The US market was the standout again and is poised to deliver annual gains exceeding 25%. This makes 2024 among the strongest performances this century. Notably, it would mark only the second time on record that this level has been achieved in back-to-back years (the last time was in 1954 and 1955).
The gains this year have been driven by falling inflation and interest rates, corporate earnings growth and tech innovations – such as demand for silicon chips and growth in datacentre deployment.
Key lessons for investors from 2024
Mark Twain’s saying that “history doesn’t repeat, but it often rhymes” rang true this year, with the key lessons from 2024 being those we’ve seen many times before.
Keep politics out of investing
Political and geopolitical headlines dominated the news cycle this year, from Middle East conflict to the drama of European and US elections. Despite the noise, markets took these events in stride.
It is hard enough trying to pick the outcome of an election, let alone which policies investors will focus on, and how this may impact on markets. As we saw after the 2016 Donald Trump election victory and the United Kingdom Brexit vote – markets reacted differently than pundits had predicted.
Likewise, despite the war in Ukraine still raging and conflict in the Middle East seeming to escalate, oil prices are trading lower than they were before the Russian invasion in February 2022.
Investors who have remained focused on fundamental factors and avoided being sidetracked by political distractions have been rewarded.
Having a global portfolio often pays
With US markets stealing the spotlight and New Zealand under pressure for much of the year, 2024 was a reminder of the benefits of international diversification.
The New Zealand dollar’s tendency to fall during periods of domestic weakness provided an added boost to returns on foreign assets – with the US dollar up over 10% against the NZ dollar this year.
Most Kiwis have the bulk of their wealth and income tied to the domestic economy. Having international exposure can provide an important offset when our economy and share market are doing it tough, reduce volatility, and enhance long-term return outcomes.
Innovation and earnings growth drive returns
The outperformance of US shares in 2024 reaffirmed that innovation and earnings growth are the true drivers of market performance. Share markets in much of Europe, with fewer listed tech companies, have seen their fortunes lag.
Many of the large companies driving markets higher this year have benefitted from structural growth in areas like software, cloud computing, digital payments and e-commerce.
AI is just one example of innovation propelling earnings growth and returns. Nvidia and Meta (aka Facebook/Instagram) are great examples of companies benefiting from AI – both companies have seen their earnings estimate rise by more than 40% during the year - and their share prices are up significantly more.
But it isn’t just technology companies powering the markets. Much loved retailer Costco is up over 40% this year, and more than 150% since it first broke ground in New Zealand in 2020.
The point here is that over the long term, the key to successful investing is finding well-run businesses that innovate and can grow under their own steam. Again, focus on the fundamentals and block out the noise.
What lies ahead for 2025
After a decade of unusual economic settings, the backdrop in 2025 appears to be more conventional. Pre-Covid, the world experienced an unusually long period of very low inflation and interest rates, while the pandemic caused a once in 40-year spike in inflation and interest rates.
Coming into 2025, inflation is subdued, and central banks are lowering interest rates.
This balance of steady global growth and restrained inflation typically provides a good backdrop for equity markets. Likewise, long-term bond yields are still near decade highs, giving fixed-income investors a boost just as term deposit rates start to fall.
But, as they say, the only constant in the markets is change. Some of the risks to watch out for include instability in the Middle East, areas of hype and over-valuation in some markets and ramifications from US political change.
With US debt levels already high, and tax cuts on the cards, there are growing questions about the sustainability of US debt levels (and many other major economies for that matter). The potential for the incoming US administration to impose trade tariffs also increases the risk of higher inflation and slower growth – if taken to extremes.
As 2025 gets under way, you’ll no doubt read many predictions about what the new year will hold. Some of these may play out, but many won’t.
For long-term investors, it’s important to remember there is a lot to be optimistic about.
Despite frequent predictions to the contrary, in recent years we’ve witnessed continual economic development – and rapid innovation in areas like technology and healthcare.
This all bodes well for economic growth, health, and prosperity in the years ahead.
