A new year begins, and geopolitical instability continues

2024 was a year of geopolitical instability, and 2025 is already starting off with a bang as Canadian Prime Minister Justin Trudeau announced his resignation in the first week of the new year. 2024 was also a year of better-than-expected stock market performance, and I expect 2025 to be another positive year with performance broadening from what we saw last year. Where else might the trends from 2024 extend into 2025? Follow along to find out.

2024: A year of surprises

The global economy. The global economy was more resilient than most expected, especially the US economy. The International Monetary Fund estimates that once the final data is tallied, global gross domestic product growth for 2024 will be 3.2%.¹

Global stock performance. Also in the better-than-expected category: Stock market performance, especially in the US and China. The MSCI World Index rose 18% for the year, the MSCI China Index gained 19.7%, and the MSCI US Index rose 25.1%.²

Monetary and fiscal policy. Policymakers, especially central banks, proactively supported economies and markets. This was a far cry from the more laissez faire attitude of previous generations of policymakers but helped avoid greater problems.

• As soon as the Federal Reserve (Fed) saw enough weakening in the labor market, Fed Chair Jay Powell began to message a pivot. At the Jackson Hole Symposium in August, he signaled the Fed would not welcome any further “cooling” in labor market conditions. Several weeks later, the Fed finally began easing with a 50 basis point cut.
• In Korea, financial policymakers quickly stepped in to calm markets after the surprise declaration of martial law in December and ensuing market turmoil. The South Korea Ministry of Economy and Finance and the Bank of Korea pledged to “inject unlimited liquidity into stocks, bonds, short-term money market as well as forex market for the time being until they are fully normalised.”³
• We also saw Chinese policymakers announce plans for major stimulus as they work to support and enhance economic growth.

Changing expectations for Fed policy. We saw significant changes in expectations around Fed policy over the course of the year, especially after President-elect Donald Trump began surging in the polls and economic data surprised to the upside. This caused market volatility, especially in the bond market.

Geopolitical instability. There were many major elections in 2024 — from India to Mexico to the United Kingdom to the United States — and some surprise outcomes as voters showed a clear distaste for incumbents. But perhaps more importantly, there was a significant rise in political instability from Germany to France to Japan to Korea last year, with much of it related to budget woes. The French government collapsed, the German government collapsed, and the leader of South Korea was impeached. French political instability and budgetary disagreements resulted in higher borrowing costs as investors worried about rising deficits and higher debt-to-GDP levels. This resulted in French bond yields rising above Greek bond yields.⁴ In South Korea, consumer confidence experienced the largest drop since the start of the pandemic.⁵

2025: What should investors expect?

So what does 2025 have in store for us? Probably more of the same.

Geopolitical instability. The year is starting with a bang. I always expected more geopolitical instability and uncertainty but not necessarily this quickly. Canadian Prime Minister Justin Trudeau announced his resignation on Jan. 6 following a fallout with Finance Minister Chrystia Freeland that involved the budget. As I mentioned in my last blog back in December, budgets will be an important theme going forward – look for them to precipitate more political turmoil.

The global economy. I also expect global GDP growth to re-accelerate in 2025, helped by both the US and Chinese economies. We’re seeing consumer confidence rise in the US as well as improvement in the China Services Purchasing Managers’ Index.⁶

Global stock performance. I also expect stocks to have another positive year, although I believe we’re likely to see better returns from mid- and small-cap stocks as well as stocks outside the United States.

Monetary and fiscal policy. I believe expectations around Fed policy will continue to change going forward, especially since there is a small but not miniscule risk that inflation may re-accelerate — and the Fed may even need to actually hike rates in 2025. Finally, and perhaps most importantly, I expect policymakers to continue to proactively support their respective economies and work to counter whatever headwinds may appear in 2025.

In short, in 2025 the key question remains whether central banks can steer the world’s major economies toward moderate growth while keeping inflation in check. I think it will be able to, which is why I favor risk assets in this environment. However, I note the need to keep risks tightly controlled and not overlook valuations, as higher valuations limit the upside for risk assets. I also anticipate volatility in the near term as markets react to geopolitical uncertainties, including the potential for tariffs, as well as shifts in the rates outlook. I also would expect to see market jitters in reaction to any weak economic data, especially labor data.

Our 2025 outlook

Given greater investor uncertainty as we enter the new year, I think it’s important to reiterate our outlook for 2025. Below are a few highlights – you can read the full outlook here.

Stocks. I favor cyclical and small-cap equities given relatively attractive valuations and greater sensitivity to the economic cycle. I also prefer developed ex-US and emerging markets equities for those same reasons. As central banks cut rates, I anticipate that valuations should also see support from lower discount rates.

Fixed income. With bond yields still at relatively high levels, I believe bonds also offer attractive opportunities despite tight spreads, especially for longer holding periods. In my view, strong fundamentals underpin many fixed income assets, helping to explain very tight credit spreads in both investment grade and high yield credit. I favor some credit risk to take advantage of this resilient and improving growth backdrop. I also like the diversification properties of bank loans, which tend to have similar volatility to investment grade credit and also offer a high current yield. Given the near-zero duration of bank loans, I expect them to be relatively immune to interest rate volatility compared to other fixed income asset classes. I also continue to anticipate good performance from emerging markets bonds.

Real estate. I remain positive on real estate and believe there is more upside potential as the environment improves. For example, cuts in policy rates provide scope for reductions in real estate debt costs and capitalization rates, which I believe could lead to renewed transaction activity and progress toward price recovery. 

Diversification. I continue to believe in the importance of broad diversification for the long run and anticipate a general broadening of markets as economies and monetary policies normalize.

New Year’s resolutions

Let me finish by sharing my New Year’s resolutions for 2025. No matter what surprises may be in store over the next 12 months, I believe these resolutions can help you stay focused on your long-term financial goals while being open to short-term opportunities:

1. Don’t get spooked by headlines. Expect volatility and expect sell-offs — make them your ally by keeping a list of purchases you would like to make in the event they fall to your price target.
2. To help you maintain perspective on market corrections, always keep your time horizon in mind.
3. I believe in having portfolio exposure to some lower valuation assets, as there will be times when markets punish high valuation assets.
4. Remember that economies don’t have to be firing on all cylinders for their stock markets to perform well. A key catalyst for stock market returns is positive surprise, and that can come in many forms. Also recognize the importance of earnings in driving returns.
5. Review your investment policy statement and make any edits now, while in an emotional vacuum at the start of the year. And then commit to following it – without making edits to it throughout the course of the year.
6. In reviewing your investment policy statement, take a close look at your portfolio’s diversification. I favor being well diversified with adequate exposure to alternative asset classes. Rebalancing on a regular schedule can help you to take profits and prevent overexposure to specific areas of the market.

Looking ahead

As we begin 2025, I’ll continue to look for any signs of larger cracks in the global economy — especially in economies where there has been significant tightening — or resurgences in inflation that could alter our base case scenario and our favored asset classes. I’m not just looking for confirmation, but also for data that contradicts my thesis. In the immediate term, I’ll be particularly focused on both the US Job Openings and Labor Turnover Survey (JOLTS)  and the US Employment Situation Report given obvious Fed concerns about the labor market.

I’m happy to be on this journey with you. Happy New Year!

Dates to watch