Macro Update

• • Market sentiment soured in December as the focus shifted from the policy implications of US election results to higher Federal Reserve rate expectations.
    
  • The FOMC cut rates by 25 bps to 4.25% - 4.50%, as expected. However the committee’s economic projections signaled a hawkish bias towards only two rate cuts in 2025. Current market expectations are that rates will remain on hold at the January meeting.
    
  • Non-farm payroll growth rebounded in November to a solid 227,000, while the unemployment rate ticked higher from 4.1% to 4.2%. The report points to a labor market that is still healthy overall but slowing.
    
  • Progress on disinflation continues to be stalled above the Fed’s target, with both core CPI and core PCE unchanged from the prior month, holding at 3.3% and 2.8%, respectively.
    

Global Equity

• • Equity markets were lower in December as markets reacted to the hawkish Fed projections. Small cap stocks lagged as the risk from higher than expected rates offset the prior month’s optimism over potential benefits from election results.
    
  • The US dollar continued to strengthen, weighing on non-US equity returns. The dollar is nearing a two-year high, built on expectations that US growth will continue to outpace peers. Central bank policy divergence and the potential for trade tariffs have also contributed to recent dollar strength.
    
  • Valuations for US equities, particularly large caps, are stretched but earnings forecasts remain solid. Despite the positive US growth outlook, valuation levels leave little margin for error. Non-US valuations are reasonable, but the more challenged macro outlook could dampen upside potential.
    

Global Fixed Income

• • The US Treasury curve steepened in December with longer-term bond rates rising as markets came around to the view that rates are likely to remain well above pre-pandemic levels in 2025. The US 10-year yield moved 40 bps higher to 4.57% while the 2-year yield rose 9 bps to 4.24% and short-term rates fell as the Fed cut.
    
  • Global rates were mostly higher as slowing disinflation is expected to limit central bank easing. The Bank of England held rates steady in December amid inflation fears, while the European Central bank delivered its 4th cut of 2024 as economic growth in the bloc remains weak.
    
  • Credit spreads widened modestly in December but remain well below average. Current spread levels leave little room for further contraction, but total income remains relatively attractive and the strong US economy supports corporate fundamentals.
    

Global Real Estate

• • Returns for core real estate were positive in the 3rd quarter for the first time since the 3rd quarter of 2022. Property values still declined modestly, but the income component of returns more than made up the difference to generate a positive return overall. All sectors but Offices produced positive returns in the quarter.
    
  • Cap rates have seen upward pressure in an environment of increased and sticky bond yields. With borrowing rates stabilizing and likely to fall, real estate transaction activity is picking up.