Key takeaways from the latest round of central bank meetings

Executive summary:

• The Nasdaq Composite Index crossed 20,000 for the first time ever
• The Bank of Canada delivered another jumbo-sized rate cut
• We anticipate a broadening opportunity set in private markets in 2025

On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin discussed U.S. equity-market strength as well as recent rate decisions from key central banks. He finished by highlighting the main themes in Russell Investments’ newly released 2025 Global Market Outlook.

U.S. equity markets hit record highs—again

Lin began by digging into the recent strength in U.S. equity markets, noting that the Nasdaq Composite Index crossed above 20,000 for the first time in history earlier this week. Specifically, the tech-heavy index closed at 20,034 on Dec. 11, he said—the latest milestone in a remarkable year for the Nasdaq, which has delivered robust gains of around 35% year-to-date. Outside of the Nasdaq, other major U.S. equity benchmarks have also performed strongly in 2024, Lin noted, with the S&P 500® Index advancing roughly 27% year-to-date and the Dow Jones Industrial Average up by about 16%.

So, how much more could U.S. markets climb? Just because they’ve established new all-time highs doesn’t mean the rally will stop, Lin said, pointing out that equity markets have already broken through record highs multiple times in 2024. However, he noted that as markets have continued to move higher, equity valuations have become more expensive and investor sentiment has turned noticeably overbought (albeit not yet at euphoric levels, according to the strategist team’s composite contrarian indicator).

“This backdrop could create a potential for asymmetry in market returns in 2025, where the room for upside may be more limited. During these types of market environments, proactively rebalancing back to a strategic asset allocation can be an important risk management consideration,” Lin said, noting that doing so would still allow investors to participate in a market rally if equity markets continue to grind higher.

Three days, three central bank meetings in Canada, Australia, and Europe

Turning to central banks, Lin noted that three key central banks held policy meetings the week of Dec.9: the Reserve Bank of Australia (RBA), the Bank of Canada (BoC), and the European Central Bank (ECB).

Starting with the RBA, he said that Australia’s central bank left interest rates unchanged, with bank leaders viewing inflation as still too high to warrant a rate cut. Lin explained that Australia had a later start to the inflation run-up than most other developed countries, and that inflationary pressures have also been slower to moderate there as well. Going forward, however, he anticipates that price increases will continue to ease, allowing the RBA to be in a position to begin cutting interest rates next year.

Pivoting to the BoC, Lin said that Canada’s central bank delivered another supersized rate cut at its Dec. 11 meeting, slashing borrowing costs by 50 basis points (bps) for the second time in a row. “Out of all the G-7 (Group of Seven) countries, Canada has been the most aggressive in cutting interest rates in 2024, with the BoC delivering a cumulative 175 bps of rate cuts this year,” he remarked.

Why? Lin explained that the Canadian labor market has remained relatively weak while inflation rates have fallen significantly from their peak. This combination has enabled the BoC to cut rates at a brisk pace, he said.

Moving forward, Lin said that while BoC Governor Tiff Macklem indicated the bank might adopt a more “gradual approach” to rate cuts in the months ahead—as interest rates are now closer to the BoC’s estimate of the neutral rate (2.25% to 3.25%)—he believes the BoC will ultimately continue to be data-dependent.

“While the bar for moving in 50-bps increments will be higher, if the Canadian economy continues to slow at a sharper pace than expected, we don’t think the BoC will shy away from making big, bold moves,” Lin stated.

The ECB also cut rates this week, with the central bank delivering a 25-bps cut on Dec. 12, Lin said, noting that ECB President Christine Lagarde remarked that the disinflationary process in the eurozone is “well on track.” The ECB also downgraded its growth projections for the eurozone economy compared to its September forecast, he noted, with the bank now projecting a GDP (gross domestic product) growth rate of 0.7% in 2024 and 1.1% in 2025.

As for potential investor implications, Lin said that while Europe may be more exposed to cyclical risks than the U.S., European equities are also closer to fair value than their U.S. counterparts. “All in all, we think investors would benefit from having a well-diversified portfolio,” he remarked.

Key takeaways from our 2025 Global Market Outlook

Lin concluded the segment with a look at the main takeaways from Russell Investments’ 2025 Global Market Outlook, which was published Dec. 10. The report outlines the key economic and portfolio themes that the strategist team expects to play out in the year ahead, he explained.

“On the economic front, we think the U.S. will achieve a soft landing in the year ahead, with a growth rate of around 2.0%. Beyond the U.S., in places like Europe and China, we expect that growth will remain under pressure due to uncertainties around the trade policies of the incoming U.S. administration. However, many of the cyclical headwinds may already be reflected in the valuation of European and Chinese equities, which we believe are closer to fair value than U.S. equities,” Lin remarked.

Portfolio-wise, the team sees potentially compelling opportunities in U.S. small cap equites in 2025  They also anticipate a broadening opportunity set in private markets, particularly in sectors like real assets, as well a reduction in concentration in public markets, Lin said.

“Ultimately, we believe success in 2025 will require investors to continue to stay disciplined, and think about potential opportunities across a mix of public and private markets.” Lin concluded.

Editor’s note: There will be no Market Week in Review on Dec. 20 and Dec. 27 due to the end-of-year holidays. MWIR will resume in January 2025.