Weekly Market Update - 7 January 2025

Last year, over half the world’s population voted in an election and, in many cases, voted for change.

Commenting on the last 12 months, Hetal Mehta, Head of Economic Research at SJP, said: “In a year peppered with many notable elections, the global economy was marked by heightened economic uncertainty in 2024. Despite concerns at the start of the year that restrictive monetary policy would weigh on GDP, growth surprised to the upside and recessions in the key developed market economies were avoided. A gradual cooling of labour markets - lower vacancies and lower wage growth without a significant increase in unemployment – combined with progress in taming inflation, has allowed central banks to pivot policy towards gradual rate cuts.”

“But with the major elections behind us, it’s now time for governments to start implementing their policies.”

Key among these policies for investors will be the potential use of tariffs. Donald Trump spoke about their use a number of times during his election campaign and has continued to do so since. Other countries have threatened tariffs of their own in response. Tariffs tend to have an inflationary effect, as costs are passed across the supply chain, and this could have a knock-on effect for Central Banks debating whether to reduce interest rates, and at what pace.

Expectations around the pace of interest rate changes in the US were already slowing in 2024, as returning inflation to 2% proved more challenging than expected.

Speaking at the annual American Economic Association conference in San Francisco last week, Federal Reserve policymaker Adriana Kugler admitted: “We are fully aware that we are not there yet - no one is popping champagne anywhere.”

Despite the inflationary pressures, 2024 was a good year for large US shares generally. The S&P 500 recorded its second straight annual return of more than 20.0% (in US dollar terms). At the same time, the NASDAQ finished the year up over 20.0% for a sixth time in the last eight years.

Staying in North America, the political situation in Canada remains uncertain. Reports over the weekend suggested that current Prime Minister Justin Trudeau is set to announce his resignation in the coming days. Canadian elections are due in October, with Trudeau’s Liberal party currently notably behind in the polls.

Turning to Europe, the political situation remains very much in the air for a number of countries. This includes Germany, which also has an election later this year. The centre-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU) are currently leading the polls, with the far-right Alternative for Germany (AfD) behind them.

Questions also hang over the French political system. Fran?ois Bayrou was named Prime Minister in December and faces a potentially hostile parliament that will make passing reforms challenging.

While the traditional heavy weights of the EU, France and Germany, have found themselves struggling of late, many of the countries that suffered in the Eurozone debt crisis in the aftermath of the 2008 Financial Crisis, such as Spain and Greece, have posted surprisingly positive economic news over the last 12 months.

Finally, turning to the UK, questions are being raised about potential ‘stagflation’ (higher inflation with stagnant economic growth) over 2025. This will be causing headaches for the Bank of England, who will need to finely balance competing pressures of reducing interest rates to spur economic growth while also keeping an eye on inflationary pressures.