Markets and Economy 2025 investment outlook: After the landing
We expect significant monetary policy easing to push global growth higher in 2025, fostering an attractive environment for risk assets as central banks achieve a “soft landing.”
We’ve seen in the past that stocks’ immediate reaction to election results can be ephemeral.
In the very near term, I anticipate the “Trump trade” will continue. But I think it’s important to stress the important role of central banks.
Once you get past very short-term market reactions, I believe monetary policy matters more to markets than political developments.
Between the US presidential election and multiple central bank meetings across the globe, markets had a lot to absorb last week. Here are my key takeaways about what we’ve learned and the implications for economies and markets.
First, we saw the election of Donald J. Trump to a second, nonconsecutive term as president of the United States. Markets had a strong initial reaction, with US stocks rallying and European and UK stocks posting losses. The bond market also showed a significant impact, with yields immediately rising dramatically on fears of both higher inflation and higher deficits. However, by Friday, in the wake of the Federal Reserve (Fed) decision to cut interest rates by 25 basis points, some of those moves had been reversed.
That’s because at the end of the day, once you get past very short-term market reactions, I believe monetary policy matters more to markets. Yes, US stocks immediately had a jubilant reaction to the election, but those gains can be somewhat ephemeral — for example, we saw some retracing of the short-term stock market gains made right after the election in 2016.1 Yes, what seems likely to be a “red sweep” of Republican leadership in the White House, Senate, and House of Representatives will likely enable more of the Trump agenda to come to fruition, but the reality is that we don’t know the scope and timing of policy coming from the new administration. And that means we don’t know different policies’ impact on growth — and inflation.
In the very near term, I anticipate the “Trump trade” will continue. That includes the obvious suspects such as bitcoin.
I’m positive on risk assets in general but especially US small- and mid-cap stocks, which have been more attractively valued and, in my view, are likely to have stronger relative performance in anticipation of an economic re-acceleration next year.
Many are betting on energy stocks given the new administration’s interest in increasing production. However, that increased production could be good for the economy in helping ease overall inflation, but it could be negative for energy stocks given that lower prices typically result in lower profit margins. (In fact, we saw energy stocks underperform clean energy stocks during the first Trump administration.2)
A more likely beneficiary could be financials, given the potential for relatively swift deregulation in that sector.
I do think gold will continue to show weakness in the shorter term; it is very expensive after a large multi-year run-up, which makes it more vulnerable to the recent strengthening in the US dollar and a rise in Treasury yields. However, I believe at least some of the price decline in gold is due to some speculative demand for gold shifting to bitcoin in the wake of the US election.
The Fed meeting on Thursday reminded us of the power of the Fed, as markets seemed to like what they heard. Fed Chair Jay Powell emphasized the significant progress made on lowering US inflation. He noted that the one exception, housing services prices, didn’t reflect current inflationary pressures but rather past inflationary pressures. Powell explained the Fed is continuing to cut rates because it believes monetary policy is still restrictive. In addition, he said the labor market has cooled in the last two years and is still softening, and the Fed doesn’t want to see further cooling.
Powell flexed his muscles at the press conference in a variety of ways:
To illustrate the Fed’s power, US stock sectors that did not perform well immediately after the election performed better after the Fed decision. These were stock sectors that are more sensitive to higher interest rates, such as real estate, utilities and consumer discretionary; their performance improved after Powell’s relatively dovish comments on Thursday.3
The UK seems to be living in a parallel universe to the US. Last week, as with the Fed, the Bank of England (BOE) enacted the second rate cut of its easing cycle. The BOE is also adjusting to a new government in power, with the Autumn Budget released just the week before. So while the BOE noted there had been further progress on disinflation, it also warned that policies in the new budget had the potential to increase inflation. This caused the BOE to significantly increase its two year-ahead forecast for inflation (it should be noted that it also increased its gross domestic product growth forecast by an even larger amount).
In addition, the UK is likely to get a material economic boost from the uncertainty of its Autumn Budget being over — just as the US is likely to get the same from the uncertainty of its presidential election being over. It’s been clear from data and anecdotal information that the uncertainty put a damper on corporate hiring and spending plans as well as some consumer spending in each respective economy.
The Bank of Japan (BOJ) also reminded us of the importance of data in the release of its Summary of Opinions from its Oct. 30 meeting. It shows the BOJ is watching US political developments closely, and will proceed cautiously, which makes sense given the potential for substantial tariffs and other policies that could impact the Japanese economy and/or its currency. One BOJ member suggested the bank pause to “assess developments in the US economy” and then consider future rate hikes. It’s clear in a world with significant change and uncertainty, it’s more important than ever to use data as a guide.
The net effect is that the path of both the BOE and Fed’s easing cycles is expected to be more modest and less steep. And the path of the BOJ’s tightening/normalizing cycle may be more muted as well. However, it will be dictated by the data.
In summary, I think it’s important to stress the important role that central banks play for economies and markets. While 2024 elections have created policy changes in a number of countries, those changes are likely to play a very secondary role to monetary policy. If new government policies result in higher inflation, central banks can recalibrate to counteract inflationary pressures. And finally, central banks can be a stabilizing force in times of de-stabilization in markets.
