Monday Digest
Posted 6 January 2025
December’s market-moving events – most notably the Fed telling markets ‘bah humbug’ – didn’t spoil 2024’s year-long party in US equities; they just stopped it a little early. Investors have grown extremely confident about US growth since Trump’s election win, expecting tax cuts and deregulation, somehow coupled with ultra-efficient government and a reduced budget deficit. The ‘soft’ data (measuring confidence) has backed this up but the ‘hard’ data (actual activity) has not so far. Americans will want to quickly see that their confidence is well-founded this year.
That will be difficult if the Trump administration starts fighting itself. The Trump coalition’s ultra-conservative wing is already confronting the Elon Musk “tech bro” wing over skilled immigration. Trump himself has always been coy on policy specifics, but the specifics are now needed – which may make markets slightly less optimistic.
Investors have been getting ever more dour about Europe and the UK. We think energy prices are still Europe’s main handicap, and the energy outlook is uncertain. Russia is now halting all gas pipeline deliveries through Ukraine – causing prices to spike – but this is being portrayed as a consequence of Ukraine’s rather than Russia’s actions, and European relations are fractured. It’s uncertain, but this plausibly could be positioning ahead of an end to fighting. That should mean lower energy prices and perhaps a brighter 2025 for Europe.
Markets are negative about the UK. Growth is non-existent, but commentators suggest that Britain’s wage inflation will be higher than elsewhere because of short labour supply and the government’s tax policies. If they’re right, the government might have to expand the deficit further, making gilts even less attractive. That’s why the spread between UK and German bonds has reached its highest in 25 years, but this strikes us as too far, considering the economic similarities.
2025 starts with more unknowns than usual. We have to stay a step ahead, but also accept that outcomes can be highly unpredictable when so many factors are at play. It will be an interesting year and we think diversification will be more important than ever. Here’s hoping for a peaceful, sustainable global backdrop to underpin returns.