Stocks rise, economies twist, governments fold

During 2024, company shares were the best performing major asset class. Commodity prices rose, while bonds underwhelmed.

One of the major themes of the year was the strength of the U.S. economy. American households continued to spend, beginning the year with high cash balances from Covid payouts and ending it with higher incomes and reduced travel expenses.

Economic performance outside the U.S. was distinctly mixed.

China, for example, did not emerge in early 2024 from its Covid lockdown with the same economic vigour that developed countries did. The Chinese government has attempted to wean the economy off real estate investment as a driver of growth. Typically, periods of lacklustre economic growth could be perked up by encouraging more construction. State banks would ensure households had the means to pay for new properties, and there was plenty of demand because Chinese households had relatively few alternatives to invest their savings into. Unfortunately, this led to too many properties being built and, with low occupancy, prices started to fall. In stark contrast to America, China’s economy has been weak, with consumers at the heart of that weakness.

In the UK, its economy grew at a modest pace. It ended 2023 in a shallow recession and entered 2024 with an election in prospect. Household spending edged up as taxes were cut and the long shadow of utility bill increases began to lift.

Like many European economies, the post-Covid period has been difficult for the UK, imposing a heavy cost in terms of energy security and government debt. Replacing Russian energy supplies has been costly, with households bearing the brunt of high inflation. The combined impact of Covid and subsequent inflation has resulted higher government borrowing costs.

Democracies change their lead

The economic situation has brought significant political challenges, too. In a year in which over 100 countries (accounting for half the world’s population) held elections, voters dismissed most of the incumbent governments.

Inflation made households much worse off, and governments were unable to help. That’s mainly because their finances were stretched, but even if they hadn’t been, extra government spending would risk fuelling inflation anyway – an impossible bind.

Over the final quarter of the year, the new UK Labour government announced its budget. Unperturbed by high borrowing and high tax rates, the chancellor looked to tax and borrow even more to improve the standard of public services. In the view of the Office of Budgetary Responsibility (OBR), this will increase inflationary pressure and so won’t increase economic growth much. If inflationary pressures increase, it will be difficult for the Bank of England to cut interest rates much. Just two cuts are currently expected for 2025.

Snap elections in Europe

Although French President Emmanuel Macron’s term in office is not due to end until 2027, he triggered early legislative elections in July, as his popularity has waned. After no party achieved a majority, it took until September for Michel Barnier to be appointed as prime minister. However, his minority government lasted only until the beginning of December due to unpopular tax increases and spending cuts needed to bring France’s budget within European Union borrowing limits. As the year ended, new Prime Minister, Francois Bayrou had formed a new government and was attempting to agree a budget.

Over the border in Germany, Chancellor Olaf Scholz triggered early elections as his three-party coalition government (centre-left Social Democratic Party, centrist Free Democratic Party, and centre-left the Greens) were unable to agree on economic policies. The elections will take place in February, with the centre-right Union party alliance currently far ahead in the polls, although still short of a majority, with the further-right Alternative for Deutschland in second place.

America plays the Trump card

All this European political drama will struggle for prominence in the history books relative to November’s U.S. elections.

President-elect Donald Trump’s victory came in addition to his Republican Party retaining control of the U.S. House of Representatives and capturing a Senate majority. This so-called sweep of the White House and both chambers of U.S. Congress theoretically leaves the Republicans in a strong position to pass and enact legislation. The nuance is that the majority in the House is just four seats. This means they need virtual unanimity to be assured of passing legislation. A series of failed votes in the days before Christmas to extend federal funding and avoid a government shutdown showed just how difficult it’s going to be to achieve the unanimity required.

Despite such challenges, the election result was cheered by the stock market and bemoaned by the bond market in anticipation of policies which may favour U.S. growth.

What could these policies look like?

It’s widely assumed that a Republican Congress will cut taxes. However, as the U.S. federal budget deficit (the amount by which borrowing increases) ran to nearly to $1.8 trillion last year, cutting taxes would seem difficult to justify for anyone who considers themselves fiscally conservative.

A fiscal wildcard?

Spending cuts would be one way to slow the pace of borrowing in the U.S. How will those be achieved? Enter Tesla founder Elon Musk, who Trump has appointed as one of the chairs of the Department of Government Efficiency (DOGE), which will look to cut “at least $2 trillion” from U.S. government spending by eradicating “waste”. However, there’s much scepticism about how effective this is likely to be.

More tangible is the belief that the regulatory environment will be lighter under a second Trump presidency. A principal beneficiary of this would be U.S. banks, which performed strongly in the weeks surrounding the election and rose to high valuations to become one of the best performing sectors of 2024.

The other strong performers of the year were technology and communication services. However, these sector definitions obscure a group of companies perceived to benefit from the increased roll-out of artificial intelligence (AI) through their access to data, their data processing capabilities, or because they provide the semiconductors that form the brain matter of AI.

At the other end of the spectrum, the nomination of Robert F Kennedy Jr as Secretary of Health and Human Services weighed on healthcare stocks due to his outspoken scepticism over vaccines.

Gold had a strong year, although its ascent stalled a little after the election. Gold has limited supply and therefore contrasts with fiat currency (government-issued currency that isn’t backed by a commodity such as gold) or government bonds, both of which have seen substantially increased supply in recent years.

Although gold doesn’t provide the income stream that bonds do, its low supply and historical association with wealth can make it seem attractive. These limited supply characteristics are also found in Bitcoin, which enjoyed a boost towards the end of the year as Trump, who once described Bitcoin as a scam, seems more disposed to it now. There is, however, a seemingly limitless array of other cryptocurrencies that somewhat challenges the idea of “limited” supply.

A loaded deck

The positive stock market reaction to President-elect Trump’s victory seems to imply that he will increase economic growth. This is something many economists are sceptical of. They argue that several policies (tariffs, immigration restrictions and deportations), if they were practical, would weigh on economic growth over the long term. But inevitably, many of his campaign pledges might not be delivered, as was the case in his first term. The most deliverable element is the easier regulatory environment, which requires little input from Congress, so this is the one the market is focused on.

As a new year begins, we have an idea of what the new president and Congress will be hoping to achieve, we just don’t know what they’ll manage. Because as those who know politics say:

“Politicians can’t manage. All they can do is talk.” – Donald Trump, 45^th President and President-elect of the United States

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