Markets in 2024: The U.S. Rally Captivates Investors

By Naomi Rovnick, Dhara Ranasinghe and Rodrigo Campos

LONDON (Reuters) - As 2024 unfolded, many investors anticipated that a global stock rally would lose momentum. They expected swift U.S. interest rate cuts that would benefit Treasuries and reduce the strength of the dollar, also hoping for a boost in emerging market currencies. However, this consensus has been challenged.

World stocks are on track for a second consecutive yearly increase of more than 17%, showing resilience in the face of various global issues including conflicts in the Middle East and Ukraine, a struggling German economy, unexpected political instability in France, and China's economic slowdown.

The impressive performance of global stocks can be attributed largely to another year of significant gains in the U.S. stock market. The excitement surrounding artificial intelligence and strong economic growth have drawn more investment into U.S. assets, resulting in a 7% rise in the dollar against other currencies in 2024.

Investor optimism surged following Donald Trump's election victory on November 5. Trade speculation centered on his promises of tax cuts and deregulation, which also drove the price of bitcoin up by an impressive 128% over the year.

As the year comes to a close and antennas are raised for 2025, the global markets appear increasingly tethered to U.S. trends, presenting a risk following recent remarks from the Federal Reserve. The central bank indicated that fewer rate cuts would occur in the coming year, which followed weak U.S. job data and an unexpected midyear interest rate hike in Japan. These events caused considerable volatility in financial markets, leading to a temporary market downturn in August.

Debt market players are beginning to express concern about potential trade tariffs proposed by Trump, which could reignite inflationary pressures and lead to increased borrowing by the federal government. Such dynamics carry the potential to disturb the $28 trillion Treasury market and broader government bonds.

"If the U.S. market experiences a downturn, it will be challenging to find safe havens for investment," stated Julien Lafargue, the chief market strategist at Barclays.

Wall Street's Strength

Wall Street's key stock index saw a remarkable increase of 24% this year, following a similar rise last year, marking the strongest two-year performance since 1998.

Noteworthy rises included shares of artificial intelligence chip manufacturer Nvidia, which jumped 172% in 2024; Tesla, led by Elon Musk, which saw a 69% increase; and overall exposure to U.S. stocks reaching record highs in December.

The combined market value of the so-called Magnificent Seven U.S. tech stocks constitutes about one-fifth of the MSCI world share index, posing additional market risks in case their earnings or advancements in AI fall short of expectations.

Europe's Challenges

This year, the euro lost approximately 5.5% against the dollar, while European stock markets significantly underperformed their U.S. counterparts—marking the worst relative performance in at least 25 years.

Following four rate cuts by the European Central Bank, the eurozone economy is expected to decline at a slower pace, and some analysts are predicting a rebound for Europe in 2025.

The likelihood of an international market rally is generally low if the U.S. economy falters. Notably, gold prices rose 27% in 2024 as investors sought alternative diversification strategies.

The Resilient Dollar

Concerns regarding U.S. tariffs and strong dollar performance have burdened emerging market currencies, deepening the struggles of many nations. For instance, currencies in Egypt and Nigeria plunged around 40% against the dollar after recent devaluations, while Brazil's real weakened by more than 20% amid rising concerns over government debt and spending.

In contrast, Malaysia's ringgit experienced a modest 2% rise, while the Hong Kong and Israeli currencies remained almost unchanged over the year.

"We remain cautious toward emerging market currencies, primarily due to the implications of the Trump trade war," explained Arif Joshi, co-head of emerging market debt at Lazard Asset Management.

China's Volatile Market

The Chinese stock market exhibited extreme fluctuations in 2024, soaring nearly 16% in just one week in September after the government hinted at potential economic stimulus. However, markets have also seen sharp declines since then. Investors who endured the volatility in Chinese stocks were rewarded with a cumulative 14.5% increase by year-end, though many predict continued short-term fluctuations until the Chinese government intervenes.

Bonds Under Pressure

Throughout 2024, despite a general decrease in interest rates across major economies, bond investors faced losses after anticipating more monetary easing than central banks ultimately provided, as inflation proved more persistent than expected.

In the U.S., yields rose roughly 60 basis points; in Britain, 10-year gilt yields jumped 100 basis points; and German yields increased by 16 basis points. Japan saw two interest rate hikes this year due to rising inflation, causing the 10-year bond yield to spike by 45 basis points, marking its largest increase since 2003.

Looking ahead, the bond markets are poised for challenges as uncertainty surrounds how Trump's policies will impact the Federal Reserve. Recent turmoil in French debt has also indicated that investors are now vigilant about punishing excessive government borrowing.

Unexpected Performers

Amidst the bond market struggles, some of the riskier markets yielded significant returns in 2024. For example, dollar bonds from Lebanon, which defaulted recently, performed well, returning around 100% as investors anticipated weakening of Hezbollah due to ongoing conflicts in the Middle East.

Additionally, dollar bonds issued by Argentina returned 100%, fueled by an ambitious reform agenda and expectations surrounding Trump’s potential impact on Argentina’s economy. Similarly, Ukrainian bonds jumped over 60% as hopes grew that Trump could help end the Russia-Ukraine conflict.

Markets, Investors, Stocks