Thin Trading Fuels Stock Plunge, Dollar Weakness Wall Street Wobbles

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Market Roundup: A Look Back at 2024 and Ahead to 2025

As the curtain closed on Christmas week and the final trading days of 2024, markets experienced a slight pullback, characterized by profit-taking and anticipation of the upcoming year. While the year concluded on a more subdued note, 2024 delivered impressive gains across major indices, fueled by robust economic growth and expectations surrounding the incoming presidential administration.

The U.S. stock market, after enjoying a significant rally earlier in December, saw some retracement in the last week of the year. Analysts attributed this to a combination of profit-taking ahead of the New Year's holiday and potential portfolio rebalancing by institutional investors, shifting assets from stocks to bonds. High-performing technology stocks, including Tesla, Amazon, Microsoft, and Nvidia, led the decline, contributing to the S&P 500's 1.11% drop on Friday. Despite this, the S&P 500 still managed a 0.67% gain for the week, capping off a remarkable year with a 25% overall increase. The Dow Jones Industrial Average boasted a 14% rise for the year, while the tech-heavy Nasdaq Composite soared by an impressive 31%.

The U.S. dollar, while experiencing a slight dip on Friday, maintained its strength, poised for a nearly 7% annual gain. This strength is largely attributed to anticipated U.S. economic growth, driven by prospective tax cuts, deregulation, and trade policies under the new administration. Market participants believe these factors will encourage the Federal Reserve to maintain a cautious approach to interest rate cuts well into 2025. Federal Reserve Chair Jerome Powell's earlier statements about cautious rate reductions further solidified this expectation.

The dollar's performance against other major currencies also reflected its robust position. It showed a notable 6.6% gain for 2024, including a 5.4% rise against the Japanese yen in December alone and a near 12% surge for the entire year. The euro remained relatively steady but near its two-year low, reflecting a 5.6% loss against the dollar year-to-date.

Across the Atlantic, European markets fared well, with the Stoxx 600 index gaining 0.67% on Friday and approximately 1% for the week. However, the economic outlook for the eurozone remains uncertain, with traders anticipating further rate cuts by the European Central Bank (ECB) to combat slowing economic growth. This expectation of looser monetary policy contributes to the euro's weakness against the dollar.

The global economic landscape is poised for significant shifts in the coming year. The incoming U.S. administration's policies, including deregulation, tax cuts, and potential trade adjustments, are expected to have both positive and potentially inflationary impacts on the global economy. Central banks worldwide are closely monitoring these developments, with the Bank of Japan expressing a preference for clarity on U.S. policies before making significant monetary policy changes. This cautious approach underscores the interconnectedness of global economies and the potential ripple effects of U.S. policy decisions.

In the fixed-income market, the two-year Treasury yield, a key indicator of interest rate expectations, eased slightly. U.S. debt trends also influenced European bond yields, with Germany's 10-year bund yield rising. Meanwhile, gold prices dipped slightly but were on track for a substantial 27% annual gain, the strongest since 2011, driven by geopolitical uncertainties and inflation concerns.

As 2025 begins, market participants are closely watching the unfolding political and economic landscape. The interplay of U.S. policy changes, global economic growth, and central bank actions will likely shape market dynamics in the coming year. The inauguration of the new U.S. president is seen as a potential inflection point, with market expectations already reflecting anticipated policy shifts. The coming months will reveal how these policies translate into tangible economic outcomes and their subsequent impact on global financial markets.