Here’s a short summary to jog your memory:
- Going into 2024, the US term spread had been negative for a full 18 months. While pessimism was slowly receding, there was no dearth of well-respected sources citing a substantial probability of recession in 2024. After all, the negative term spread was universally recognized to be the best recession indicator there is. As it happens, the US economy strengthened instead. After a very strong third quarter, recent estimates put the 2024 growth rate at 2.8%.
- A large part of the optimism was driven by widespread expectations of rate cuts, with the Federal Reserve expected to cut the Fed funds rate by as much as 150 basis points, starting in March. They didn’t start until September. And it turned out to be no more than 100 basis points – which is still substantial, though. This year, the European Central Bank (ECB) was leading the way, cutting the main refinancing rate from 4.5% in June to 3.15% in December.
- Despite lower key rates, long market interest rates rose markedly in 2024. The yield on 10-year US Treasuries rose by 66 basis points and the corresponding euro yield rose by 35 basis points. As usual, Norway tagged along with the US, while Sweden followed the euro market. The Bloomberg Global Aggregate, the most widely accepted gauge of global investment grade bonds, fell by 1.6% and now has a lot of catching up to do
- And despite notably higher long rates, growth stocks outpaced value stocks. The MSCI World Growth index returned 28.7%, versus 14.5% for the MSCI World Value index. Given the higher duration of growth stocks, one would not expect them to excel in this environment. I guess this is an extra strong testament to the optimism surround the Magnificent Seven stock market giants in particular and AI in general.
See where I’m getting? It’s not so much about expecting the unexpected, a phrase I believe you’ve seen a number of times. It’s about realizing that markets don’t always comply with rules of thumb or follow your standard reasoning. Even when something unfolds as expected, something unexpected may still follow. Accounting identities aside, there are no uncomplicated relationships in the world of economics and finance. That’s what makes it so fun!
In the meantime, have a wonderful, peaceful and prosperous 2025! I’m not offering anything in the way of forecasts, just a very simple reminder: Empirically, economic growth is a lousy predictor of stock market returns. It’s generally the other way around; markets are leading the economy. I’m not saying that this will be the case now (this time may very well be different). But if it turns out to be the case for 2025 too, most economies should hold up nicely for yet another year.
Finn Øystein Bergh
Chief Economist & Strategist
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