Welcome to the Summer edition of On the Marc. In this edition, we will review markets for the final quarter of the 2024 calendar year and consider the outlook for the foreseeable future.

Market update

Global equity markets were volatile over the December quarter due to US election uncertainty, significant shifts in interest rate expectations, and long-term bond yields.

After a weak start to the quarter, markets were buoyed in November by the conclusive victory of Donald Trump in the US elections, which provided both political certainty and the prospect he would enact policies that would be supportive of US economic and corporate earnings growth.

However, renewed inflation concerns and a spike in long-term bond yields offset this in December, particularly following a hawkish December Federal Open Mark Committee (FOMC) meeting. At this meeting, Fed Chair Jerome Powell flagged a sharp increase in 2025 year-end inflation projections and a halving in the Fed’s expected rate cuts for 2025 (from four 25 basis points (bps) cuts to just two). This contributed to a surge in long-term bond yields (interest rates), with US 10-year bond yields up 79bps to 4.57% and Australian 10-year bond yields up 39bps to 4.36% over the quarter.

The US Federal Reservice cut interest rates by 100bps since September, has seen long-term US bond yield rise sharply across all durations. Figure 1 illustrates that while the short end of the yield curve has declined compared with a year ago (reflecting the cumulative Fed rate cuts), the long end has increased by around 90bps. The current movement is highly unusual when comparing the changes in yields to prior interest rate cutting cycles – typically, we would expect long-term rates to remain relatively flat or decline as rates fall (refer to Figure 2). The bond market appears to be taking a cautious view on rising inflation risks and elevated US budget deficits into an environment with a high degree of uncertainty regarding the ultimate form and impact of President Trump’s economic policies. This has started to weigh on equity markets in recent months and could add a further headwind should the US 10-year bond yield head above 5%.

Domestically, a dovish pivot from the RBA in December and supportive inflation data brought forward market expectations for interest rate cuts to potentially as early as February 2025. The Australian market declined 0.8% this quarter. The best performing sectors were Financials (+5.9%), Industrials (+3.3%) and Communications Services (+2.2%) while Materials (-11.9%), Property (-6.0%) and Energy (-5.4%) suffered moderate losses.

Market returns for major indices

Below is a table showing the percentage returns of the major market indices to 31st December 2025.

The outlook for the year ahead

Among democratic countries, 2024 saw over 80% of incumbent governments lose support compared to the previous election. Politic sentiment around the world appears to have shifted Nationalistic and to the Right. Australia will face an election in 2025, and at this point, it appears a change in the elected party is likely.

We continue to see the greatest financial pressure on people with lower socio-economic status while the affluent are thriving. Crudely, in democracies, it is one vote per person, not one dollar per person. It is not surprising to see political change diverge from economic change.

Economic growth is slowing globally. Many consumers, notably lower socio-economic people, are under financial pressure, and consumer confidence is generally soft. Corporations are cautious and are constraining discretionary spending. Government spending has offset some of the private sector pressures. Still, whether it be the ‘Department of Government Efficiency’ or other fiscal discipline, there are foreseeable scenarios where public spending is not as supportive of growth as it has been in the COVID and post-COVID years.

Economic growth expectations remain positive, albeit relatively muted. Interestingly, recognising the limitations of macroeconomic forecasts, growth expectations for the US have been increasing over recent months, while Eurozone growth expectations continue to drift lower.

2025 GDP growth expectations for China have remained flat at around 4.5%. A more important indicator is long-term interest rates in China, which have never been lower.

Did you know?

The S&P 500 enjoyed top decile performance relative to its history (refer to Figure 5), with performance once again extremely concentrated among the ‘magnificent 7’ mega-cap tech stocks (Nvidia, Tesla, Microsoft, Alphabet, Meta, Apple and Amazon). These seven stocks alone were, on average, up 61% in 2024 and 112% in 2023, which, given their size, contributed to over half of the S&P 500 total return for 2024 and ~60% of the total return for 2023. These returns, plus a stronger US dollar, propelled US markets to outperform all other developed markets globally (refer to Figure 4).

Did you know how narrow market leadership has been? The performance of the Russell 3000 illustrates this, which represents approximately 98% of the investible US equity market. Although the index advanced 22% in 2024, a deeper look highlights a markedly different outcome for its constituents. The median stock in the index gained just 3.8%, and nearly half of its constituents ended the year in the red.

In Australia Financials and Information Technology sectors together generated ~95% of index returns for the calendar year.

Final reMarc

With tensions in the Middle East abating and Trump’s promise to end the Ukraine and Russia conflict one way or another, the geopolitical outlook appears to be the best in recent years.

AI will continue to create enormous efficiencies for the public and private sectors, which bodes well for domestic and global markets. A potential headwind is that interest rates are not reduced by much, resulting in the current high cost of living impacting most households in Australia and worldwide.

We continue to believe that a growth asset portfolio using select managers will continue to offer the best long-term returns for clients by avoiding the overheated areas of financial markets and investing those trading at a discount where future growth is expected.

" You can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life. "

Steve Jobs

Key Facts & Figures

Australian Cash Rate was kept on hold in December at 4.35%.
The RBA Cash Rate is likely to decrease in February when the RBA next meet (78% chance of a rate cut).
Our annualised inflation rate is 2.8%. This is within the RBA’s target band of 2 - 3%.
Australia’s unemployment rate is 4.0%.
The US Federal Reserve cash rate band is 4.25% - 4.50%.