The Fed finishes 2024 rather as it ended 2023

This will probably be my last post of the year as I take a break over the festive period 2024. The US The Fed did exactly what the market expected on Wednesday, or what we thought the market expected, by cutting rates by 25 basis points and then delivering a more hawkish statement on the outlook for interest rates in the coming year. Jerome Powell left the market expecting only two cuts from the Fed in 2025. In Mr Powell’s words, “We had a year-end projection for inflation, and it’s kind of fallen apart as we approach the end of the year.” The US equity market, which by any measure looks expensive, took fright. Yields sold off but not dramatically.

This year is, in many ways, a mirror image of 2023, with big tech driving the S&P 500 to new highs. Smaller cap stocks lag their big brother, and European equities, including the UK, lagging almost everything else. In many ways, Jerome Powell’s statement was also similar to the one he gave 12 months ago. The horizon for interest rate cuts has been pushed out as economic growth has remained resilient and inflation rates have remained sticky. The world continues to fret about economic growth in China. One difference as we enter 2025 is that we now have a new pro-growth president whose policies may further complicate the Fed’s position next year.

We should mention the Bank of England, who left rates where they were despite lowering their growth targets for 2025. In the accompanying statement, the Bank did refer directly to the impact on growth and inflationary pressures from the measures announced in the Autumn Budget. As we enter 2025, some forecasts suggest we could see inflation back over 3%, growth stall further, and the possibility that this combination will force Ms Reeves back to the taxpayer with a cap in hand. I am reminded by the words of Churchill: “The idea that a nation can tax itself into prosperity is one of the crudest delusions which has ever fuddled the human mind.”

As we look to 2025, it struck me that fund managers who started their careers just after the financial crisis of 2008 will be in their late 30s now and could even be in their early 40s. They will have had little experience with interest rates much above zero and have not really experienced a global economic recession. I don’t count 2020; that was over in a flash and led to an explosion of liquidity. It feels as if they have become immune to stocks trading on extended valuations, referring to the US, and consider it the norm. Their biases are now programmed to buy stocks on multiples that one feels only work in a perfect world. The dilemma remains: buy expensive stocks with growth potential, i.e. the US, or cheap but dull stocks, i.e. the UK and Europe. Or one could stick it in the bond market and wait for your opportunity.