Monthly economic and market review: December 2024

The local equity market faltered at the starting line in 2024, declining in both January (-3.0%) and February (-2.4%), before stringing together seven consecutive months of gains and notching up several new record all-time highs (the blue line in the chart below). The final quarter of the year was marked by increased volatility as the FTSE/JSE All-Share index notched up a new high of 87,644 points on 28 October before falling back to 83,803 points in November, recovering to 87,643 in early December and then closing the year back down at 84,095. When all was said and done, however, the JSE benchmark was down in each of the final three months of 2024 (-0.5% in December) to finish the year with a capital return of 9.37% and a total return (including dividends) of 13.44%. With the latest published inflation figure being 2.9%, the real return to JSE investors in the year was around 10.5%.

The S&P 500 index had another spectacular year with 57 new all-time highs and a return of 23.31% in 2024 to follow the 24.23% gain of 2023. Including dividends, the S&P 500 returned a total of 25.02% to investors. The all-time peak of 6,090 points was achieved in early December (see the green line in the chart below) but the market couldn’t hold its head above the 6,000 point level to see out the year. The Federal Reserve Bank cut rates by 25 basis points on the 18^th of December, as expected, but the quarterly summary of economic projections published at the same time showed Fed members expected only two further cuts to interest rates in 2025. This was less than previously expected and sent the markets into a tailspin. After an initial sell-off, the market bounced back but the recovery couldn’t be sustained and the index closed the month out 2.5% lower to record only the third monthly market contraction this year. Sectors that outperformed the S&P 500 index’s positive 23.31% return in 2024 included Communication Services (+38.89%), Technology (+35.69%), Consumer Discretionary (+29.13%) and Financials (+28.43%). The underperforming sectors included Materials (-1.83%), Healthcare (+0.90%), Real Estate (+1.72%), Energy (+2.31%), Consumer Staples (+11.98%), Industrials (+15.64%) and Utilities (+19.58%). Outside of Materials, all of the market sectors provided a positive return in the year. (See the appendix for other global equity market performances in 2024 in local currency terms).

FTSE/JSE All Share index (blue, RHS) and S&P 500 index (green, LHS): 12 months to 31 Dec 24

Source: Factset

With expectations once again that interest rates in the US could be relatively higher for longer while in other countries and regions, notably Europe, interest rate cuts still had some way to go, the dollar surged to its best level of the year. The greenback closed the year out at $1.04/€ after starting the year at $1.10/€. Weak South African economic growth data had already hurt the rand and the stronger dollar just added to the rand’s woes, leaving the currency at R18.87/$ from a 2024 start of R18.29/$. The rand traded in a range over the year between R19.32/$ (February) and R17.11/$ (September) and anyone trying to forecast the shorter-term movements of the rand was reminded of the futility of the task. Apart from the fallout in the currency and equity markets from the Fed’s slightly less positive outlook, bond markets took the news personally. Two year US treasuries added nine basis points in December (4.15 to 4.24) to close the year out virtually unchanged, despite the Federal Reserve having cut the Fed Funds target rate by 100 basis points in 2024 (5.50 to 4.50). The 10-year US bond yield climbed 40 basis points in the month (4.17 to 4.57) to close the year 69 basis points higher than its starting level of 3.88. South Africa’s 10-year government bond yield traded 17 basis points higher in the month (10.13 to 10.30) but still reflected a decline of 104 basis points over the year (from 11.34), with the Reserve Bank cutting the repo rate by just 50 basis points in 2024 (8.25 to 7.75). The stronger dollar left many commodity prices a little lower in December (see table below) but despite the gold price losing $42/oz in the month, it still closed the year 25.5% higher at $2,609/oz.

The lower prices of commodities had a material impact on the JSE during December and over the year as a whole. There were additional company-specific negatives in some cases but as price-takers, the resources and materials companies were broadly knocked lower and this is evident from the 2024 loser’s list below right where the top nine losers were all resource-related companies. Much of the softness in the commodities space stemmed from the ongoing slowdown in the Chinese economy where insufficient monetary and fiscal policy stimulus left demand for materials weak. Low rates of inflation and even deflation in parts, provided a headwind to Chinese commodity demand and ultimately global resources prices. In the absence of a more sustained and co-ordinated stimulus package of substantial size from the authorities, resources prices are likely to remain under pressure in 2025.

Much has been written around the potential for the companies exposed to the South African economy to do well in 2025 as interest rates are trimmed further, confidence improves and growth picks up (from a contraction in the third quarter of 2024). The Government of National Unity and the stability of electricity supply have helped improve confidence but it still needs to be translated into growth and company earnings. We witnessed a sharp pick up in the prices of some of those companies this past year in anticipation of better days to come. Mr Price (+88%), Foschini (+51%), Truworths (+39%), Tiger Brands (+44%), Capitec (+55%) and AVI (+34%) were amongst them (see table of winners below). Corporate action helped realise greater value in a number of counters and while deals had not been fully concluded by year-end, the buyout offers to shareholders of Barloworld (+37%) and Multichoice (+33%) left those counters as big winners this year (before they delist and we bid them adieu). The market also became a little more confident in a turnaround at Pick n Pay (+55%) following a year of Sean Summers back at the helm and the remarkably successful listing of Pick n Pay’s crown jewel, Boxer Retail. The initial public offer for Boxer was hugely oversubscribed and after listing at a price of R54.00 per share, the counter traded to a high of R67.00 per share before ending the year at R64.40 per share – a 19% premium to the placement price. There is still some way to go to translate domestic confidence into realised corporate earnings growth and ultimately share price gains but the market is starting from a cheaper rather than an expensive valuation level.

