A very belated Happy New Year!
What do investors and, indeed, all of us have to look forward to in 2025? As I see it, the global economy in 2025 is poised for a year of mixed prospects across many sectors.
First, both domestic and international equities will have to navigate a landscape characterized by government policy shifts and by economic uncertainties.
In the United States, equities could benefit from moderate growth and disinflation, supported by continued monetary easing. Monetary easing is defined as lowering interest rates as well as increasing the amount of cash available to borrowers. The desired result of this easing is to provide a bump to the economy. If corporate earnings remain solid, we expect to see continued growth in US equities.
Conversely, the Federal Reserve's potential move toward a more neutral stance vis a vis interest rates, coupled with the new administration's policies, could lead to higher growth and resurging inflation.
None of us can predict what the effect of the policies around tariffs and immigration will have on the economy. What is certain is that volatility will increase. The overall volatility in the economy will directly affect the volatility of the markets.
We are seeing declines in the growth rate of some major European economies, e.g., Germany and France. However, central banks in these countries are undertaking rate cuts to support growth. In addition, we expect continued growth in the largest Asian markets, e.g., Japan and China. At this time, international equities are priced cheaper than US stocks. As a result, positive returns are anticipated for equities in the international markets.
The expected volatility will impact the Fixed Income markets as well. Yields have surged following recent rate cuts, making bonds an attractive option for diversified portfolios.
These markets are shaped by a balance between monetary and fiscal forces. Monetary policy is the management of the nation’s money supply and interest rates. Fiscal policy is the government’s plan for taxation and spending. If the Fed lowers interest rates (monetary), the effect will be to increase the value of bonds or bond funds already owned. If, however, the government uses tax cuts (fiscal) to stimulate the economy, this could drive up interest rates and cause the price of currently held bonds to fall. This environment will create volatility but also present opportunities for fixed income investors.
The U.S. dollar is projected to maintain its strength in 2025, driven by solid economic growth and higher interest rates compared to other developed markets. Despite two Fed rate cuts in 2024, the dollar has continued to rise, supported by superior productivity growth and few labor supply issues. However, the dollar's ascent may face constraints due to the U.S.'s persistent trade balance deficit and potential policy shifts under the new administration.
Foreign trade in 2025 is expected to be influenced by a complex interplay of tariffs and geopolitical tensions. The still new U.S. administration's focus on prohibitive tariffs and interventionist industrial policies could further fragment global trade relations. Despite these challenges, overall trade volumes are likely to increase, driven by stock-market gains and technological advancements. However, the global economic landscape remains uncertain, with significant risks posed by rising public debt levels and geopolitical conflicts.
In summary, 2025 will be a year of navigating economic complexities, with opportunities and challenges across equities, fixed income, the dollar, and foreign trade. Diversification, including geographic diversification, will become even more important in the year ahead. Investors will need to stay vigilant and adaptable to capitalize on the evolving market dynamics.
If I can help you with planning for the future, please feel free to call (215-836-4880) or email the office (ellend@regardingyourmoney.com) to set up an appointment.
Have a super financial year.