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Your guide to what the 2024 US election means for Washington and the world
The bus market’s moves in the final days of 2024 provided a stark reminder that investors are heading into a risky year.
Stocks and bonds edged lower after the Federal Reserve’s final policy meeting of the year, rattled by the notion that the central bank may not be able to keep rate cuts (as it had previously expected) due to still-tepid inflation. boiled.
The key is not what Fed Chairman Jay Powell said. It’s 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 could be bad for growth, boost inflation, or even both.
So, for the first time in many years, investors have what they call “two-sided risk” in Fed policy that drives the bond market and supports global asset prices. The central bank may be able to keep cutting — the thinking is that would be Trump’s preference. But it’s not outlandish to suggest it could start raising rates again instead. This can become alive.
Stocks are no longer easy to read. The miracle that is the US market, new for two years with gains of around 20 percent each, may or may not be on borrowed time. The upside is that high-value tech companies deserve their valuations because of their earnings. “What will drive global markets will be the US,” 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 AI-driven paradigm makes boring old business and market cycles a thing of the past — even before you consider the American exception. The pessimistic case is that this is getting silly, AI is overloaded and something has to give.
My crystal ball is in the repair shop so I don’t know how it will turn out. But I remember 2022 – hardly a feat of memory, but still a period money managers would rather forget. Bonds and stocks fell sharply at the same time — by about 20 percent each over 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 rate hikes are not. It’s not hard to imagine a repeat of this nightmare scenario.
Investors are facing this area of risks for 2025 in slightly better shape than they were back in December. A few weeks ago, Bank of America’s monthly survey of fund managers revealed what it called “super-bullish sentiment.” He noted that bullish sentiments – as measured by allocations to cash and stocks, as well as economic expectations – had intensified at the fastest pace since June 2020. That was a bit too much of a fizz. Thankfully – albeit painfully – the shock of the Fed’s new world view knocked some of the foam off.
At the same time, however, markets still have no idea what a returning President Trump will actually do. After all, trade tariffs of 60 percent on imports from China and 20 percent from the rest of the world are plausible. Equally, it’s a much lighter touch – a set of fees that are more symbolic than impactful. The impact of illegal immigration can also range from a small number of targeted deportations to mass detention and severe disruptions in the labor market.
This leaves investors blindfolded and tiptoeing around the rockets. “Meh is the most unlikely path to 2025, in my view,” wrote Henry Neville, a portfolio manager at hedge fund group Man in a recent blog. “I can see a 1970s scenario of inflationary pressures asleep, not dead, reawakened Both the stock and bond markets are as strange as if it were 2022. But it’s also possible that we have more too much Trump good for the market (deregulation, tax cuts, government efficiency, Ukraine peace deal) than the market (policy instability, tariffs, labor market restrictions) and then we could celebrate like it’s 1996.” Neville leans toward pessimism, but fireworks are ahead either way.
Adding to the anxiety, Trump likes to make policy statements, sometimes with significant market impact, in seemingly random social media posts. This strategy keeps rivals and opponents off balance, but it also unnerves money managers and injects volatility into asset prices. Fund managers generally say they know it’s coming and are better prepared to ignore the noise than they were in the first Trump administration. I’m not so sure. His first few months in the White House will be the test — then investors can try to sketch what kind of president they’re really dealing with.
The good news is that while bonds face potential risk from inflation, equity hedges are fairly cheap. Gold – a lightning hole in times of strife – now seems to be rising in all weathers. Its 26 percent gain this year outpaces the S&P 500. Think-tank OMFIF reckons gold in official reserves is on track to hit its highest point since 1965. The upshot: cautious investors can hedge themselves. They may need it.
“We have to be humble and say, ‘I don’t know where this is going to break down,'” said Peter Fitzgerald, head of macro and multi-asset investments at Aviva Investors in London. “The key is, don’t get overconfident.” good luck.
katie.martin@ft.com
