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Your guide to what the 2024 US elections mean for Washington and the world
The rollercoaster market movements of the final days of 2024 have provided a stark reminder that investors are heading into a year of living dangerously.
Stocks and bonds He staggered down After the Federal Reserve's last monetary policy meeting of the year, they were dismayed by the idea that the central bank might not be able to continue cutting interest rates (as previously expected) due to still-simmering inflation.
The key is not what Fed Chairman Jay Powell said. This is what he was careful not to say, but what every fund manager knows: When Donald Trump returns to the White House this month, his economic agenda may be bad for growth, fuel inflation, or even both.
So, for the first time in many years, investors face what they call “two-way risks” in Fed policy that drives the bond market and supports global asset prices. The central bank may be able to continue cutting – the intuition is that this would be Trump's preference. But it is not surprising to suggest that they may start raising interest rates again instead. This can become vital.
Stocks are not the easiest to read. The miracle that is the US market, which just came in after two years with gains of around 20 per cent each, may or may not be on borrowed time. The positive case is that highly valued technology companies deserve their valuations because of their profits. “It's the US that will move global markets,” said Niamh Brodie-Machura, co-chief investment officer for equities at Fidelity International. “It looks expensive but there's a reason for that.”
Some even argue that A New model AI is driving it to make boring old business and market cycles a thing of the past — even before you think about American exceptionalism. The pessimistic case is that this is getting ridiculous, AI is overrated and something has to give up.
My crystal ball is in the repair shop so I don't know how this will turn out. But I remember 2022 – hardly a feat from memory, but still a period money managers would rather forget. Bonds and stocks fell dramatically at the same time — by about 20 percent each over the course of the year — destroying the inverse relationship that generally gives investors a safety net. Growth shocks and interest rate cuts are good for bonds. Inflation and high interest rates are not. It is not an exaggeration to imagine the return of this nightmare scenario.
Investors face this area of risk for 2025 in a slightly better position than they were earlier in December. A few weeks ago, Bank of America's monthly survey of fund managers found what it called “extremely bullish sentiment.” He noted that good sentiment — measured by allocations to cash and stocks as well as the economic outlook — had intensified at the fastest pace since June 2020. This was a bit ambiguous. Fortunately – albeit painfully – the shock of the Fed's new worldview has removed some of the foam.
However, at the same time, markets still have no idea what a returning President Trump will actually do. Ultimately, trade tariffs of 60% on imports from China and 20% from the rest of the world are reasonable. Likewise, there is a much lighter touch – a set of tariffs that are more symbolic than impactful. The campaign against illegal immigration can also range from a small number of targeted deportations to mass incarceration and severe labor market disruption.
This leaves investors blindfolded and tiptoeing around the rake. “The most likely path is for 2025 in my view,” wrote Henry Neville, portfolio manager at hedge fund group Man. In a recent blog. “I can see a 1970s scenario of dormant, not dead, inflationary pressures reawakening. Both stock and bond markets It's strange that it's 2022. But equally, we could have more of a good-market Trump (deregulation, tax cuts, government efficiency, Ukraine peace deal) than a bad-market Trump (policy volatility, tariffs, labor market restrictions) and then we could We celebrate like it's 1996. Neville leans towards pessimism but fireworks await either way.
What adds to the concern is that Trump is fond of issuing political statements, which sometimes have a significant impact on the market, in seemingly randomly timed posts on social media. This strategy keeps competitors and liabilities off balance, but it also unnerves money managers and injects volatility into asset prices. Fund managers generally say they know this is coming, and are more willing to ignore the hype than they were in the first Trump administration. I'm not sure about that. His first months in the White House will be a test — and then investors can try to determine which flavor of president they really identify with.
The good news is that while bonds face potential risk from inflation, equity hedges are reasonably cheap. Gold – considered a vulnerability in times of conflict – now appears to be on the rise in all weathers. Its 26 percent rise this year is outpacing the S&P 500. Think tank OMFIF believes gold in official reserves is on track to reach the highest point since 1965. The upshot: Cautious investors can protect themselves. They may need to.
“We have to be humble and say: I don’t know where this is going to end,” said Peter Fitzgerald, chief investment officer for macro and multi-asset at Aviva Investors in London. “The key is, don't be overconfident.” good luck.
