2025: INTRIGUING OUTLOOK?

EMR December 2024

Dear Reader,

HISTORICAL HINTS

By way of introduction, we will look at the performance of the S&P500 and the NASDAQ equity index since 1980 following the respective presidential elections. The aim is to remind investors that they should be prepared for short to medium-term fluctuations. To do this, we use the data from Christopher Hayes and Alex Harring, which is as follows:

STOCK MARKET & US ELECTIONS?

Looking at the performance of the historical averages of the S&P500 and NASDAQ indices (as shown above), it seems reasonable to remember that past results do not always and necessarily help to determine the most likely future performance. For example, if one examines the “percentage annual change” of the S&P500 and NASDAQ indices, respectively, one finds that there have been more positive than negative monthly than annual changes; 7 for the S&P500 and 8 for the NASDAQ. In other words, the odds are slightly more in favor of a positive outcome in 2025 than a negative outcome.

Christopher Hayes and Alex Harring’s data explain that there have been 23 elections since the S&P 500 Index began and that in 19 of the 23 years (83%) there has been positive performance. They also remind us that in the years when a Democrat was in office and a new Democrat was elected, the total return for the year averaged 11%, while in the years when a Democrat was in office and a Republican was elected, the total return for the year averaged 12.9%.

It should be borne in mind that the story does not follow a specific pattern and is not easy to judge, as the decisive events and factors are very specific. What comes next remains a difficult undertaking. Environments cannot always be extrapolated unless one can pinpoint the determining factor(s). At this crossroads, credibility is needed, particularly with regard to the whereabouts of the big tech giants relative to economic activity. It is worth noting that the 10 tech stocks have recently accounted for 35.1% of the gains in the S&P500 index, for example. Recall that in 2015, the list was dominated by 10 tech giants that accounted for only 20% of the total weight.

In order to estimate the most likely outcome for the year 2025, we would first like to point out the most important key determinants, which we consider to be very deterministic, but which are also very difficult to assess with sufficient credibility and precision.

1. State of vulnerability. At present, the economic environment is considered to be very fragile, primarily due to the outcome of the US elections. An environment that is difficult to quantify with a high degree of acceptance.
2. The two leading European economies, Germany and France, are facing particular problems. Germany, the world export champion, is in danger of falling into recession. Many companies in the DAX index are struggling with high energy costs, falling demand and shrinking profitability.
3. France, the proud ‘Grande Nation’, is becoming a weak link in the eurozone. Even in France, there are dangerous signs of an impending recession.
4. Other markets have not had much to say in recent quarters. In general, analysts have focused on political events, which has led to a great deal of uncertainty about the imminent future of the stock markets.
5. Against this consistent backdrop, the dollar should remain strong against both the euro and the Swiss franc, and the Swiss franc should appreciate against the euro.
6. In addition, the environment continues to be burdened by the Russian war against Ukraine. Technological interdependencies (West-East) and, in particular, the localization and re-localization of technological innovations are causing continued volatility. All developments point to an increasingly divided economic environment. The dependence of Western economies on fuel imports from politically unstable countries does not promise rapid change in the short or medium term. In addition, the political disputes in the industrialized countries (see e.g. Germany and France) do not bode well for inflation and the expected reaction of the monetary authorities.

OUTLOOK 2025

What might the economic, political and social environment look like in 2025 is the difficult question that many are asking themselves at this point in time. Traditionally, investors tend to extrapolate the recent past. We believe that such an intention does not seem very promising at present. We will therefore try to define a slightly more promising perspective, which may force us to review the state of play in due course.

Let’s start with the country allocation. As Swiss investors, we are still “over-exposed” to our home market, both from an equity market and currency perspective. Traditionally, the CHF has outperformed most other currencies in a very contrarian environment, so we expect this to be the case again in the near future

Most people we speak to are asking the same question: What will President Trump’s policies really achieve? A “closed store”, i.e. an extreme focus on the domestic market, or a slow but steady return to an open environment? Do you have a suggestion?

We believe that the Russian war against Ukraine as well as the war in the Middle East are immense unworthy tragedies that will not help anyone economically or socially. Furthermore, we find the current focus of various governments on further interest rate cuts astonishing indeed, especially considering the risk of recession, especially in the European context.

The two sectors that continue to attract our attention are likely to remain technology and financials, while current expectations point to further rate cuts. As expected, the Fed cut the key interest rate further at its latest meeting. This means a full percentage point for 2024! To avoid an inflationary spike in 2025, further rate cuts should be expected. We wonder why most analysts do not examine the impact on economic growth, inflation differentials and other countries’ currencies and thus on the announced drastic change in policy, and not only in the United States. Do you have any suggestions?

The graphical representation of the performance of the various share indices for the period since April 12, 2022 and in particular since December 10, 2023 speaks volumes. The outperformers include the NDX (+95.99 %), the S&P500 (+57.65 %), the NASDAQ (+90.01 %) and the NIKKEI (+50.07 %). The worst performers in local currency terms were the FTSE (+21.15%) and the SPI (+19.01%). The CAC40 and the SX5P index performed slightly better than the SPI and the FTSE index. At this point, the question arises: what can be deduced from these major differences?

First of all, the most profitable investments in the reporting period were in the technology sector. Economic developments in the individual European countries were also a determining factor. Another aspect of considerable influence was and is the whereabouts of the respective currencies, even more so than the much-vaunted fine-tuning of interest rates. The reactions of the share indices to the record interventions on the currency markets since 30.09.2020 were of deterministic relevance. See the chart.

SUMMING UP

The political, economic and social environment remains characterized by opacity and volatility. The US elections have not brought any substantial certainty either. The tone is different, but the facts will have to wait.

Accordingly, we will maintain a rather restrictive country allocation based on technological innovations, financial management and currency expectations. Provided that the East-West constellation does not deteriorate, we, as Swiss investors, will continue to focus on our own domestic market, particularly in connection with currency developments. From a technical perspective, we continue to favor the US equity market over the European markets.

MERRY CHRISTMAS AND A HAPPY NEW YEAR 2025

Suggestions are welcome.