With December falling between US earnings reporting seasons, individual company news from the S&P 500 companies was in short supply and the overall market direction in the month was firmly dictated by macro events. As highlighted above, the market took a jaundiced view of “higher for longer” US interest rates and the S&P 500 gave up 2.5% in December. Share price gains in the month were hard to come by and just 13 of the 100 largest S&P 500 companies ended in the green for December (see the gainers and losers in the table below). Five of those 13 winners were drawn from the “Magnificent Seven”: Tesla (+17.0%), Alphabet (+11.7%), Amazon (+5.5%), Apple (+5.5%) and Meta (+1.9%). The other two “Magnificent” stocks, Microsoft (-0.5%) and Nvidia (-2.9%), ended in the red but Nvidia could be forgiven a small pullback after topping the charts again with a 2024 return of 171.2% after the 238.9% gain in 2023. Broadcom was a big winner in December (+43%) after the CEO Hock Tan advised investors on results day of much lower costs and greater margins and profitability of its VMware private cloud computing platform. The monthly gain lifted Broadcom to centurion status with a gain of 107.7% in 2024. Healthcare stocks had generally been on a weaker footing but the assassination of UnitedHealth CEO Brian Thompson on 4 December sent shivers through the health insurance sector. After some investigation and the arrest and indictment of a murder suspect, it was believed that the killer was motivated by his hostility towards the health insurance industry, wealthy executives and denied and delayed health insurance claims. Parent company, UnitedHealth Group lost 17.1% in December to finish down 3.9% for the year.

A common argument against further gains in the S&P 500 index in 2025 is that the market is more than a little expensive. In price/earnings (“P/E”) ratio terms, the historical (last 12 months) P/E at year-end was 27.7x, well above its 10-year average of 22.0x and its five-year average of 24.2x. Looking ahead, the forward (next 12 months) P/E is given as 21.5x, also well above its 10-year average of 18.2x and its five-year average of 19.7x. The counter-argument to the American markets being too expensive is that “that’s where the growth is.” It’s true that the prices of technology stocks have risen dramatically but earnings growth has been just as dramatic as technology advances have moved in leaps and bounds. Companies have chased after semiconductors and artificial intelligence and data centres and battery technology and robotics and self-driving cars, all intent on not being left behind and losing a competitive advantage or maybe even gaining a competitive edge. The developers, manufacturers and suppliers of these goods have benefitted handsomely and earnings growth has justified high valuations. However, where companies have mis-stepped and missed earnings expectations or provided weaker-than-expected guidance on future earnings, their share prices have instantly been punished. Adobe’s 14% loss on the day after their Q4 results was one recent example but we witnessed something similar with ASML and even the mighty Nvidia has taken a hit or two when it hasn’t quite met fantastical expectations.

While we should continue to see technology stocks at the forefront of market earnings growth, it is unlikely that the heady pace of growth of recent years can be sustained. It’s fortunate then that as interest rates are lowered around the world (as inflation has moderated back towards target levels) that a broader range of industries will report an increasing rate of earnings growth (see the current FACTSET consensus earnings expectations in the table below). This then can support the market as earnings growth from the technology stocks returns from the stratosphere to more sustainable long-term levels. That should be supportive of the American markets and while the S&P 500 is forecast to provide high single digit to low double digit returns, it’s not likely that we’ll see a repeat of the 24% gain of 2023 and the 23% gain of 2024. We could also experience an increased level of market volatility with a market correction or pullback before closing out the year at a higher level.

Consensus revenue and earnings estimates for the S&P 500

Even with a constructive view on the equity markets in 2025, there are risks to a positive outcome. President Trump will be inaugurated on 20 January and it remains to be seen how much of the pre-election promises and threats come to fruition and to what extent. This creates a lot of market uncertainty and nervousness as from this vantage point it’s not clear the magnitude of tariffs that will finally be enacted, the degree of resultant inflation, the level of market interest rates, the extent of deregulation, the nature of antitrust actions against corporates, fiscal stimulus, geopolitical sabre-rattling (or war) or how Trump’s appointees to critical government positions will actually perform. Outside of the political arena, questions are being asked of the longevity of the artificial intelligence and semiconductor themes. A slowdown in demand would be negative for the markets but while it remains a risk, it shouldn’t be a story for 2025. General economic growth is also under the spotlight as any slowing down in economic activity would hurt demand and negatively impact corporate earnings and ultimately share prices. On balance, global growth is expected to further stabilise in 2025 and benefit from an environment of lower interest rates and other stimulus measures. While economic growth is expected to modestly improve and earnings continue to grow, the market risk of subpar economic growth shouldn’t be discounted. Nevertheless, while there will always be shorter-term risks and black swan events that upset the apple cart, the equity markets are where capital grows over the longer-term. More modest gains are expected in 2025 but investors should stay the course and benefit from the ongoing compounding of returns that comes from being a patient equity market investor.

Appendix:

Global market movements in 2024 (blue) versus 2023 (orange) - local currency terms