Year-end volatilityWhile it’s true that yesterday wasn’t completely void of economic events, a disappointing Chicago PMI can’t really shoulder the blame, or take the credit, for the wild stock market swings that took place. The Dow was down 700 points first thing, on no news. It then rallied 500 soon after the US open, before dropping 200 in the last hour of trading. In S&P terms, that was a loss of 100 points in three hours; a rally of 60 over the following three, topped off with a 30 point slump in the final hour of trading. As they say over the Atlantic: “Go figure.” A clue to what all that was about may be found in the US Treasury market where yields pulled back from recent highs. The 10-year Treasury note lost around 8 basis points yesterday, again on no news. So, like Sherlock Holmes and the ‘dog that didn’t bark’, it seems fair to suggest that investors were indulging in a dollop of year-end window dressing and rebalancing. Equities have had a strong twelve months, so these were sold off on profit-taking; bonds have had a dreadful fourth quarter, so they got bought, sending yields lower. This should help maintain the traditional 60:40 equity/bond portfolio to which most money managers aspire. That still leaves the 10-year yield over 4.50%, and a potential headwind for equities, although it’s remarkable how quickly investors can acclimatise to new environments. Could a 5.00% yield be the new danger threshold next year, as 4.50% now looks rather tatty and obsolete? Going forward, there are two related issues that investors are considering: Will growth continue to outperform value? Can the tech giants continue to lead the market, providing investors with further outsized gains (how does one try to calculate the future returns of generative AI and quantum computing)? Or will the more neglected value stocks take over? That’s all one issue. The second one is: Has the US peaked in terms of market outperformance? Is it now time to rebalance towards Europe and emerging markets? Is China once again an investment opportunity? That’s the other one. Linking all this is where the US dollar is likely to head from here. Yesterday, Jared Dillian, in his ‘Daily Dirtnap’, posted a chart of the Dollar Index superimposed on the same chart from 2016, around the time of Trump’s first presidential election victory. It shows the Dollar Index peaking around 106.00 a month after the result, then falling to 94.00 eight months later. Will history repeat? We know that President-elect Trump likes low interest rates, and tariffs. Could that be enough to trash the greenback? If so, then 2025 is likely to see higher commodity prices, a bond market rally and a bit of a headwind for US equities. Let’s look forward to finding out.
