As 2024 comes to an end, the year has been a very positive one for the U.S. equity market, gold prices and Crypto assets. President Trump’s election has given the traditional “Santa Rally” an “America First” turbo boost, with U.S. assets outperforming rest-of-the-world by 7% since the election on November 5. For most investors, the move makes sense. President Trump has promised to deliver growth-accelerating tax cuts while waging a trade war that should hurt foreign and help domestic firms.
The U.S. dollar strengthened considerably. Investment-grade and high-yield bonds also showed positive returns. October was marked by the “Trump trade” that lifted Treasury yields significantly higher, but bonds reversed their course and gained on the back of the nomination of Scott Bessent as Treasury Secretary.
- A Benign Cycle
- Tariffs: The Most Beautiful Word in the Dictionary
- Equity Markets
- A Stronger Yen
- What Happened to the China Stimulus Plan?
- Fixed Income Strategy for 2025
- Bitcoin Hit $100,000
- Our Portfolio Positioning
A Benign Cycle
Going into 2025, we are entering a benign part of the cycle; interest rate cuts that coincide with economic growth tend to be supportive for equities. Nevertheless, global equities have already risen significantly since October 2023 leaving them more vulnerable to any disappointments.
The macro and policy backdrop appears unusually uncertain as we head into the New Year. Tail risk looms large from many perspectives, at a time when risk assets have discounted a lot of good news and sentiment is very bullish.
Meanwhile, significantly easier Fed policy seem less likely now. There are two key macro and policy themes that will determine how 2025 plays out. One is that increasing productivity is supporting corporate profits, while the second one is how the policies of the Trump 2.0 administration will unfold.
Driven by strong gains in productivity, the U.S. economy has significantly outperformed its peers. U.S. GDP and productivity have risen to well above the pre-Covid highs. In contrast, the other major economies have struggled to grow after the post-pandemic rebound in activity. The recently published 2025 economic outlooks from the IMF and OECD show that the U.S. should continue to grow faster than other developed economies. There is little reason to doubt these forecasts.
We take an optimistic view for both themes, but there is plenty of room for things to go wrong, especially as equity valuations have increased and leave little room for further valuation expansion. We expect equity returns to be driven largely by earnings growth. Given high valuations and unusually high concentration in equity markets, we prefer to focus on diversification to improve risk adjusted returns.
Tariffs: The Most Beautiful Word in The Dictionary
On October 15, speaking at the Economic Club of Chicago, Donald Trump called tariffs “the most beautiful word in the dictionary.” Since then, he threatened to slap a 25% tariff on all imports from Canada and Mexico, and an additional 10% tariff on Chinese imports. Collectively, the three countries account for 45% of US imports. Perhaps some of his rhetoric is to set the level playing field for future negotiations to extract certain concessions from trading partners.
However, we do think we will see new tariffs next year as Trump is serious about erecting a protectionist wall around the U.S. because he really does believe that other economies are ripping off America.
Another factor to watch is Trump’s promised tax cut, specifically when and how big. At present, neither is clear. What is clear is that Trump has a strong mandate to deliver what he promised, and therefore, the corporate tax rate will likely be reduced.
Clearly, if tax cuts are deep and fiscal stimulus is sizable, the Fed’s policy will likely change, but Jay Powell also made it clear that the Fed will only react to changed circumstances and not take any pre-emptive actions. This could mean either fewer rate cuts or even renewed monetary tightening later in 2025. At present, it is hard to make a call as there are too many unknowns. Last but not least, the inflation picture remains hugely important for Fed policy. So far, most indicators for core PCE inflation remain pointed down.
We should also keep in mind that tariffs and trade wars are not inflationary. They can lead to a contraction in total trade, which is ultimately deflationary.
Equity Markets
The U.S. equity market could face turbulence and heightened volatility on the back of policy changes in 2025, but opportunities are likely to outweigh risks.
The benefit of deregulation and a more business-friendly environment are likely underestimated along with potential for unlocking productivity gains and capital deployment. The U.S. is to remain the global growth engine with the business cycle in expansion, a healthy labor market, broadening Artificial Intelligence-related capital spending, and the prospect for a stronger capital market and deal activity.
Europe continues to face structural challenges while Emerging Markets struggle with higher-for-longer rates, strong USD, and increasing trade policy headwinds. The current polarized regional equity performance will likely remain in place going into 2025, with U.S. equities preferred over Eurozone and Emerging Markets.
As 2025 progresses, there exists the potential for a convergence trade, given extreme relative positioning, valuations and price divergences across regions. However, more clarity is first needed on global trade and geopolitics.
Japanese equities stand to benefit from domestic reflation with improving real wage growth, accelerating buybacks and continued corporate reforms.
