, which would mark the highest earnings growth in three years.
Economic data released during the month was mixed. The labor market remained solid but continued to cool in November; nonfarm payrolls rebounded to a 227,000 gain and unemployment gradually trended higher to 4.2%. Healthy wage growth and a historically low level of layoffs continued to fuel broad-based gains in consumer spending, underscoring the economy’s enduring strength. Retail sales in November increased at a larger-than-expected 0.7% monthly pace, and personal spending rose 0.4% (slightly below expectations) after a 0.3% gain in October. In December, the Conference Board’s Consumer Confidence Index unexpectedly slipped to 104.7 — the first decline in three months — amid concerns that potentially higher tariffs could increase durable goods prices. Housing market data improved in November, even as affordability remained strained by inflated home prices, along with higher mortgage rates, which are anticipated to remain elevated for longer than previously expected. Pending home sales increased for a fourth straight month to their highest level since early 2023, new-home sales rebounded amid the largest inventory of new homes in 17 years, and existing-home sales topped four million for the first time in six months.
In December, the Institute of Supply Management (ISM) Manufacturing Index approached recovery, increasing to 49.3, from 48.4. Production rebounded and new orders continued to rise, although companies faced higher input prices. The services sector expanded in November at the slowest pace in three months, as the ISM Services Index slid 2.9 points, to 52.1. However, the S&P Global Flash US Composite PMI advanced to a 33-month high of 56.6 in December, driven by accelerating growth in services. Encouragingly, inflation pressures eased as prices charged for goods and services rose at the slowest rate since June 2020. In November, the NFIB Small Business Optimism Index surged to its highest level in more than three years in anticipation of more favorable economic policies under President-elect Trump.
Within the S&P 500 Index (-2.4%), eight of the 11 sectors posted negative results for the month. Materials (-10.7%), energy (-9.5%), and real estate (-8.6%), were the worst-performing sectors. Industrials (-8.0%) also underperformed, led lower by machinery (-9.3%). Communication services (+3.6%) was the best-performing sector, led by interactive media & services (+7.9%). Consumer discretionary (+2.4%) and information technology (+1.2%) also outperformed.
Europe
European equities (-0.5%) edged lower in December. Eurozone business activity contracted marginally during the month as a renewed expansion in services activity offset an ongoing decline in manufacturing output; the HCOB Flash Eurozone Composite Purchasing Managers’ Index (PMI) increased to 49.6 in December, from 48.3, with economic activity in the region primarily weighed down by Germany and France, where the rates of decline eased only slightly from November. Eurozone employment fell at the fastest pace in four years as companies responded to a drop in workloads. Job losses were exclusively driven by the manufacturing sector. Against a backdrop of lackluster economic growth and an increasingly uncertain outlook, the ECB marked a significant policy shift by implementing a third consecutive rate cut and notably removing language from its policy statement about keeping interest rates restrictive. ECB President Christine Lagarde signaled that the bank’s focus would pivot from inflation control to addressing economic growth risks. The central banks of Switzerland and Sweden lowered policy rates, while the central banks of Norway and the UK left rates unchanged. Annual eurozone headline inflation rose to 2.2% in November and is forecast to register 2.1% in 2025 and 1.9% in 2026, according to the ECB’s latest projections. Third-quarter earnings for companies in the STOXX 600 Index are anticipated to increase 7.8% from a year earlier, according to LSEG.
Europe’s manufacturing sector deteriorated at a faster pace in December; the HCOB Eurozone Manufacturing PMI fell further into contractionary territory amid accelerated contractions in new orders, output, purchasing activity, and inventories. Input costs were unchanged for the first time since August, and output prices continued to fall. Encouragingly, business confidence improved modestly as growth expectations hit a four-month high. The HCOB Flash Eurozone Composite PMI revealed that services sector activity returned to modest growth, marking the first monthly expansion in services since August. Concerningly, input costs and output prices rose at an accelerated rate, likely due to higher wages.
