The Weekly Edge

It would be wonderful to live in the cozy world of only-happy Surprise Surprise, but the reality in 2025 is likely to be far more balanced between potential positive and negative surprises coming out of DC.

While Tech stocks came close to making a 10% correction last week, many of the sectors that lagged last year (yes, even international stocks) were among the leaders. With growth, led by personal consumption and a strong labor market, still solid heading into 2025, investors may be remembering the lead single from U2’s 1987 classic, The Joshua Tree, as they ask whether they can live “With or Without” the AI trade.

Overall, we do not see economic growth giving the Fed The Reason to cut rates in the near term, with the U.S. economy exhibiting much more resilience to short term interest rates this cycle. But given the wild cards of President Trump’s second term and the funding challenges of the Treasury, we expect to see continued jawboning around a desired path forward for Fed policy, even if growth remains resilient.

Fed rate cuts appear to be on hold. Global government bond markets are in retreat. And stocks have been jittery in the opening days of 2025. The trend for each of these hinges, to varying extents, on whether the U.S. job creating machine can continue humming in 2025. The December U.S. employment report gave us hope that it can.

The investing world has awoken from a two-week holiday slumber, and a new year has begun. 2025 starts, as most years do, with more questions than answers. But the outcome for the global economy and financial markets seems unusually uncertain to us. High valuations and market concentration combined with softening economic data and rising policy uncertainty mean the picture is murky, at best.

Currently, there is a splintering in financial markets and economic data that is likely to prove temporary, but as this splintering mends, markets could be singing Gin Blossoms’ “Follow You Down” along the way.

But oh, it's heavenNowadays “Nowadays”, Roxie Hart, Chicago the Musical It’s good, isn’t it? “Let me start by saying that we think the economy is in a really good place, and we think policy is in a really good place.” Grand, isn't it? “The economy is strong overall...

In the grand ranking of defeated and desperate pleas for love and acceptance, Fräulein Sally Bowles’ haunting “Maybe This Time” at the end of the first act of Cabaret takes the cake. In a close second comes Value stocks in 2024. Defeated, desperate, unloved, unaccepted, the Value factor/style might as well apply to jobs in the chorus line at the Kit Kat Club.

Our last Weekly Edge addressed the potential that we could see improving economic data in the wake of the U.S. election, reflected by more optimistic consumer and business survey responses. Since then, we’ve seen that effect materialize in some places (consumer expectations) but not others (services business sentiment).

While markets have been shaky over the past two weeks, the positive trends remain broadly similar to those in the final two months of 2016. Stocks could muster another lurch higher if business sentiment begins to reflect a more bullish outlook for 2025, perhaps due to a combination of lower expected tax rates or less stringent regulation.