Published January 10, 2025
Happy New Year! Markets have begun the year where they exited 2024, with quite a bit of uncertainty. Blake Millard does a good job laying out the sources of that uncertainty in his comments shown below:
“Policy uncertainty should lead to higher volatility
The U.S. economy remains on solid footing as we head into 2025, supported by a steady consumer, easing inflation, relief from higher/restrictive interest rates, and a pickup in the corporate earnings cycle.
With trend GDP growth expected, the fundamental underpinnings that support economic expansion are robust and well known. However, a number of wild cards patiently await in the shadows that could determine the trajectory of the economy and financial markets over the next year.
President-elect Donald Trump is set to resume his seat in the White House on January 20, and with his arrival comes a number of policy unknowns that will directly impact the consumer, global trade, and economic growth. These include tariffs, immigration, extension of the 2017 Tax Cuts and Jobs Act (TCJA), deregulation, and the budget deficit – to name a few.
Markets have noticed the looming policy uncertainties, too. Since the election results were announced, volatility has been drifting higher and the VIX index now resides at 18.1.
We’ve seen this script with the President-elect before. When policy uncertainty rose in Trump’s first term, the VIX rose alongside it.
Whether it’s the transition from the Biden-to-Trump administration, ongoing tariff overtures, port strikes, or the looming budget deficit/debt ceiling negotiations, there are numerous risks to keep investors on high alert. This backdrop could prevent any meaningful gains given elevated volatility, however we know that markets often climb the wall of worry.
The markets will have to contend with plenty of the Trump wild cards throughout the year. Depending on how each evolves, volatility will ebb and flow.
Take tariffs, as one example.
From the Trump 45 administration we witnessed the impact of the 2018-2019 trade war on inflation (below, left exhibit) as well as the tightening of financial conditions that prompted an immediate about-face and easing in Fed policy.
Much about the current cycle is different, but the 2018-2019 analog shows that policy risks from tariffs are at a minimum two-sided.
Goldman Sachs wrote that expected “policy changes under the incoming Trump administration will weigh on growth in 2025.”
The drag on growth from reduced immigration and tariff orders are likely to materialize more quickly than the boost from tax cuts, thus depressing growth in 2025 before a offset boost returns in 2026.
For now, there are too many unknowns. The market will have to wrestle with the uncertainty and await its answers. As we know, the stock market does not do well with uncertainty.
Once the President’s agenda comes into greater focus and the gap between proposed policy and enacted policy narrows, markets should breathe a sigh of relief and move past the uncertainty as it refocuses on economically-oriented variables of the business cycle.
Historically, after some early indigestion in the months immediately following the election, equities tended to rally over the course of the year as election and politicking uncertainty subsided – although it should be noted that first-years under the Republican party have been less than desirable. Below is the average S&P 500 progression for the first year of the Presidential Cycle.
Over the last 100 years, annual returns during the first year of a Presidential Cycle have averaged +6.6% for the S&P 500, with the average maximum drawdown within the year of -16.3%.
Investors should brace for higher volatility in 2025 as the economy works its way through the new political climate and associated wild cards with the 119th United States Congress.”
Market Update
Semiconductor stocks took flight Monday as word of “targeted” tariffs from the incoming Trump Administration encouraged investors who had been fearing a broader approach. Further fueling the tech-led advance was optimism for this week’s Consumer Electronics Show (CES) with Nvidia’s CEO Jensen Huang on tap to announce the AI-darling’s latest technology. The Nasdaq popped +1.2% Monday. But the glee was short-lived as stocks sold off Tuesday on a pair of solid economic reports which pushed interest rates further upward. The Nasdaq tumbled -1.9%. Nvidia CEO Huang’s CES presentation failed to spark the hoped-for buying as the stock opened at record highs only to fall sharply throughout the trading day. The indexes, however, held little changed ahead of Thursday’s President Carter Day of Mourning market holiday. A strong monthly jobs report Friday led to another round of selling by investors. The ample hiring caused investors to push out hoped-for Fed interest rate cuts. Interest rates surged again leaving the 10-year U.S. Treasury yield at 4.77% by the close of trading. Investors keep hoping for the sharp rise in rates to abate, fearing that a breach of the 5% level will bring a more serious wave of selling of stocks and bonds. But the slowdown has yet to occur. Friday’s -1.5% drop in stocks offered further proof that stocks are in a danger zone and reacting negatively to the month-long runup in rates.
A strong start to the week evaporated by Friday with the S&P 500 falling -1.94% this week. The Nasdaq 100 (QQQ) slid -2.19%. Small cap stocks failed to build on the prior week’s advance tumbling -3.36%.
Warm wishes and until next week.