December Market Update
Trump Change
The US election already feels an age away; but as we entered November, the final phase of campaigning was in full swing, with both candidates keen to win over key swing states. What was anticipated to be a closely contested race, surprisingly, turned out to be the opposite. Whilst the Trump win may have hit immediate efforts to tackle climate change, the result did provide a degree of stability for markets.
With sufficient seats secured for majorities in both the House and Senate, Trump is strategically positioned to promote his legislative goals. U.S. equities experienced an increase of more than 7% over the month, significantly outperforming other regions, as markets responded positively to Trump’s pro-business approach. Smaller-cap stocks excelled and were viewed as the primary beneficiaries of his policies.
The upcoming months will be focused on distinguishing between reality and rhetoric of tariffs and drastic measures to reduce immigration. The Federal Reserve faces the challenge that many of Trump’s proposed policies may contribute to inflation. Their primary objective is to maintain price stability, and with an inflation rate that is not fully under control, this places them in a precarious position. Lacking clarity on the timing and scale of potential changes, the Fed can only concentrate on existing data. Consequently, they implemented a rate cut of 0.25%, adjusting interest rates to a range of 4.5% to 4.75%. A significant concern for the Fed will be Trump’s attempts to undermine their independence.
Shifting policies in the UK
The Bank of England followed the Federal Reserve’s example by reducing rates from 5% to 4.75%. This reduction was anticipated; however, since the Autumn Budget, projections for additional interest rate cuts have weakened. Currently, only two further reductions are expected before June 2025.
The Bank of England also announced plans to implement changes based on Ben Bernanke’s independent review conducted earlier this year. These adjustments will focus on the decision-making processes of the Bank and their communication methods. It is essential for forecasting and modelling to align more effectively with the current economic landscape, while messaging must foster credibility and confidence to maintain stability in financial markets.
Global Uncertainty
Chinese authorities have gradually implemented their fiscal support package, which includes $1.4 trillion designated for refinancing local government debt. It appears that China may be postponing additional support measures until there is greater clarity regarding future tariffs from the US. Trump has initially proposed a 60% tariff on all goods. The nearly 2% decline in Emerging Market equity reflects the prevailing uncertainty and associated risks. Conversely, favourable developments could result in more meaningful returns, considering current low expectations and confidence levels.
European politics remains uncertain, following the collapse of the German coalition government after Chancellor Olaf Scholz dismissed his finance minister and announced a snap election. The turmoil is largely due to disagreements surrounding fiscal spending and debt management. Similar challenges are destabilising the French coalition government at present. The FTSE World Europe-UK Index declined by more than 1% during the month.
The market landscapes on either side of the Atlantic can tell contrasting stories. However, it is crucial to discern what is already factored into market pricing. The US market appears costly by many metrics, yet it still shows robust growth and attracts the majority of investments.
Disclaimer: This content is for your general information purposes only and does not constitute investment advice. The commentary is intended to provide you with a general overview of the economic and investment landscape. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
Past performance is not a reliable indicator of future results. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances. Your capital is at risk and the value of investments, as well as the income from them, can go down as well as up and you may not recover the amount of your original investment.