Within Europe, the UK could be more shielded with respect to trade headwinds, given a smaller manufacturing base and lower beta to the global equity index.
The outlook for the Eurozone remains muted given a combination of persistent growth and earnings downgrades, challenging politics and disappointing China growth.
European equities have brutally underperformed their U.S. peers, with the Euro STOXX 50 Index showing its third-worst relative performance against the S&P 500 since the late 1980s. Accounting for the euro’s depreciation, it is the second-worst performance in nearly 40 years, clocking in at more than 20%.
Europe has high exposure to global growth, with its equity market showing even greater sensitivity. It is facing a lot of overseas challenges with lacklustre Chinese stimulus and elevated trade tensions.
We remain cautious on Emerging Markets, with risk of trade tariffs remaining a material overhang. While Fed rate cuts have historically been positive for Emerging Markets relative performance, it is unclear how much more the Fed will be able to cut relative to current market expectations. Besides, strength of USD continues to cap Emerging Markets equity upside.
A Stronger Yen
The November Tokyo CPI beat market expectations, with headline inflation accelerating to 2.6% y/y from 1.8%. The Tokyo CPI provides an advance estimate of national price pressures. Japan remains out of sync with its DM peers, as it is one of the few economies where the labor market keeps tightening, with wage growth and inflation accelerating meaningfully.
A weakening yen since September should contribute to near-term inflationary strength. These underlying price pressures warrant a 0.25% hike at the BoJ’s December 19 meeting. And therefore, we remain bullish on the Japanese Yen, which would also support the USD performance of Japanese equities.
What Happened to the China Stimulus Plan?
The biggest problem with Beijing’s package is that it is not a stimulus package, but a debt-swap plan. Specifically, there is no fresh fiscal stimulus in the form of major tax cuts. The debt swap may help ease financial pressures on local governments but will do little to address the inadequate aggregate demand problem.
The real estate meltdown has wiped out $1 trillion in real estate investment, which is worth about 5.4% of GDP. There is also a secondary loss of consumer demand related to the property market. The sharp fall in property prices has crimped Chinese household net worth, forcing consumers to save more and spend less to rebuild their lost wealth.
In order to stimulate domestic demand, the stimulus measure will need to be significant and despite the promises, details are still scarce. With the risk of significant additional tariffs being imposed, we think the Chinese equity market will remain under pressure in the near future.
If Trump and China were to reach some sort of grand bargain, that would be very positive for the equity markets, especially coming off very low valuations.
Fixed Income Strategy for 2025
Our benign macro base-case view is positive for risk assets, but it does not align with a major shift in yields in either direction. Of course, a big geopolitical event could push Treasury yields sharply lower in a flight-to-quality. But outside of that, we think the Treasury market is fairly priced. The 10-year Treasury yield is close to fair value at 4.25%.
We will see volatility in bond yields as the market will fluctuate between fears about fiscal overspending to fears that a potential trade war will lead to a recession.
Bitcoin Hit $100,000
The dollar remains strong, but gold and Bitcoin are even stronger, suggesting that the marginal safe haven is shifting away from the dollar. Gold and Bitcoin are now seen as safe havens. Bitcoin may have edged out gold post-election due to perceptions that the U.S. will support it.
However, gold remains a solid safe haven given its lower volatility compared to Bitcoin. Regarding the supply response, gold production is constrained. Gold ETF demand is also significant, effectively making gold ETFs the third-largest central bank of gold. The same is happening for Bitcoin, with ETFs now being the biggest holders of Bitcoin.
As for silver, it is a big beneficiary of the green transition because it is used in solar panels. It has a dual role as a precious metal and a green metal, which is why it has outperformed gold this year.
Our Portfolio Positioning
Going into 2025, we think there could be more upside in equity markets but we will see volatility, especially in the first half of the year when Trump’s policy choices become more clear, while at the same time Fed policy will play an important role for the market outlook. We continue to favor diversification to deal with unexpected surprises next year, even though some of them could very well be positive surprises.
DISCLOSURES
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
Core PCE Price Index y/y shows changes in prices for a fixed basket of consumer goods and services purchased by US residents in the given month compared to the same month of the previous year. This indicator is also called “PCE deflator”. It takes into account households’ actual and imputed spendings on durable and non-durable goods and on services. Prices for food and energy are excluded from the core index calculation due to their high volatility. The index is benchmarked to a basis of 2009.
The Dow Jones Euro Stoxx 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The Standard & Poor’s 500 (S&P 500) Index is a free-float weighted index that tracks the 500 most widely held stocks on the NYSE or NASDAQ and is representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and creditworthiness of the issuer.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.
