Stocks have outperformed bonds for two consecutive years, with Wall Street expecting this trend to persist in 2025 as Trump takes office. However, this relies on a rebalancing of economic growth from the United States, China, and India toward Europe, Japan, and Canada. The key factors influencing this scenario include policy uncertainty, inflation, and growth trajectories, which are central to regime-based investing.
With risk parity pioneered by Ray Dalio, the founder of Bridgewater, struggling over the past 3 years, regime based investing is getting a lot of interest. Regime-based investing emphasizes the importance of inflation and growth dynamics, leading to four possible market scenarios. For instance, when inflation rises unexpectedly and growth declines, gold performs well, while simultaneous increases in both inflation and growth favor commodities. However, the difficulty lies in predicting the prevailing regime. Business cycle theory suggests regimes follow a sequential order, heavily influenced by prior years' economic conditions.
In 2024, stocks led asset performance, with the MSCI World Index up 20%, far outpacing commodities and bonds. This indicates that growth exceeded expectations while inflation was lower than predicted. The consensus forecasts strong global growth in 2025, with the IMF projecting a 3.2% expansion. However, risks loom large. Recent ISM manufacturing data, initially seen as a positive signal, was driven by inventory restocking ahead of potential trade tariffs. Chinese manufacturing remains weak, as evidenced by declining PMIs and struggling export growth in South Korea and Taiwan. Moreover, global semiconductor sales, boosted by AI-driven demand in 2024, are expected to slow in 2025 due to disappointing launches, like the iPhone 16.
Shifts in consumer behavior also play a role. Dining out, a key indicator of service sector strength, is on the rise globally, particularly among younger generations. Yet, discretionary spending, such as dining and vacations, remains susceptible to stock market volatility. Simultaneously, aggressive discounts in the auto industry—seen in both the US and China—have merely pulled future demand forward, casting doubt on 2025's growth prospects.
Geopolitically, high-growth countries like India, China, Brazil, and the US are forecasted to slow in 2025. The anticipated rebound in Europe, Japan, and Canada is undermined by significant policy uncertainty, particularly in Germany, France, and Canada. Germany faces manufacturing challenges and political gridlock, while France struggles with political fragmentation and fiscal instability. Japan's export growth is stagnant despite a weak yen, and inflationary pressures limit its central bank's options. In Canada, housing market stabilization and economic recovery are hindered by prolonged political uncertainty under Justin Trudeau's government.
In the US, potential trade policies under Trump 2.0 add to global economic uncertainty. Despite optimism about a possible US-China trade deal, the narrow Republican majority in Congress may impede swift policy implementation.
Looking ahead, the global economy faces downside risks in 2025. Weak inflation and growth relative to expectations favor holding US government bonds, particularly with maturities up to five years. However, investors are advised to proceed cautiously, given the volatility surrounding trade and policy uncertainties. The complex interplay of global macroeconomic forces highlights the challenges of sustaining growth amid shifting regimes and unpredictable geopolitical landscapes. David Woo, a former top-ranked Wall Street global macro strategist tells it as it is. You may not agree with everything he says but he will make you reassess everything you thought you knew.
#Stocks2025 #GlobalEconomy #MarketTrends

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