December was the second month to end in the red after April 2024 on the equity markets. This ended a seven-month streak in the green, with the global equities index shedding -0,42%*.
While regional performances were close (-0,49%* for Europe and -0,65%* for North America), the currency effect hid some disparities. The greenback rose nearly 2% against the euro based on the rise in bond yields, and cushioned the poor performance of the US markets for European investors.
In December, the markets experienced two very different periods. Indices were fairly bullish in the first half of the month, continuing the upward trend underway since the US election in early November. In mid-December, performances were quite good, reaching a high of +1.5%*.
That said, the US Federal Reserve (Fed) meeting on 18 December dealt a blow to the markets’ “Christmas rally”. While the Fed cut its rate by another 25 basis points, the market focused instead on the rate cuts planned for 2025, which are now just two instead of four.
Persistent inflation, particularly in the core segment, caused the Fed to be more cautious with regard to future rate cuts. Then there is the uncertainty linked to the economic policies that Donald Trump may implement, which cloud the Fed’s visibility on growth and inflation forecasts. In spite of it all, Fed Chairman Jerome Powell remains particularly attentive to the labour market, justifying the December rate cut and the two cuts planned for 2025.
Naturally, the bond market remained jumpy in this environment characterised by sustained growth, rigid inflation and a high government deficit. Moreover, the US 10-year rate has continued to climb since its September lows, rising from 3.60% to 4.5% in December. There again, the economic and trade policies that Trump promises are driving investors to be more cautious about public finances and inflation, which naturally impacts long-term rates.
Ultimately, the rise of bond yields is one of the main limits that the equity market could face, and partly explains why equities fell in December. High valuations make investors nervous when they are not accompanied by rate cuts. While the Fed has been generous in its rate cuts, which amounted to 100 basis points in 2024, the bond market has shown some reluctance as to the Fed’s ability to continue in this direction. However, Powell made a reassuring statement – that the job market was no longer "a source of broad inflationary pressures for the economy" – and the temperance of employment indicators could limit the rise in yields on the bond market, which would relieve investors on the equity market.
In terms of allocation, the preference was for equities over bonds. The strong economic growth and solid corporate earnings expected in 2025 are raising hopes for this asset class. The only downside: appetite for bonds remains more mixed due to strong economic activity in the United States, persistent inflation and a high government deficit. In Europe, the more complex economic situation is raising the profile of government bonds. In terms of sectors, communication services, healthcare and finance via US banks are overweight.
*Performances are calculated in euros.
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