January 2025 | Macro and Flows Update

Summary

The video discusses the macroeconomic outlook for 2025, focusing on the potential impact of the new U.S. administration, high market valuations, and the role of the Federal Reserve. The speaker predicts a market decline, especially if the Fed maintains a cautious approach, potentially leading to a 10-15% drop by March. There's a chance for a rally later in the year, but a major market correction could occur by Q3 or Q4. The video also highlights the possibility of a shift in Chinese equity performance and rising interest rates, advising caution while monitoring market developments.

Takeaways

• 😀 Election years have historically shown strong returns, with an average of 21.5% in positive years, excluding the populist periods of the 1960s and 1970s.
• 😀 The period from the 1960s to the 1970s saw zero nominal returns and negative real returns, highlighting a challenging historical period for markets.
• 😀 The recent two election years saw returns of 21% and 23%, reinforcing the trend of strong performance during populist periods.
• 😀 Current market valuations, particularly in the US, are at historically high levels, comparable to the tech bubble, indicating a risk of overvaluation.
• 😀 The US faces significant risks related to tariffs, stricter immigration policies, and global conflicts, all contributing to market uncertainty in 2025.
• 😀 The Federal Reserve's actions under the new administration, particularly regarding monetary policy, will be crucial in shaping market movements and investor sentiment.
• 😀 If Trump pursues an aggressive monetary policy, we could see a temporary market rally, but a longer-term decline is likely to follow.
• 😀 If the Federal Reserve adopts a cautious stance, the market may decline by 10-15% by March 2025, setting the stage for further volatility.
• 😀 After a potential decline in Q1 2025, a counter-trend rally may occur, but this could be the last major rally before the market faces another decline in Q3 and Q4 2025.
• 😀 Global assets, particularly Chinese equities, may outperform US assets if the new administration takes a proactive approach to working with China.
• 😀 Interest rates are expected to rise to 6.25%-6.5% by the end of 2025, contributing to a market decline later in the year, with pullbacks along the way.

Q & A

What is the significance of the year 2025 in the context of the video?

2025 marks the beginning of a new administration in the United States, with a new president and the end of an election year. This transition is significant as it impacts economic policies, markets, and potential changes in governance that influence the broader economy.

How do election years typically affect market performance?

Election years, on average, show a 12% return in the market, but if you exclude highly volatile years like 1964, 1968, and 1972, the average return drops to around 5.5%. However, the last two election years were exceptions, with returns of 21% and 23%.

What is the relationship between election years and market volatility?

Election years tend to show volatile market performance, with significant fluctuations observed in certain years. Specifically, the years that had higher returns were those with substantial market volatility and populist-driven policies.

What is the outlook for the market in the coming year according to the video?

The video suggests that the market is likely to experience a decline in the first quarter of the year, possibly by 10-15%. There could be a relief rally in the months following, but this may ultimately lead to further declines due to weaker structural flows and a challenging macroeconomic environment.

What role does the Federal Reserve play in the market's performance under the new administration?

The Federal Reserve's monetary policy will be crucial. The video speculates that the new administration might exert influence over the Federal Reserve, with an emphasis on running the economy 'hot' to stimulate short-term growth, which could push the market to new highs before a possible decline later.

What are the risks associated with current market valuations?

Current valuations are high, particularly in comparison to interest rates, and are considered even higher than during the tech bubble. While expensive assets don't always lead to a quick market downturn, the long-term outlook suggests that markets may struggle due to these inflated valuations.

How might global issues impact the U.S. market?

Global conflicts, stricter immigration policies, and potential tariffs could exacerbate inflation and impact market stability. Additionally, global tensions could lead to market volatility, further complicating the economic outlook.

What might happen if the Federal Reserve adopts a more cautious approach?

If the Federal Reserve remains cautious in its approach, without aggressive monetary stimulus, the market may decline by 10-15% through March. This could signal a broader downturn if inflation continues to rise and the Fed does not intervene decisively.

What is the expected market trend in the mid to long-term?

The video predicts that the market could experience a significant rally from March to June, possibly reaching new highs. However, this rally would likely be short-lived, with a larger decline expected in the latter half of the year, possibly resembling the market declines seen in the late 1960s.

How will interest rates affect the market in 2025?

Interest rates are expected to rise throughout 2025, possibly reaching 6.25-6.5%. This rise in rates could contribute to market declines in the latter half of the year, but the market may experience pullbacks or rallies before that point, depending on the Federal Reserve's actions and economic conditions.