How the Stock Market’s Santa Rally Derailed — After Trump Provided an Early Boost

Stock market investors have been denied a so-called Santa Rally in the closing stages of 2024, after weathering yet another year dominated by geopolitical turmoil and macroeconomic headwinds.

High-flying tech stocks were among the few companies to advance during December, reflecting a year in which artificial intelligence has emerged as a dominant market theme.

Investors have turned more bearish in the past month as global growth fears grip the UK, US, Europe and China.

The US Federal Reserve delivered the worst week for stock markets since early September last week, when the Fed adopted a more aggressive interest rate policy despite a third straight cut.

Markets now expect just two Fed rate cuts next year, as opposed to the four cuts proposed at the central bank’s September meeting.

US markets fell in response after rising the month before as the election of Donald Trump for a second term as president raised hopes of a smoother business environment.

Rory McPherson, Chief Investment Officer at Magnus FDM, said: “The Federal Reserve took on the role of stock market grim last week! While they delivered a long-awaited rate cut (which brings their rate cuts this year to a full 1 percent), there was a cautious tone to their outlook, which weighed on stocks and bonds.”

He added: ‘The US Fed’s more cautious tone set the tone for the market last week, but it’s worth noting that US economic data (which, along with earnings growth, has driven this bull market) were very strong.

‘U.S. growth rates (GDP) for the third quarter were revised upwards to 3.1 percent (from 2.8 percent), while personal consumption (which drives U.S. growth) was revised up to 3.7 percent (from 3.6 percent).

“In addition, U.S. core personal consumption spending (the Fed’s preferred inflation measure) fell below expectations at an annual rate of 2.8 percent.”

How major markets have performed

The S&P 500 and Dow Jones are down 0.9 and 4.2 percent respectively over the past month, while the dominance of global tech giants has helped the Nasdaq rise 2.7 percent this month.

The Nasdaq is up 33 percent since the beginning of the year, while the S&P 500 and Dow Jones have added 25 and 23.6 percent, respectively.

US markets have generally outperformed their global peers this year as US consumers continue to drive the economy.

In contrast, the FTSE 100 and FTSE 250 are down 2.3 and 1.6 percent last month, limiting gains in 2024 to an uninspiring 2.3 and 1.6 percent respectively.

As in the US, expectations for the size and pace of the Bank of England’s rate cutting cycle have also fallen sharply due to persistent inflationary pressures. Markets are currently expecting two or three cuts next year.

Unlike the US, however, UK economic figures have gone from bad to worse in recent months.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: ‘There isn’t much cheer about Britain’s economic prospects as the latest assessment from the ONS paints a picture of stagnation.

“The long period of speculation leading up to Rachael Reeves’ announcements probably didn’t help, as the rumor mill went into overdrive.”

Similar growth problems have also hit the eurozone, with the Stoxx Europe 600 returning just 5.2 percent this year.

Meanwhile, waves of stimulus from the Chinese government have helped calm markets as turmoil in the country’s all-important real estate sector has sent shockwaves through the broader economy.

China’s CSI 300 Index rose 2.2 percent last month, taking gains to 16.16 percent in 2024, after officials said Beijing would “adopt a more proactive fiscal policy and moderately accommodative monetary policy.”

Justin Thomson, head of international equities at T. Rowe Price, said: “The world is likely to have to get used to a structural decline in China from the 5 to 6 percent growth rates of recent decades.

“A further challenge to Chinese growth could come if Trump makes good on his promise to impose more tariffs on China.

‘Meanwhile, the combination of compressed valuations, bottom-up innovation and the potential for strong counter-trend rallies means that opportunities to invest in China will continue to arise.’