CAPITAL MARKETS REVIEW January 2025

Strong Year for US Equities Despite Late-Quarter Volatility:

The US stock market capped off 2024 with a dynamic fourth quarter, characterized by a period of exuberant gains followed by a late-year stumble. A confluence of positive factors, including robust economic growth, expanding corporate earnings, and a dovish Federal Reserve, propelled equities to record highs throughout the quarter. The Fed's decision to cut interest rates twice, in November and December, provided a significant tailwind, easing financial conditions and boosting investor sentiment. The fourth-quarter market surge was primarily fueled by the continued dominance of technology stocks, particularly those in the artificial intelligence sector. Nvidia, a prominent player in AI, saw its stock price increase by over 10% during the quarter, recovering from a decline in the previous period.

However, this bullish narrative was disrupted by the Fed's December meeting, where a more cautious outlook on inflation and uncertainty surrounding future policy actions rattled investor confidence. Concerns emerged that the path to sustained disinflation might be more challenging than previously anticipated, leading to a late-quarter sell-off. Despite this late turbulence, US equities still managed to deliver a strong quarterly return of 2.4% and a remarkable 25.0% gain for the year.

Rising Yields and Election Concerns Dampen Bond Market Performance:

The bond market exhibited a more subdued performance during the quarter. Rising yields, driven by concerns about persistent inflation and the potential implications of the US election results, weighed on bond prices. The 10-year Treasury yield climbed 0.76% between October and December, culminating at 4.58% by year-end. This rise in longer-term yields, coupled with falling short- term rates, significantly impacted longer-duration bonds, which suffered losses exceeding 8%. In contrast, short-duration corporate bonds experienced more modest declines, limited to less than half a percent. Of the major bond sectors, the high-yield sector was the only one to deliver a positive return for the quarter, driven by high started yields and stable credit markets.

Strong Dollar and Global Headwinds Drag Down International Stocks:

The global equity landscape presented a stark contrast to the US market. International stocks struggled throughout the quarter, grappling with a multitude of headwinds. For US-based investors, the persistent strength of the US dollar proved to be the biggest hurdle for returns, as the dollar rose 7.1% during the quarter. Additionally, the battered Chinese consumer, and the ongoing energy crisis in Europe, particularly impacting the German manufacturing sector. The MSCI EAFE index registered a substantial 8.1% decline during the quarter, highlighting the divergent performance between US and international equities. A bright spot in international markets was Japan, where optimism around the end of deflation, a weakening Yen, and continued corporate reform helped Japanese equities deliver positive returns for the quarter and the year.