Deepening political upheaval continued to disrupt the eurozone’s most powerful countries (Germany and France) at a time of mounting economic and security uncertainty. Germany (+1.0%) faces early elections in February after Chancellor Olaf Scholz lost a vote of confidence. After a sharp decline in November, the country’s ZEW Indicator of Economic Sentiment unexpectedly increased drastically in December due to falling interest rates and expectations of more accommodative economic policies; however, the assessment of the current economic situation continued to worsen. In France (+2.2%), President Emmanuel Macron selected longtime ally François Bayrou as prime minister in a bid to stabilize the political turmoil following the collapse of Michel Barnier’s government. The UK’s (-1.3%) economy unexpectedly shrank 0.1% in October, the second consecutive monthly contraction. The S&P Global Flash UK PMI Composite Output Index showed that business activity increased marginally in December, yet employment declined at the fastest rate since January 2021.
Pacific Basin
Pacific Basin equities (+2.1%) rose over the month. In Australia (-3.1%), the Reserve Bank of Australia (RBA) faced tepid economic growth, which contrasted with stubborn core inflation and a tight labor market. GDP rose only 0.8% in the third quarter compared to a year ago, and, excluding the pandemic period, at the lowest rate since 1991, sending the Australian dollar down. Despite lackluster economic growth, the RBA left its cash rate unchanged at 4.35%, as expected, amid sticky inflation. However, the RBA adopted a dovish tone, indicating greater confidence that some of the upside risks to inflation have eased. Still, a key measure of core inflation (trimmed mean inflation) accelerated 3.5% annually in October after it had declined to nearly a two-year low of 3.2% in September. Additionally, stronger-than-expected job growth and an unexpected drop in the unemployment rate, from 4.1% to 3.9% in November, underscored the resilience of the labor market and prompted traders to pare back the probability of a February interest-rate cut. Consumer sentiment ebbed slightly in December amid persistent cost-of-living pressures coupled with political uncertainty abroad.
In Japan (+4.3%), rising inflation did not spur the BOJ to raise interest rates in December, although hawkish comments signaled the potential for a rate hike in January. While BOJ board members showed support for raising interest rates, they also indicated that they might choose to leave policy unchanged to allow time to monitor wage trends and the trajectory of the US economy under President-elect Trump. Higher inflation was largely driven by rising energy prices after the government phased out subsidies for gas and electric bills. In November, Japanese core consumer prices excluding fresh food accelerated 2.7% from a year earlier. The same measure accelerated 2.4% in Tokyo in December. The BOJ’s Tankan survey indicated that business confidence among Japan’s largest service providers and manufacturers remained upbeat in December. This was a positive sign for the BOJ as it evaluates whether wage increases are solidifying at a level that sustains inflation and justifies higher interest rates.
In Singapore (+0.3%), core inflation declined to a three-year low of 1.9% year over year in November, and economic growth beat estimates in the fourth quarter, potentially opening the door for more accommodative monetary policy in 2025. A preliminary estimate showed that GDP grew 4.3% year over year in the fourth quarter, well above estimates of a 3.8% gain but lower than the third quarter’s reading of 5.4%. New Zealand (+1.1%) fell back into recession after third-quarter GDP declined at a surprisingly sharp 1.0% quarterly pace, increasing pressure on the central bank to reduce interest rates more aggressively.
Emerging Markets
Emerging markets (EM) equities (+1.2%) rose in December. Europe, the Middle East, and Africa (EMEA) led the gains, followed by Asia, while Latin America declined.
In EMEA (+2.3%), OPEC+ delayed its oil output hike until April and extended the full unwinding of production cuts until the end of 2026. Saudi Arabia’s (+3.1%) non-oil business activity hit a 16-month high in November, with the S&P Saudi Arabia PMI rising for the fourth consecutive month. The country’s central bank cut interest rates by 25 bps, to 5.0%. South Africa’s (-1.4%) economic output unexpectedly fell 0.3% in the third quarter as drought weighed on agricultural production. The United Arab Emirates (+9.1%) announced plans to reduce oil shipments next year.
