As a good year is coming to an end, investors have rarely been more excited for the new year ahead. People are flocking into the "Trump trade", whether it is US small caps, bitcoin, or (expensive) financial stocks. The AI craze is also alive-and-kicking in investors' minds for 2025 as well. Truth be told, the Trump victory came at the right moment, when US equities had started correcting from the year's highs. Come November and US equities zoomed higher, for a 5% monthly return for the main indices, and now the S&P500's year-to-date return exceeds 25%. European equties were broadly lower for the month, with most indices falling about 2%, as the region is doomed under Trump and due to its own issues (lack of capital markets union, low productivity, rigid labor markets and a global investment community which has been dilsiking the region for more than ten years). It is worth noting that Europe's weight in the MSCI World index has fallen from about 33% in the early 2000s to just below 14%, while that of the US has increased from about 40% to more than 65%.
The consensus view for 2025 is that this US supremacy will continue and the region's equities will outperform again, despite the hefty valuations. This is clearly shown in the extreme leveraged positions of hedge funds, evident in various sentiment indices as well as in all presentations of analysts and strategists that we have come across lately. European equities are on course to finish the year with an underwhelming performance of about 5%, if things stay around current levels, and are considered a "lost case" for next year too. We see no reason to become the "lone wolf" and challenge this widely-held consensus. The time has come for the year-end celebrations and we should be cheerful and thankful. Put the champagne in the fridge !
In the shortened week for US markets, the S&P500 hit a new record high, as it rose by 1%. Smal Caps and Technology battled each day for the top position, both ending the week with about 1% gains, as volatility provided obstacles to the two main themes that investors like at the same time : namely Trump trade and Previous Winners. European equities were also volatile but managed to eke out small gains (0.5% on average), except for the French market which ended in the red (-0.5%).The fragile French government is already having issues with passing the 2025 budget, but the market reaction led Mrs Le Pen to offer some reconciliation with Prime Minister Barnier. The situation will remain fluid, and French exposure is perhaps best to be reduced.
President-elect Trump spoke again about his favorite subject : tariffs. Seeing that the market is perceiving the appointment of Mr. Bessent to the Treasury as a softer stance on tariffs, he took matters in his own hands, again. He twitted that on the first day of his presidency imported goods from Canada and Mexico will face taxes of 25% and China an additional 10% on the existing ones. It is interesting that China's extra tariffs will only be 10% according to his post, as he was talking about 65% during his campaign. And targeting Canada, which is the largest trade partner of the US by a wide margin, was another surprise. As we have already said, exciting times lie ahead of us, which will either lead to a boom (as the consensus has penciled in ) or a bust, which will lead to a bloodbath given extreme positioning. We prefer to stay on the optimistic side, but maintain at the same time various hedges (Swiss Franc, Long duration high quality bonds, and some defensive stocks).
Eurozone November Inflation rose 0.3pp to 2.3% y/y, matching expectations. Higher energy inflation helped by the base effect, was the key driver behind the increase. On the positive side, Core inflation remained unchanged at 2.7% y/y vs. expectations for a small rise to 2.8%. Within Core, consumer goods inflation moved slightly higher to 0.7% y/y , while services inflation dropped o 3.9% y/y. For inflation to move lower than 2%, in a sustainable way, we need to see Services such as Insurance premiums, Medical Care and Rents find at last a ceiling, much like food, drinks and other consumer goods did in 2024. In any event these data, confirm the view that the ECB will cut rates by 25bp next week.
The US macro economic data were marginally weak. Although the second reading of the Q3 GDP was in-line with expectations at 2.7% and jobless claims remained low (213k), Durable Goods orders (-0.2% month-on-month) and New Home Sales (-18% month-om-month), were particularly weak. We should also highlight the collapse of Chicago Manufacturing PMI to 40, despite the consensus view for a rise to about 45, and that is the lowest level since the pandemic years.
Bonds had a very positive week, as the US macro data underwhelmed. The US 10-year yield returned to 4.20% , a whopping 30bp below the levels of two weeks ago, while the German equivalent has also dropped 30bp and is now trading below 2.10%. The 2-8yr German curve is again yielding less than 2%. This confirms our view that high quality bonds should have been bought during the weakness, right after the US elections. Now, we would avoid adding more positions. We should also note the fact that during the week we saw headlines in the main financial media about the French 10-yr yield surpassing for the first time the Greek one... The new year is indeed brewing to be very exciting, yet volatile.
The Trump-trade has not been friendly to Gold. The yellow metal is trading back closer to 2600$, after visiting 2800$ a few weeks ago. The dollar rally, bitcoin's competition and the rise in bond yields which was the side effect of Trump's election are all negative forces on Gold. On the positive side, the next two months are typically strong for physical demand, as the wedding season in India and China is about to begin. These folks still buy scores of Gold for the occasion. It remains to be seen if physical demand will prove stronger than the trading positions which sell/short the metal, as part of the Trump-trade.
Chart of the Week : This has not been a "traditional" year.
The above chart shows the monthly performances of the S&P500 , with the blue bars being this year's returns and the green bars represnting the monthly average since 1990. As can be seen, this year has not followed the season patterns very closely. Starting with the very strong February which is traditionally among the worst months, we then moved to April which was deeply negative, although it is usually in the top 2-3 months in term of performance. Then, August and September were very positive months, although seasonality would have suggested otherwise. Moving to October we saw another "violation" of the pattern, as we ended in the red, although usually it is a very good month. November was the only month to live up to its expectations for being the best month on average. How December will look is anybody's guess, but judging from the momentum, ultra-positive sentiment and lack of catalysts, we would guess that it is going to be at least a positive month, even if that proves much smaller than hoped. On the positive side, traditionally there are only two negative months during the year, and we already had those.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week : KSH/FactSet
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