Now central banks may not be able to help with what may be the biggest problem facing these governments: rising debt levels. Government debt is increasing, especially in the US, and higher rates have only exacerbated the total cost to service that debt. As we saw recently, even though a central bank cuts rates, it doesn’t mean rates will come down at the longer end of the curve. And there is a greater possibility of higher yields at the longer end of the curve if the US House of Representatives is won by the Republican party and there is in fact a “red sweep.” That’s because of the greater likelihood of a full extension of the Tax Cuts and Jobs Act and therefore higher fiscal deficits. High yields can curtail lofty spending plans, so we will want to follow developments there closely.
One last thought: “trades” based on election results are likely to be short-lived; it’s more important to focus on economies holistically, and the impact of various factors on asset classes. Stay tuned for our 2025 outlook, which attempts to do just that.
Date |
Report |
What it tells us |
---|---|---|
Nov. 12 |
UK Unemployment |
Indicates the health of the job market. |
|
Germany Consumer Price Index |
Tracks the path of inflation. |
|
Germany ZEW Economic Sentiment |
Measures economic sentiment in Germany for the next six months. |
|
Eurozone ZEW Economic Sentiment |
Measures economic sentiment in the eurozone for the next six months.
|
|
India Industrial Production |
Indicates the economic health of the industrial sector. |
|
US NFIB Small Business Optimism Index |
Indicates the health of small businesses in the US. |
|
NY Fed US Consumer Inflation Expectations |
Tracks consumer expectations for US inflation. |
|
Japan Producer Price Index |
Measures the change in prices paid to producers of goods and services |
|
Australia Wage Price Index |
Indicates the health of the job market. |
Nov. 13 |
US Consumer Price Index |
Tracks the path of inflation. |
|
Australia Unemployment Rate |
Indicates the health of the job market. |
Nov. 14 |
Eurozone Gross Domestic Product |
Measures a region’s economic activity |
|
Eurozone Industrial Production |
Indicates the economic health of the industrial sector. |
|
European Central Bank Account of Monetary Policy Meeting |
Gives further insight into the central bank’s decision-making process. |
|
US Producer Price Index |
Measures the change in prices paid to producers of goods and services |
|
Bank of Mexico Monetary Policy Decision |
Reveals the path of interest rates. |
|
Japan Gross Domestic Product |
Measures a region’s economic activity |
|
China Industrial Production |
Indicates the economic health of the industrial sector. |
|
China Retail Sales |
Indicates the health of the retail sector. |
|
China Unemployment Rate |
Indicates the health of the job market. |
|
Japan Industrial Production |
Indicates the economic health of the industrial sector. |
Nov. 15 |
UK Gross Domestic Product |
Measures a region’s economic activity |
|
UK Industrial Production |
Indicates the economic health of the industrial sector. |
|
US Retail Sales |
Indicates the health of the retail sector. |
|
US Industrial Production |
Indicates the economic health of the industrial sector. |
|
Bank of Canada Senior Loan Officer Survey |
Collects information on the business-lending practices of Canadian financial institutions. |
Source: Bloomberg, L.P. The S&P 500 Index return after the 2016 election (Nov. 8, 2016, to Dec. 13, 2016) was 6.18%. “Retracement” (a loss of 1.45%) occurred from Dec. 13, 2016, to Dec. 31, 2016).
Source: Haver, Invesco. In the first Trump administration, clean energy returned 136% while traditional energy returned -52%. Clean energy represented by the S&P Global Clean Energy Index, which is designed to measure the performance of companies in global clean energy-related businesses from both developed and emerging markets. Traditional energy represented by the S&P 500 Oil, Gas, and Consumable Fuels Index, which represents the oil, gas, and consumable fuels industries within the S&P 500 Energy sector.
Source: Bloomberg, L.P. Based on S&P 500 sector performance immediately after the 2024 US election (Nov. 4 – Nov. 6) compared to after the November 2024 Fed meeting (Nov. 6 – Nov. 8). Real estate (-1.3% after the election, 2.8% after the Fed meeting), utilities (0.4 after the election, 2.0 after the Fed meeting), consumer discretionary (-0.9 after the election, 1.8 after the Fed meeting).
We expect significant monetary policy easing to push global growth higher in 2025, fostering an attractive environment for risk assets as central banks achieve a “soft landing.”
The Federal Reserve unanimously decided to cut rates by a quarter point, and in my opinion, there’s far more to go for the Fed in this easing cycle.
Markets got the clarity they crave with Donald Trump’s decisive victory in the presidential election. Now the focus shifts to taxes, deficits, tariffs, immigration and more.
Important information
NA4018711
Image: Simone Wave / Stocksy
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Past performance does not guarantee future results.
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Disinflation, a slowing in the rate of price inflation, describes instances when the inflation rate has reduced marginally over the short term.
Dovish refers to an economic outlook that generally supports low interest rates as a means of encouraging growth within the economy.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.
Inflation is the rate at which the general price level for goods and services is increasing.
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Tightening monetary policy includes actions by a central bank to curb inflation.
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