The year 2024 was marked by a striking divergence in the performance of global markets, with the United States emerging as a clear outlier. The U.S. economy defied initial forecasts, with real GDP growing at an impressive 2.7% compared to the expected 1%. This outperformance was underpinned by strong corporate profits concentarted in large tech companies, favourable credit conditions, healthy balance sheets, and a potent wealth effect stemming from surging equity markets.

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The relevant portion of the video runs from 3:34 to 11:30.

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The key trends of 2024

The strength of the U.S. economy was reflected in the appreciation of the dollar, which gained 5.5% over the course of the year. Conversely, the Australian dollar depreciated by 7%. The tech-heavy Nasdaq index was a standout performer, soaring 34% to reach unprecedented highs. Bitcoin, the bellwether cryptocurrency, experienced a staggering 151% surge, captivating investors worldwide.

The unexpected victory of Donald Trump in the U.S. presidential election and his protectionist trade agenda likely provided an additional boost to U.S. equities and the dollar in the latter part of 2024. As investors grappled with the implications of the new administration's policies, markets reacted with a mix of optimism and uncertainty.

Central banks around the world took divergent paths in their monetary policy decisions. While most opted to cut interest rates, with the U.S. Federal Reserve surprising markets with a 50-basis-point reduction, the Reserve Bank of Australia (RBA) maintained rates at their existing levels. This divergence sparked discussions about the "neutral rate" for policy and its implications for economic growth and inflation.

Meanwhile, China faced economic headwinds as its growth trajectory slowed. Despite the implementation of stimulus measures, domestic demand remained sluggish, hampered by high levels of housing debt and declining home prices. The world's second-largest economy found itself grappling with the challenges of rebalancing and sustaining growth in the face of structural shifts.

Inflation, a key metric for central banks and investors alike, generally trended lower across major economies in 2024. However, there was ongoing debate about the pace at which inflation would continue to fall and eventually stabilise at lower levels.

In Australia, the market performance was influenced by both global trends and domestic factors. The S&P/ASX 200 index delivered a solid return of 12%, supported by the resilience of the Australian economy and the relative stability of the banking sector. However, the stronger U.S. dollar and the underperformance of key trading partners like China weighed on some sectors, particularly resources and export-oriented businesses.

What this meant for diversified funds

Diversified funds in Australia, which aim to spread risk across various asset classes and geographies, faced a challenging environment in navigating the divergent market conditions. Funds with a higher allocation to U.S. equities and the technology sector likely outperformed those with a more balanced or conservative approach. However, the depreciation of the Australian dollar would have provided some support to returns from international assets.

Overall returns ranged from around 6% for conservative funds to almost 15% for aggressive passive funds, while industry funds lagged due to high allocations to unlisted investments for the second year inn a row. Further detail and analysis can be found in this week's video between 3.34 and 11.30.