In line with expectations, the ECB, the SNB and the US Federal Reserve lowered their key interest rates. The SNB surprised with a higher than expected rate cut of 50 basis points, while the US Federal Reserve's assessment of a slower pace of future rate cuts caused a stir. Although the US inflation figures were in line with market expectations, they were too high for the Federal Reserve's decision-makers. Data on the US labor market continues to confirm the picture of a stable US economy, while falling consumer confidence and data on credit card loan defaults point to a slowdown. Following the loss of the vote of confidence in Chancellor Olaf Scholz, new elections are due in Germany. The ECB's interest rate cut of 25 basis points is good news for Europe - but further measures are needed to revive the outlook. Possible catalysts are any economic stimulus programs from China, lower than feared trade tariffs from the USA or an unexpectedly positive development in the Ukraine war.
From a historical perspective (since 1950), December is a good month for equities on average. For example, the S&P 500 performed +1.5% on average with 74% positive observations. 2024 is a clear exception with -2%. The Swiss Performance closed slightly better at -1.3%, while other markets such as the Euro Stoxx 50 (+1.4%), the Japanese Nikkei 225 (+4.5%) and the Chinese CSI 300 (+2.2%) performed positively in local currency terms. In terms of sectors, only Consumer Discretionary (+2.4%), Communication (+2.3%) and IT (+0.7%) performed positively - the other sectors closed the month with a performance of -4.3% to -8.2% in USD. Market breadth narrowed again sharply in December, with less than 20% of the stocks in the S&P 500 outperforming it in December and less than 30% over the year as a whole.
For the year as a whole, markets were expecting significantly greater interest rate cuts from the US Federal Reserve, the ECB and the Bank of England (BoE). Instead of the seven interest rate cuts expected by the US in January, there were actually four. This is due to the fact that the US economy, supported by high fiscal spending, remained unexpectedly robust for 2024 and inflation therefore also remained above the Fed's target. The global bond market is trading 1.7% lower in USD terms for the past year. If global bonds had not risen by 5.7% in 2023, 2024 would have been the fourth consecutive year of losses for bondholders (in USD). Rising deficits and declining inflation rates, which are still above central bank targets depending on the region, were the driving forces behind the past investment year for bonds. The Swiss bond market is the exception with an increase of over 5% in CHF. Compared with the other major central banks, the SNB exceeded expectations with its interest rate cuts.
We continue to favor solid diversification across all asset classes. We prefer real assets (equities and precious metals) to bonds. In view of the valuations prevailing on the global equity markets, we use hedging instruments to protect the portfolio in the event of an unexpected dip in the economy. For 2025, we see opportunities that may arise unexpectedly - these include, in particular, new stimulus programs in China and a faster rate cut by the ECB. A solution to the Ukraine war could also lead to a risk-on rally in Europe. Not to be underestimated is the new spirit of optimism in German politics, which, depending on the outcome of the election, could help the German economy regain momentum if the right measures are adopted and implemented swiftly. With interest rates very low in Switzerland, there is no alternative to Swiss equities with their attractive risk premium. Despite the positive fundamental data, we have greater respect for the valuations of US equities. Should AI investments slow down or the US economy falter contrary to expectations, they are susceptible to setbacks. The re-emergence of the debt ceiling debate in 2025 and the high refinancing requirements of the US in Q1 could initially put a dent in fiscal spending and slow growth. In the long term, however, increased volatility and market corrections always offer opportunities to increase exposure to real assets.
We wish our clients and readers a successful start to 2025!