MARKET INSIGHT – December 2024

MARKET INSIGHT

Prime Partners’ monthly analysis of global economic and financial market news.

“Captain America”, the return of Donald Trump

In early November, the US ballot boxes delivered their verdict, and it was unequivocal. For the second time, Americans chose Donald Trump as their new president. A comeback that had been anticipated for many months, but an electoral victory whose magnitude nonetheless came as a surprise. Indeed, many observers feared a close result, or even a somewhat worrying scenario in which the Republican candidate would not concede defeat. This was not the case. Donald Trump clearly won the popular vote and, even better, the Republican camp took both chambers of Congress, giving the future president a great deal of freedom of action at least until the next mid-term elections at the end of 2026.

The financial markets were quick to react. Beyond the victory of one camp or the other, it was above all the perfectly unambiguous nature of the election result that was welcomed by Wall Street. Well-versed in the art of galvanizing crowds, Donald Trump wasted no time in finding the right words to say to investors, hammering home his rhetoric of “America First” and the omnipotence of the United States. The first appointments made in November, including that of billionaire Elon Musk to head the Department of Government Efficiency (DOGE), helped prolong the rally in US equities, with the S&P 500 posting its best monthly return of the year, up 6%, while the European, Swiss, Japanese and emerging indices ended the month in the red!

Captain America is a Marvel character who first appeared in December 1940 (Captain America Comics #1). This superhero was originally an American patriotic figure, in reaction to the Nazi regime. Unlike other characters in the Marvel Universe, he is not endowed with superpowers per se, but rather with physical and intellectual capacity “at the peak of human potential”, according to his creators.

Even with the help of Elon Musk (and his Neuralink brain implant project), the comparison between Donald Trump and Captain America in terms of superpowers is irrelevant. On the other hand, when it comes to patriotism and defending America’s greatness, there is an interesting parallel to be drawn.

When he is inaugurated on January 20, the new American president will take over the reins of a country that is a leader in most major fields. Whether in technology, energy or military power, American leadership is hard to dispute, much to the displeasure of its many detractors.

Whether in technology, energy or military power, American leadership is hard to dispute, much to the displeasure of its many detractors

Against this backdrop, what can we expect for the US economy next year as the new Trump administration takes power? The latest data from Uncle Sam’s country is rather flattering, especially compared to what is happening in Europe and China.

With growth close to 2.5%, inflation still under control, albeit higher than in the 12 years prior to Covid, and a job market that can be described as healthy, it is hard to be highly pessimistic about 2025.

Admittedly, the new president’s program is still vague, and in some respects may even seem out of step. The tax cuts promised to American businesses can be seen as a vitamin treatment administered to a patient already in robust health. The threat of additional tariffs on certain foreign products (and not just Chinese) raises legitimate questions, particularly in terms of potential inflation. Last but not least, the government’s intention to give preference to US workers and implement a much stricter immigration policy is by no means good news for many American employers, whose payroll costs are bound to rise.

We are therefore faced with two opposing dynamics, and at this stage it is hard to predict which will prevail over the other. On the one hand, the US economy will receive a boost, mainly in the form of deregulation and tax cuts. This should prolong its current momentum and further enhance its attractiveness in terms of incoming capital flows and to foreign companies wishing to set up shop in the USA. On the other hand, a consequence of this stimulus could be a rise in inflation, forcing the FED to revise its roadmap, which until recently seemed quite straight-forward in terms of future interest rate cuts. Beware, then, the side-effects of a re-acceleration of the US economy, when the train is already moving at sufficient speed.

Across the Atlantic, the picture is far different on the Old Continent. Germany confirms that it is in a dire economic situation, with a fifth consecutive contraction in GDP. In France, the Barnier government seems to be hanging by a thread, and has had to pare back its draft 2025 budget for lack of a majority. The result is a perilous situation for the evolution of the French public deficit, whose objective of rapid improvement is receding into the distance. The financial markets are fully aware of this, and will continue to demand higher interest rates from the French state than in the past.

The situation in China is yet different, but hardly more encouraging than in Europe. As we have regularly reported in this newsletter for many months, we consider the Chinese economic slowdown to be deep-seated. There was a time when, if the economy showed signs of slowing down, the government would boost construction. Today, however, the country’s massive real estate crisis has rendered such measures ineffective. Add to this the fact that consumption is far less sustained than before Covid, and it is clear that the China’s economy is becoming increasingly dependent on foreign trade. Import tariffs of up to 60% in the United States, as regularly mentioned by the new American president, would have a significant impact.

The year 2024 is drawing to a close, and after managing our allocations for 11 months, we can be satisfied with their performance. Our focus on building robust portfolios and ensuring that the strategies we invest in complement each other has paid off. We did not want to rely entirely on equities to generate returns this year. The pleasing figures for the major US indices in 2024 conceal major sector disparities and even greater differences between certain stocks within the same sector.

In this respect, the broad diversification of the bond holdings in our portfolios, together with our ongoing exposure to gold, contributed around a third of the total performance of our allocations in 2024. On the equities side, our determination to have sufficient exposure to the US market and, conversely, minimal exposure to China has also paid off.

The broad diversification of the bond holdings in our portfolios, together with our ongoing exposure to gold, contributed around a third of the total performance of our allocations in 2024

We will be entering 2025 with fewer economic and political certainties. This in not to say that we expect a difficult year, but potentially more volatility and shorter-lived trends.

The picture of the US economy painted above leaves little room for recession fears regarding the world’s leading power. However, a surge in inflation cannot be totally ruled out and would greatly complicate the FED’s work. We also bear in mind that a marked slowdown in China would have a far greater impact on Europe than on the United States. The old continent really has no need of this at present, given its situation.

Finally, let us not forget that Donald Trump has his own methods of communication, and that his “tweets” regularly stirred up the markets during his first term. There is little reason for this to change over the next 4 years. What is more, the United States has a key role to play in the geopolitics that now prevail. All this should only add to the volatility.

A former French president recently declared that “everything we think is fragile lasts”, thus emphasizing the importance of worrying about what is precious and taking the necessary care of it. Performance will remain at the heart of our concerns in 2025, and the sound construction of our portfolios will continue to guarantee this, as well as acceptable volatility for our clients. We wish you all the very best for the holiday season, and look forward to being at your side in 2025.