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Your guide to what the 2024 US election means for Washington and the world
Rollercoaster market moves in the final days of 2024 offered a blunt reminder that investors are heading into a year of living dangerously.
Stocks and bonds lurched lower after the Federal Reserve’s final policy meeting of the year, spooked by the notion that the central bank may be unable to keep cutting rates (as it had previously expected to) because of still-simmering inflation.
The key is not what Fed chair Jay Powell said. It 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 could be bad for growth, fuel inflation, or even both.
So for the first time in many years, investors have what they call “two-way risk” in the Fed policy that drives the bond market and underpins global asset prices. The central bank might be able to keep on cutting — the hunch is that this would be Trump’s preference. But it’s not outlandish to suggest it might start raising rates again instead. This could get lively.
Stocks are no easier to read. The miracle that is the US market, fresh from two years with gains of around 20 per cent each, may or may not be on borrowed time. The positive case is that richly valued 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 paradigm driven by artificial intelligence makes boring old business and market cycles a thing of the past — even before you consider American exceptionalism. The pessimistic case is that this is getting silly, AI is overhyped and something has to give.
My crystal ball is at the repair shop so I don’t know how this will pan out. But I do remember 2022 — hardly a feat of memory but still a period that money managers would rather forget. Bonds and stocks fell heavily at the same time — by about 20 per cent each over the year — nuking the inverse relationship that generally gives investors a safety net. Growth shocks and interest rate cuts are good for bonds. Inflation and rate rises are not. It is no stretch to imagine this nightmare scenario returning.
Investors are running into this field of risks for 2025 in slightly better shape than they were earlier in December. A few weeks ago, Bank of America’s monthly fund manager survey found what it called “super-bullish sentiment”. It noted that good vibes — measured by allocations to cash and stocks as well as economic expectations — had intensified at the fastest pace since June 2020. This was a bit too fizzy. Luckily — albeit painfully — the shock of the Fed’s new view of the world knocked off some of the froth.
At the same time, though, the markets still have no clue what the returning President Trump will actually do. At the extreme end, trade tariffs of 60 per cent on imports from China and 20 per cent from the rest of the world are plausible. Equally, so is a much lighter touch — a set of tariffs that are more symbolic than impactful. The crackdown on illegal immigration could also range from a small number of targeted deportations to mass detainment and severe disruption in the labour market.
This leaves investors blindfolded and tiptoeing around rakes. “‘Meh’ is the most unlikely 2025 pathway, in my view,” wrote Henry Neville, a portfolio manager at the Man hedge fund group in a recent blog. “I can see a 1970s scenario of dormant, not dead, inflationary pressures reawakening. Both the equity and bond markets freak like it’s 2022. But equally, it’s conceivable we get more market-good Trump (deregulation, tax cuts, government efficiencies, Ukraine peace deal) than market-bad (policy volatility, tariffs, labour market restrictions) and then we could party like it’s 1996.” Neville leans towards pessimism but fireworks lie ahead in either case.
Adding to the anxiety, Trump is fond of making policy pronouncements, sometimes with a significant market impact, in seemingly randomly timed social media posts. This strategy keeps rivals and adversaries off balance but also unnerves money managers and injects volatility into asset prices. Fund managers generally say they know this is coming and are better prepared to ignore the noise than in Trump’s first administration. I’m not so sure. His first months in the White House will be the test — then investors can try to sketch out what flavour of president they are truly dealing with.
The good news is that while bonds face potential danger from inflation, equity hedges are reasonably cheap. Gold — a bolt-hole in times of strife — now appears to be on the up in all weathers. Its 26 per cent rise last year outstripped the S&P 500. Think-tank OMFIF reckons the gold in official reserves is on track to reach the highest point since 1965. The upshot: cautious investors could shield themselves. They may need to.
“We need to be humble and say, ‘I don’t know where this is going to break’,” said Peter Fitzgerald, chief investment officer for macro and multi-asset at Aviva Investors in London. “The key is, don’t get overconfident.” Good luck.
