• Trump’s victory boosts US markets, puts the brakes on Europe and emerging market countries, and upsets certain key sectors.
• A look back at 2024: inflation under control, monetary easing, and surprisingly robust growth.
• Challenges in 2025: US economic slowdown, trade tensions, European uncertainties, and stock market adjustments will mark a key year for investors.

One of the highlights of 2024 will undoubtedly be Donald Trump's landslide victory in November's US presidential election. This victory not only sees the former president’s imminent return to the White House, but also has seen his Republican Party take control of the House of Representatives and the Senate, consolidating legislative power. Although it is too early to predict exactly what policies will characterise his second term, the first appointments to his future administration are based on two main criteria: loyalty and a break with the previous administration. It is therefore reasonable to expect continuity, if not an intensification, of his previous policies which were based on protectionism, deregulation, a reduced role for the state, and a stricter immigration policy.

As usual, markets were quick to anticipate the impact of Trump's manifesto on different asset classes, regions, and sectors. Unsurprisingly, the US market reacted positively to Trump's victory, with stock market indices rising sharply in November on the back of the 'America First' slogan. The S&P 500 index rose 5.7% over the month. During the same period, US small and mid-cap stocks rose by almost 11% (Russell 2000), buoyed by Trump's protectionist rhetoric and the appointment of Scott Bessent as Secretary of the Treasury, something which helped ease tensions on the US Treasury yield curve.

From a sector perspective, financials, consumer discretionary, and energy were the best performers. In contrast, the worst performing sector was pharmaceuticals. The appointment of Robert Kennedy, Jr., who views vaccines as dangerous and wants to cap the prices of expensive drugs, as Secretary of Health and Human Services, sent shares in the pharmaceutical giants tumbling.

In Europe, the threat of new tariffs weighed on the performance of the main European indices. The Stoxx 600 index ended the month slightly up (+1%), boosted by Germany's 2.8% performance (DAX index). By contrast, France continued to disappoint in the face of political confusion over the sensitive issue of the national budget, as did its benchmark index, the CAC 40, which closed down by 1.5% over the month. Emerging markets also suffered from the fallout from the US elections. The appreciation of the dollar and the threat of new taxes had a negative impact on the MSCI Emerging Markets Index which fell by 3.6%.

The election also triggered significant volatility in the bond market, particularly at the long end of the sovereign yield curve. In the second half of the month, however, the market began to stabilise, supported by the removal of electoral uncertainty and the reporting of inflation and growth data in line with expectations. These factors allowed the US 10-year Treasury yield to return to its mid-October level (4.20%). In Europe, the key event was the spread on French 10-year bonds which ended the month at the same level as that of Greek 10-year bonds! Among commodities, precious metals reacted most strongly to the election. Prior to the election, gold prices had reached record highs, but the election of Donald Trump as President has seemed to remove much of the economic and geopolitical uncertainty that has been fuelling the demand for gold. Interest in gold as a safe haven temporarily waned, with the price of an ounce of gold falling by 3.7% over the month. Silver also suffered, falling by more than 6%. Finally, in the currency markets, the dollar was the big winner from the elections. Expectations of stronger growth and inflation, as well as expectations of interest rate rises, pushed the dollar higher against its major counterparts, with the DXY index rising 1.7% over the month.

2024: a Period of Normalisation

Let's face it: the past few years have been particularly challenging for the global economy which has been confronted with profoundly disruptive and unnatural events. First, the H1N1 pandemic radically disrupted the manufacturing and services sectors, threw supply chains in disarray, and destabilised the labour market. Faced with this unprecedented public health crisis, governments were forced to inject massive amounts of cash into the economy to avert a major catastrophe. Then came the war in Ukraine, a further factor of instability that triggered a cycle of hyperinflation, mainly due to the rise in energy prices; this came on top of the mountain of liquidity injected into the system in previous months and years. In the face of this inflation, central banks have had to react aggressively, raising interest rates to levels not seen in over forty years in an attempt to contain the damaging effects of inflation on growth, consumption, and employment.

Despite these headwinds, the year 2024, which is now drawing to a close, has been remarkable in many respects, both economically and in terms of market performance. Indeed, despite all the turbulence, the economic landing has been surprisingly smooth against a backdrop of an extremely tight monetary policy. The US economy continues to grow at a rate above its historical average in real terms, while at the same time the Federal Reserve has begun to ease monetary policy following a significant fall in inflation.

Europe has also managed to avoid a significant recession, despite the profound economic, political, and structural challenges facing Germany and France. The battle against inflation also appears to have been won on the Old Continent, allowing the European Central Bank to launch its monetary easing programme a few months before that of the US Federal Reserve. Switzerland, for its part, has been a good pupil, with inflation under control (thanks to the strength of the Swiss franc) and sustainable growth. And to everyone's surprise, the Swiss central bank was the first to cut its key rates, 6 months before the US central bank! We can therefore classify 2024 as a year of transition in which the various cycles, both economic and monetary, will have returned to a more normal rhythm after several years of turbulence.

Source : Bloomberg / Heritage

What About 2025?

The challenges for the year ahead are daunting. The US economy is slowing and will have to navigate through a period of monetary easing at the same time as a major change of direction in Washington. While household consumption has been the main driver of growth, falling savings and high debt levels could cloud the outlook unless real wage growth continues.

Source : Bloomberg / Heritage

In Europe, the situation remains worrying, with France and Germany remaining spectators rather than decision-makers. Growth in Europe will depend on continued disinflation, the pace of monetary easing by the ECB and a gradual recovery in consumer spending. The Old Continent will also have to deal with the consequences of US decisions on tariffs, which could affect its trade balance.

Meanwhile, China is facing a slowdown in growth and should continue to stimulate its economy but will undoubtedly feel the impact of Trump's trade policies. Finally, with valuations high in some equity markets, future performance will depend on companies' ability to grow earnings. Investors will therefore need to adjust their portfolios accordingly as they navigate through what may be a more "normal" economic period, but also one of more political uncertainty!

I wish you a happy holiday season and look forward to seeing you early next year to hear our full outlook for 2025!

Read the CIO newsletter in pdf format:CIO Letter - December 2024