The final week of 2024 and the start of 2025 showed typical holiday season volatility due to low trading activity. Markets experienced a modest Santa rally, with the NASDAQ initially gaining 4% during the Christmas period, though much of these gains were surrendered between Christmas and New Year. The first week of 2025 has seen renewed momentum, with the NASDAQ up 3% and Japanese markets surging 4%. The Australian market showed resilience despite negative press around productivity concerns and some quite dour outlook notes doing the rounds, while emerging markets and global small caps remained largely flat. Interest rates continued to trade in a narrow band, with U.S. 10-year yields hovering around 4.6% and Australian rates near 4.5%.

2024 Wrap-Up: U.S. Equities Shine Amidst Global Economic Challenges

As we turn the page to 2025, it's worth reflecting on the key market trends and surprises that shaped markets in 2024. In this wrap-up, we'll dive into the 2024 performance of multi-asset funds and highlight some of the most notable developments.

U.S. Exceptionalism Drives Soaring NASDAQ and S&P 500 Returns

Perhaps the biggest story of 2024 was the continued dominance of the U.S. stock market, particularly large cap tech stocks. The NASDAQ and S&P 500 both delivered returns just shy of 30% for the year, far outpacing other major global indices. This U.S. exceptionalism was driven not just by investor enthusiasm around artificial intelligence and Donald Trump's "Make America Great" trade policies after his election win, but by surprisingly robust economic growth.

While GDP growth expectations started the year at a modest 1%, the U.S. closed out 2024 with growth near 3%. However, the gains were highly concentrated in mega-cap tech names, while the rest of the US market and global equities saw much weaker performance. This polarisation presented challenges for active managers who were broadly underweight the U.S. and those high-flying tech leaders.

Gold Glitters, Emerging Markets Surprisingly Resilient In The End

In a surprising twist, gold was one of the top performing assets in 2024, boosted by strong central bank buying, especially in Asia. Despite negative sentiment, emerging markets also turned in solid gains of 17%. Japan impressed with a 20% climb, while Europe and Australia posted respectable 10-12% returns in local currency terms.

Yield Curve Inversion Turns To Steepening  

On the interest rate front, 10-year government bond yields remained within a 4-5% range, creeping up to 4.6% in the U.S. and 4.5% in Australia by year-end. The persistently higher rates proved to be a headwind for long duration assets which ultimately underperformed cash but with considerable volatility. Credit spreads on the other hand continued to grind lower and both high and low grade corporate credit provided robust returns. Australian floating rate notes generated particularly strong risk adjusted returns. Macro forecasters have given up on the much awaited recession but the bond market is still following a well-worn path – yield curve inversion (long rates below short rates) anticipating a cutting cycle, then long rates rise in advance of the recovery. The only thing missing so far is the recession.  

Passive Beats Active as Mega-Caps Dominate

In a market regime favouring highly concentrated U.S. mega-cap tech exposure, passive strategies outperformed active management for both conservative and aggressive multi-asset funds. For a typical "balanced" 70/30 fund, passive versions returned nearly 14% compared to around 12% for active funds. Industry superannuation options weighted to unlisted assets, struggled to keep up. Australia's largest fund, AustralianSuper, is expected to report returns of little over 7%.

Risk vs Reward in Sharp Relief

Dissecting equity manager performance reveals some noteworthy risk-return trends. U.S. tech companies like NVIDIA and Tesla delivered outsized gains, but with significantly higher volatility. Some growth managers lagged by not holding semiconductor stocks, while many value managers struggled in both absolute and risk adjusted terms which is less easy to forgive.

Looking ahead to 2025

Investors are grappling with how to construct resilient portfolios in a market that appears late-cycle, yet reluctant to rotate from highly-valued growth to cheaper value stocks. While the U.S. was the undisputed market leader in 2024, a repeat of that performance gap seems unlikely given this valuation starting point. The most astute investors will be focused on identifying the most attractive risk-adjusted return opportunities in a bipolar market landscape.

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