Did Tom Stevenson's crystal ball deliver this year?

Two years ago, in the week before Christmas, I rounded out 2022 with some economic and market predictions for 2023. I revisited these a year ago and had another look into the crystal ball for 2024. So, I guess this is a Christmas tradition I’m committed to now, foolish as it feels.

First, though, a quick look back at what I said 12 months ago.

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Without a crystal ball, what are the possible scenarios for 2024?

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Last December, I thought the recession that didn’t arrive in 2023 would finally show up in 2024 on the back of higher for longer interest rates. From a UK perspective, that wasn’t a bad assessment. A shallow recession at the end of 2023 was duly confirmed early in the year. And after a mild recovery, UK GDP is now heading the wrong way again. However, when it came to the US, I was too cautious. The resilience of the American economy has been the biggest surprise of 2024.

As a consequence, my inflation and interest rate forecasts were too low but not wildly inaccurate. I predicted that interest rates on both sides of the Atlantic would be below 4.5 per cent. This week’s cut by the US Federal Reserve means I squeaked home over the pond. But sticky inflation in the UK means that it still hovers just above that level. The expectation of higher for longer rates has kept government bond yields on either side of the Atlantic higher than my 3.5 per cent prediction. Inflation, as I expected, has remained near but only briefly at the 2 per cent target.

When it came to stock markets, I read a few well, but badly underestimated the most important one. Predicting the FTSE 100 would rise from around 7,600 to 8,200 was uncannily accurate. At the time of writing, it stands at precisely that level. I also said that stimulus would benefit the Chinese market, which it duly did. A policy-fuelled spike in September saw the CSI 300 index rise from 3,300 to 3,900.

But I was way too cautious on the S&P 500, which has risen nearly 30 per cent year to date. With the US benchmark at 4,700 a year ago, I expected falling interest rates to support already high valuations but for the long run of US outperformance to come to an end. In the end, valuation multiples continued to rise, magnifying the impact of greater than expected earnings growth. The Magnificent Seven continued to lead the way and the rally broadened out to smaller companies. My 5,200 year-end forecast was reached as early as March and the US’s blue-chip index went on to clear 6,000 by November.

I got gold right, though. I said that a string of unpredictable elections would heighten political uncertainty and keep the precious metal above US$2,000 an ounce. It actually went on to reach US$2,600 despite the apparent headwind of a lack of income in an environment of persistently higher interest rates. Oil did indeed stay below US$90 a barrel, with the exception of a few weeks in April. I said sterling would flat line as rates fell on both sides of the Atlantic. It started the year at US$1.27, and that is where it is today.

So, what do I expect to see in 2025? First, I don’t believe that we can reasonably expect to repeat the strong equity market performances of 2023 and 2024 this year. The combination of higher valuations and rising earnings has been unusual. I expect next year will see static or modestly lower valuations, taking the edge off still higher profits. The net result will be more modest gains for shares, but probably a positive year overall.

If I am wrong, I would expect this to be because the market moves into full bubble mode and we experience a re-run of 1999. I hope this doesn’t happen because, almost by definition, it will end badly. Investors could get FOMO’d into a frothy and unsustainable melt-up in markets. Far better that the 15-year bull market since the financial crisis just runs out of steam. But I’ve seen this play out before and an over-exuberant blow-off is a distinct possibility.

I do think that the dominance of the US tech giants will end this year, whether that happens slowly or abruptly. Smaller US companies are more likely beneficiaries of Donald Trump’s America First policy programme, but big, liquid stocks have enjoyed a pre-emptive sugar rush too. The Presidential cycle points to a slower next two years than we’ve enjoyed in the last two. And many other markets around the world are much better value than Wall Street. Putting year-end numbers on this, I’d say: 6,300 for the S&P 500 and 8,500 for the FTSE 100.

The under-appreciated risk for 2025 is that inflation refuses to lie down and that investors start to demand higher compensation for holding longer-dated fixed income investments. The trajectory of inflation over the past couple of years has echoes of the late 1960s and early 1970s when an initial spike was apparently tamed only to take off again when central banks took their eye off the ball. They won’t want to repeat that.

So, while interest rates will ease a bit from here, I don’t think they will go as low as we hoped. I’m looking for 3.75 per cent in the US this time next year and 4 per cent in the UK. I don’t expect to see 10-year bond yields below 4 per cent in either country. I expect inflation will be 3 per cent on either side of the Atlantic.

Both gold and bitcoin have enjoyed stellar runs this year and will pause for breath in 2025. My predictions are US$90 for the cryptocurrency, having revisited US$75 in between. I think gold will end the year at US$2,500 an ounce. Synchronised monetary policy provides little reason for the pound-dollar exchange rate to change much and oil, too, should stay within a US$75 to US$90 range.

If my hit rate is as good next year as this, I will be both surprised and pleased.

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Please note that the views expressed in this article are my own.