In Asia (+1.5%), China’s (+2.7%) government promised additional stimulus measures to strengthen the economy, including a bigger budget deficit, greater borrowing, and lower interest rates. The Ministry of Finance announced a plan to give manufacturers a 20% made-in-China price advantage for sales to the Chinese government as part of its effort to bolster the economy. The property market showed signs of stabilizing as home prices fell only 0.1% in November, the smallest decline in 17 months. Taiwan’s (+5.3%) exports rose by a larger-than-expected 9.7% year over year in November, thanks to strong demand for AI-related products. The central bank raised its 2024 economic growth forecast to 4.25%, from 3.82% in September. South Korea’s (-2.1%) President Yoon Suk Yeol was impeached after he imposed, then revoked, martial law. The central bank announced measures to boost short-term liquidity and provide special loans if needed to stabilize the economy. India’s (-1.6%) central bank downgraded its GDP growth forecast for fiscal year 2025 to 6.6% from its previous projection of 7.2% in October, and also lowered the cash reserve ratio by 50 bps, to 4.0%, to bolster liquidity in the economy. Retail inflation eased to a three-month low of 5.48% in November after surging to a 14-month high of 6.21% in October due to rising food prices.
In Latin America (-3.5%), Brazil’s (-5.3%) central bank raised interest rates by 100 bps, signaling hikes of the same size at its next two meetings in an effort to slow rising inflation. The Brazilian real fell to historic lows and stocks plummeted amid concerns that a proposed tax and spending package will not sufficiently curb the nominal deficit, which climbed to 9.5% of GDP. In Mexico (-0.3%), inflation ticked lower in the first two weeks of December, and the central bank lowered interest rates by 25 bps, to 10.00%, signaling the potential for larger rate cuts ahead. In Peru (-4.5%), interest rates remained at 5.0% as annual inflation accelerated to a five-month high of 2.27% in November, from 2.0% in October, but remained within the central bank’s target range.
Fixed Income
Global sovereign yield curves steepened markedly despite a hawkish tilt from major central banks as term premiums rose in response to a deteriorating fiscal trajectory. Credit spreads widened and fixed income sectors posted mixed excess returns.
The US economy continued on a solid track. Consumers were largely resilient during the holiday shopping season, while headline inflation edged higher on rising shelter costs. A decline in utilities and mining output dragged down industrial production, and durable goods orders suffered a widespread drop. The manufacturing PMI fell below the expansionary threshold according to S&P Global, weighed down by tariffs and inflation concerns. Employment data remained mostly upbeat as weekly jobless claims and continuing claims held steady. In the housing market, new-home sales advanced and mortgage applications picked up on a surge of refinancing activity. In Europe, the HCOB Eurozone Manufacturing PMI remained in contractionary territory. Germany’s business sentiment weakened, and factory orders decreased, led by a drop in motor vehicle orders. The UK’s annual headline and core inflation edged higher, while a decline in mining and manufacturing activity dragged down industrial production. China’s manufacturing PMI remained steady, and the nonmanufacturing PMI advanced. Industrial profits fell over the year, adding to growth concerns. In Japan, industrial production declined amid the rising costs of raw materials and labor. Canada’s economy grew slightly more than expected as the manufacturing and oil and gas sectors advanced. Australian unemployment dropped to an eight-month low.
The Fed implemented a 25 bps interest-rate cut but pivoted to a more hawkish stance. The ECB also reduced rates by 25 bps and, unlike the Fed, struck a more dovish tone. The BOJ left policy unchanged amid greater domestic political uncertainty.
Most global sovereign yields moved upward, with yield curves steepening across major developed economies. US Treasury yields rose, particularly in the latter part of the month following the Fed’s hawkish tilt. European yields also moved higher despite the ECB’s fourth rate cut of the year, with ECB President Christine Lagarde stating that the eurozone was very close to reaching the central bank’s medium-term inflation goal. Canadian front-end yields declined on a deteriorating growth outlook. In APAC, Japanese government bond yields inched higher, and Australia’s shorter-term yields moved lower as recent data on inflation and economic conditions increased market confidence that the RBA is closer to cutting rates. In EM, sovereign yields rose, with the notable exception of China, where economic data signaled persistent weakness in domestic demand. The Bloomberg TIPS Index delivered a total return of -1.58%, and the 10-year breakeven inflation rate increased by 7 bps, to 2.34%, during the month.
