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Your guide to what the 2024 US election means for Washington and the world
The rollercoaster market going through the last days of 2024 gave a clear reminder that investors are entering a year of living dangerously.
Stocks and bonds looking down after the last policy meeting of the Federal Reserve of the year, it is disturbed by the idea that the central bank will not be able to keep reducing rates (as it was expected before) due to inflation.
The key is not what Fed chairman Jay Powell said. That's what he was careful not to say but what the fund manager knows: when Donald Trump returns to the White House this month, his economic agenda could be bad for growth, rising fuel prices, or both.
So for the first time in many years, investors have what they call a “two-way risk” in Fed policy that drives the bond market and underpins global asset prices. The central bank can continue to cut – the hunch is that this will be the choice of Trump. But it is not unusual to suggest that it could start raising prices again instead. This may be interesting.
Stocks are not easy to read. The miracle that is the US market, it has just appeared in two years and the profits of about 20 percent each, may or may not be at the time of the loan. The good news is that technology companies that are richly valued deserve their valuations because of their earnings. “What will drive global markets will be the US,” said Niamh Brodie-Machura, chief equity investment officer at Fidelity International. “It looks expensive but there's a reason for that.”
Some even argue that a a new paradigm powered by artificial intelligence is making boring old business and marketing cycles a thing of the past – even before you think about America's uniqueness. The hopeless case is that this is going to be stupid, the AI is overrated and something has to give.
My crystal ball is in the repair shop I don't know how this is going to turn out. But I remember 2022 – not something to remember but a time money managers can forget. Bonds and stocks fell sharply during the same period – about 20 percent each year – nuking the crazy relationship that gives investors a safety net. Growth shocks and interest rate cuts are good for bonds. Inflation and inflation are not. It is not easy to imagine that nighttime situation returning.
Investors are heading into this 2025 risk category in slightly better shape than they were in December. A few weeks ago, Bank of America's monthly fund manager survey found what it called “surprising sentiment”. It noted that the positive vibes – measured by funds and stocks and economic expectations – have strengthened at a rapid pace since June 2020. This was very fizzy. Fortunately – albeit painfully – the shock of the Fed's new world view popped some of the bubbles.
At the same time, however, the markets still don't understand what President Trump will do. Finally, trade prices of 60 percent of imports from China and 20 percent from the rest of the world are reasonable. Equally, so is a very light catch – a set of taxes that are more symbolic than influential. The exploitation of illegal immigrants can also range from a small number of targeted deportations to mass arrests and major disruptions in the labor market.
This leaves investors blindfolded and spinning the racks. “'Meh' is the most unlikely path for 2025, in my view,” wrote Henry Neville, portfolio manager at Man hedge fund group. in a recent blog post. “I can see the dormant, undead 1970s rising inflationary pressure. Both equity and bond markets it's as good as 2022. But equally, it's conceivable that we get a good Trump in the market (removals, tax cuts, government efficiency, Ukraine peace deal) rather than a bad market (policy flexibility, tariffs, labor market restrictions) and then we can party like it's 1996. ” Neville is leaning towards optimism but the fireworks are ahead of any situation.
Adding to the concern, Trump likes to make policy announcements, sometimes with huge marketing impact, in seemingly random posts on social media. This strategy keeps competitors and rivals off balance but also worries money managers and introduces volatility to asset prices. Fund managers generally say they know this is coming and are better prepared to ignore the noise than the first Trump administration. I'm not so sure. His first months in the White House will be a test – after which investors can try to figure out what flavor of president they are really dealing with.
The good news is that while bonds face potential inflation risk, equity hedges are relatively inexpensive. Gold – pit-hole in times of conflict – now appears to be at an all-weather high. Its increase of 26 percent in the past year exceeded the S & P 500. Think-tank OMFIF calculates gold in official reserves is on the way to reach the highest point since 1965. The result: smart investors can protect themselves. They may want to.
“We have to be humble and say, 'I don't know where this is going to break',” said Peter Fitzgerald, chief investment officer at Aviva Investors in London. “The bottom line is, don't be overconfident.” Good luck.