Monthly Market Report – December 2024

The fatigue experienced by Wall Street indices and the spike in bond yields left the markets without a Christmas rally this December.

The U.S. stock market had two clearly differentiated stages. During the first sessions of the month, the upward trend seen in November continued, allowing the S&P-500 to reach new all-time highs near 6,100 points. This was achieved thanks to the Magnificent 7, as the rest of the market registered declines across the board.

In the second half of the month, the Magnificent 7 joined the selling spiral, erasing all monthly gains and dragging the S&P-500 to close December with a return of -2.50%. Stocks like Tesla dropped by -17.60% from the highs reached earlier in the month. Particularly notable was the performance of indices like the Dow Jones, which suffered 10 consecutive losing sessions, something not seen since 1978.

Despite the poor performance in December, Wall Street recorded its second consecutive year of double-digit returns. The S&P-500 closed 2024 at 5,881.63 points, reflecting an annual return of +23.31%.

Meanwhile, the bond market also experienced significant price declines, with a corresponding spike in yields. The U.S. 10-year Treasury closed the year with a yield of 4.57%, near its 2024 highs and far from the 3.88% where it started the year, which represents a price decline of -5.15%.

One of the main bearish factors was the Fed. Despite meeting expectations and cutting rates by 25 basis points, the post-meeting comments by Powell were poorly received by the market:

• One of the Fed members opposed the rate cut.
• There was repeated mention of the inflation risk and the shift in dynamics following Trump’s victory in the recent elections.
• Most members felt comfortable with just 1 or 2 cuts in 2025, a figure below earlier estimates.

Stock markets suffered significant declines following the Fed meeting, with the S&P-500 dropping -2.95%, the Nasdaq falling -3.60%, and the Russell 2000 of small-cap companies losing -4.39%.

The market was also unsettled by the second consecutive rise in inflation. The U.S. CPI rose to +2.7% from the previous +2.6%. Even more concerning was the Producer Price Index, which surged more than expected (+3.0% vs. +2.4% previously) and reignited inflation fears that the market had thought were behind.

In Europe, the ECB also cut rates by 25 basis points, bringing its benchmark rate to 3.0%, a move that was fully priced in by the market. Unlike the Fed’s outlook, Lagarde is expected to continue with a rapid pace of rate cuts in 2025, with 4 to 5 cuts anticipated for the coming year.

The widening interest rate differential between the Fed and ECB fueled the dollar’s continued appreciation, which began in the last quarter. The EUR/USD exchange rate closed 2024 at 1.0354, the lowest level recorded during the year, marking a -6.21% decline in EUR/USD for 2024.

Geopolitical risks resurfaced in December. First, in addition to the political crisis in Germany, France is also facing significant challenges in forming a stable government and approving a budget for the coming year. Added to this is the collapse of the al-Assad regime in Syria, following the capture of several cities by Syrian insurgent radicals. Two of the main pipelines to Europe pass through Syria, causing oil prices to rise by nearly 5.50% in December.