The Month in a Minute
📰 Overall: December was a tough month for share and bonds markets. With the fanfare of the recent US election dying down, investors shifted their focus back to the health of the US economy and interest rates.
💪 Benchmark Performance: Wealthify's Original Plans and Ethical Plans all underperformed their benchmark.
📈 Market Movers: Japan (+2.7%).
🗒️ Plan Summary: Original and Ethical Plans with a higher allocation to bonds, performed better than those with a higher allocation to shares.
🌍 Original Plans: Shares (-0.5%) and bonds (-1.5%) both decreased.
🌱 Ethical Plans: Shares (-1.3%) and bonds (-1.4%) both decreased.
🕰️ Going Forward: Shares outperformed bonds this month and, whilst we’ve recently increased your exposure to shares, we remain confident in our relatively cautious positioning. We’re also optimistic that the diverse set of opportunities we’ve selected will continue to have a positive effect on Plans as we go through 2025, providing protection if economic conditions change.
Markets pull back after a strong November, as the Federal Reserve’s Chairman, Jerome Powell, quells Christmas cheer.
December was a tough month for markets, as the value of global shares and bonds dropping disappointed investors heading into 2025.
The month started off well — and it seemed we were going to see a repeat of 2023’s ‘Santa Clause’ rally. Things took a turn, however, following the announcement of an interest rate cut from the Federal Reserve (the Fed).
Whilst the cut may have been looked on favourably, the Fed’s Chair, Jerome Powell, also advised caution surrounding expectations of rate cuts in 2025. He announced inflation was likely to remain higher than expected, with two cuts now predicted in 2025, down from four.
Markets reacted negatively to this, with the S&P 500 dropping nearly 4% in the hours following the announcement. Investors were disappointed, hoping for a faster rate of reductions to stimulate economic growth.
Events like this just go to show how quickly investor sentiment can change, and how markets might react if they don’t get their expected level of interest rate cuts in 2025.
Inflation will influence whether these expected rate cuts happen; whilst it’s mostly under control, slight increases were seen in both the US and UK in December. The UK did not receive an interest rate cut from the Bank of England in December, with expectations of its next cut potentially coming in February.
Asian markets saw plenty of volatility in December.
Following the declaration of martial law, political uncertainty weighted heavy in South Korea, and China announced an historic shift in its monetary policy.
The Public Bank China signalled plans to cut interest rates in 2025 for the first time in 14 years. This move was partly driven by China’s need to rely less on manufacturing and exports, amid ongoing trade tensions with the US.
Chinese market reactions to this were generally positive, as investors look forward to improved economic conditions. However, some are still worried this won’t be enough to overcome the struggling property sector and weak demand for goods and services.
The market cannot continue to rise without pullbacks as people take profit; a look back at the market in 2024 shows constant dips, before new all-time highs are reached.
November was a very strong month for markets, meaning a December or January dip is completely normal (and necessary).
And, as we push on into 2025, it’s also a reminder to remain focused on the long term.
Markets
With a return of +2.7% in December, the strongest performer were Japanese markets. While interest rates remained unchanged, inflation rose more than forecasted, backing the case for a rate rise from the Bank of Japan in early 2025.
Driven by new policy support and a shift in the government’s monetary policy, China also outperformed, finishing up +2.5%. This came despite Emerging Markets and Asia Pacific (excluding Japan) finishing down by -1.0% and -1.8%, respectively.
US markets struggled, due to changing interest rate expectations, as the S&P 500 finished down -2.5%. The tech-heavy Nasdaq did have a better month though, finishing with a positive return of +0.5%.
UK markets finished down in December, having also been affected by the changing sentiment in the US; the FTSE 100 finished down -1.7%, and the FTSE 250 -0.7%.
Another contributing factor was UK Purchasing Managers Index data; released just before the US rate cut, it showed an unexpected decline, resulting in a drop for markets. This was the third consecutive month of shrinkage for the sector, which has faced persistent domestic and international challenges — resulting in the sharpest production decline in nearly a year.
European markets also finished in negative territory, down -1.2%. Despite receiving an interest rate cut of their own from the European Central Bank, political instability and the looming threat of a US trade war weighed heavy.
Currency
It was a strong month for the pound, as it strengthened against most major currencies. Strengthening by +0.3% against the euro, it also did particularly well against the yen, up +3.8%.
The pound did decline against the US dollar by -1.1% though. The dollar continues to appreciate, reaching its highest level since November 2022 following optimism from the US election.
It was a tough month for the yen, declining against nearly all major currencies (including coming near to a six-month low against the US dollar). Despite inflation increasing, there’s still uncertainty around the Bank of Japan’s timeline for potential interest rate hikes, which has kept the currency under pressure.
Investment type performance breakdown
A tough month for markets was reflected in Wealthify Plans, which underperformed their respective benchmarks.
After November’s strong performance and increased market volatility, a pullback like this wasn’t entirely unexpected.
Shares outperformed bonds, but still finished down for our Original (-0.5%) and Ethical (-1.3%) Plans.
Bonds also finished down for both Original (-1.5%) and Ethical (-1.4%) Plans.
Elsewhere, the US 10-year bond yield increased to 4.6% (its highest level since May 2024), as the Fed reduced its 2025 rate-cut projections. This had a negative impact on our Alternatives holding.
Thankfully, China’s strong performance did create strong returns from our Emerging Markets fund.
The money market continues to benefit from high interest rates, providing positive returns for both Ethical (+0.4%) and Original Plans (+0.4%).
Summary with Plan details
Despite increasing Plan allocation to equities, we’re still cautious, as questions remain about aspects of the US economy and tech company valuations.
Should the soft landing happen, we’re well positioned to take advantage of this upside (with protection on the downside, thanks to our allocation to bonds).
As long-term investors, we currently see bonds as providing good value in terms of income and capital appreciation.
This means Plans are well protected against unforeseen risks such as a global recession — which we think may still be underappreciated by the market, given the high valuations of shares.
Our Investment Team continues to actively monitor the financial markets and their impact on Plans — and are always ready to act in your best interest as events unfold.
We’re constantly evaluating new market information and key drivers, to help keep your Investment Plan on track.
It’s important to remember that it’s normal for markets to go up and down, with periods of volatility to be expected when you invest.
As always, we continue to look for opportunities to best position your investments, with the goal of protecting your money and achieving your long-term objectives.
With investing, your capital is at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
