Posted on

There are two things to consider: The state of the global/US economy right now and then the potential impact of Donald Trump’s second term in office. But note: all expectations on the latter are priced into asset values right now.

The US continues to lead the developed world in terms if growth. China is facing slow growth weighed down by a property boom that went bust. Europe faces sluggish growth as luxury jewellery/fashion brands depend on Chinese demand and Germany and France are in relative political turmoil. The UK is also facing almost zero growth as it recovers from a budget that taxed industry hard.

On the other hand, the US grew by a healthy annual rate of 2.8% in the last quarter of 2024 and seems to be achieving, albeit slowly, a ‘goldilocks scenario’, with the economy not too hot, and also not too cold as relatively high interest rates bring inflation down.

To remind ourselves…

Inflation in the US was 10% 2 years ago. It is now 2.9%, edging towards the central banks 2% target.

The key ‘Fed Funds’ interest rate is 4.50% – 4.75% down modesty from a recent 20-year high of 5.25% – 5.50%. The market expects 1 or 2 more 0.25% cuts in 2025. Six months ago, the market was looking for 4 or 5 such cuts.

High interest rates are bad for stocks as

-They slow the economy down = less corporate profits

-They increase the cost of corporate borrowing = less corporate profits

-They make bonds look a better investment option than stocks

So US stocks are, and have been, the best performing stock market in the Western World with the S&P 500 rising 20% in both 2023 and 2024. The market has also been boosted by the substantial interest in AI with the US having the world’s major technology companies – think Microsoft, Apple, Tesla, Nvidia.

In terms of investment allocation, a strong investment case can still be made for US stocks.

Note: The US Dolar is strong right now as investors buy US dollar denominated assets plus they are attracted to buy dollars due to still high US interest rates.

The Influence of Donald Trump

Although unpredictable, the US financial markets like Mr Trump as he

-supports lower taxes which will put more money in people’s pockets and so drive consumption.

-supports lower regulation, which will allow sectors such as banks to expand their businesses and not be hampered by regulatory constraints

-supports tariffs on imports which should help the profitability of US companies

What are the risks to the US/Global stock markets?

1.The unpredictable nature of Donald Trump

2.Trump’s policies are ‘pro-growth’ i.e. quite expansionary. This excessive growth could force inflation back up. In that scenario, The Federal Reserve would have to raise interest rates instead of market 2025 expectation of lower interest rates. This would be a shock to the markets and drive stock prices lower…perhaps sharply lower…given how buoyant US stock prices are right now.

3. Trade tariffs are a delicate subject and could lead global economic instability.

How should investors deal with all this. Time for a balanced portfolio perhaps!

Leave a Reply

Your email address will not be published.

2 × 1 =