Global credit outperformed duration-equivalent government bonds. Within the securitized sectors, agency mortgage-backed, commercial mortgage-backed, and asset-backed securities outperformed duration-equivalent government bonds. Within EM, local markets debt (-1.93%) underperformed external debt (-1.40%), in US-dollar terms. Spread narrowing contributed favorably to external debt performance, while an increase in US Treasury yields had a negative impact. Depreciation in EM currencies drove the negative performance within local markets, and EM rates also hurt results.
Currencies
The US dollar appreciated versus major developed and EM currencies. President-elect Trump’s prospective policies on immigration and tariffs are likely to add upward pressure to inflation, steering the Fed’s cautious stance on interest-rate cuts. Geopolitical tensions and a challenging economic growth outlook outside the US further boosted the dollar. Among the G10 currencies, the New Zealand dollar, Australian dollar, and Japanese yen were notable underperformers. China’s manufacturing slowdown exerted pressure on New Zealand’s and Australia’s currencies, while the Japanese yen weakened to a five-month low as markets digested the Fed’s hawkish cut and the BOJ’s rate-hike uncertainty. In EM, performance was broadly negative, fueled by the prospect that Trump will impose sweeping trade tariffs. The South Korean won fell to a 15-year low following the Fed’s rate cut and domestic political uncertainty. The South African rand weakened on a hawkish Fed outlook, amplified by thin trading volume around year end. The Brazilian real fell to an all-time low as the central bank’s latest foreign exchange intervention failed to calm investors’ concerns about surging government spending.
Commodities
Commodities (+3.3%) ended higher in December. Energy and agriculture & livestock contributed positively to returns, while industrial metals and precious metals detracted during the period.
Energy (+6.0%) rose during the month. Natural gas (+15.3%) surged amid colder weather forecasts for January, particularly in the eastern US. Strong ongoing demand from liquefied natural gas export facilities and high global demand amid output cuts in the North Sea also contributed to the increase. The oil complex was bolstered by colder weather, which raised demand for diesel fuel as an alternative to natural gas. Declining US stockpiles and China’s decision to raise import quotas for its private refiners could also enhance oil demand. Against this backdrop, heating oil (+5.8%), gasoline (+5.8%), crude oil (+5.5%), and gas oil (+3.6%) advanced.
Industrial metals (-2.9%) slipped as lead (-6.3%), zinc (-4.3%), nickel (-3.8%), copper (-2.8%), and aluminum (-2.0%) declined. The metal complex faced demand pressure as the US dollar strengthened following the Fed’s December rate cut and expectations for a slower pace of policy easing in 2025, making metals more expensive for international buyers. A seasonal slowdown in industrial activity also weighed on metal prices. Precious metals (-1.5%) slid during the month. Silver (-5.6%) and gold (-1.1%) continued to decline amid a strengthening US dollar, rising bond yields, and higher inflation expectations.
Agriculture & livestock (+2.0%) ended the period higher. Cocoa (+24.4%) soared to a record high due to renewed supply concerns caused by adverse weather in West Africa, which accounts for roughly 75% of global cocoa production. The International Cocoa Organization also noted that the global cocoa market in 2023 – 2024 realized its largest deficit in over six decades due to crop failures in the Côte d’Ivoire and Ghana. Corn (+6.3%) surged as demand remained strong. Additionally, a forecast for drier and hotter weather in Argentina and Southern Brazil in January could pressure supplies in these regions. Strong demand, despite elevated meat prices, boosted the value of live cattle (+2.0%). Cotton (-4.5%) ended lower as the United States Department of Agriculture (USDA) increased its forecast for US cotton output. Lean hogs (-5.5%) fell, with a USDA survey showing ample inventory. Sugar (-8.3%) was sharply lower due to a better outlook for global supply. Additionally, the Indian government may permit sugar exports if domestic ethanol blending requirements are met, which could further bolster the global supply.
Quarterly Market Review
A monthly update on equity, fixed income, currency, and commodity markets.
By
Brett Hinds
Jameson Dunn