This will be the year of the risky investment

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Rollercoaster market movements in the final days of 2024 offered a stark reminder that investors are heading into a dangerous year of life.

Stocks and bonds went lower after the final policy meeting of the Federal Reserve of the year, frightened by the notion that the central bank may be unable to keep the rates cut (as previously expected) because of the inflation that was still angry.

The key is not what Fed Chairman Jay Powell said. That’s what he was careful not to say, but what every fund manager knows: when Donald Trump returns to the White House this month, his economic agenda could be bad for growth, fuel inflation, or even the two

So, for the first time in many years, investors have what they call “two-way rice” in Fed policy that drives the bond market and supports global asset prices. The central bank might be able to keep cutting – the hunch is that this would be Trump’s preference. But it is not outlandish to suggest that it could start raising rates again instead. This could be animated.

The actions are not easier to read. The miracle that is the US market, fresh from two years with gains of about 20 percent each, may or may not be in the borrowed time. The positive case is that wealthy technology companies deserve their valuations because of their earnings. “What will drive global markets will be the United States,” said Niamh Brodie-Machura, co-chief investment officer for equities at Fidelity International. “It looks expensive, but there’s a reason for that.”

Some also argue that a new paradigm led by artificial intelligence makes the old business and market cycles a thing of the past – even before considering American exceptionalism. The pessimistic case is that this has become stupid, AI is overhyped and something has to give.

My crystal ball is in the repair shop, so I don’t know how it will do. But I remember 2022 – barely a memory venture, but still a period that money managers would rather forget. Bonds and stocks fell sharply at the same time — by about 20 percent each over the year — nuking the inverse relationship that usually gives investors a safety net. Growth shocks and interest rate cuts are good for bonds. Inflation and tax increases are not. It’s not a stretch to imagine this nightmare scenario happening again.

Investors remain in this risk field for 2025 in slightly better shape than before December. A few weeks ago, Bank of America’s monthly fund manager survey found what it called “super-bullish sentiment.” He noted that good vibes – measured by allocations to cash and shares, as well as economic expectations – have intensified at the fastest pace since June 2020. This was a little too fizzy. Fortunately—albeit painfully—the shock of the Fed’s new worldview removed some of the froth.

At the same time, however, the markets have no idea what President Trump is going to do. At the extreme, trade tariffs of 60 percent on imports from China and 20 percent from the rest of the world are plausible. Equally, it is also a much lighter touch – a set of fees that are more symbolic than impactful. The crackdown on illegal immigration could also range from a small number of targeted deportations to mass detention and severe disruption in the labor market.

This leaves investors blindfolded and tiptoeing around the tracks. “‘Meh’ is the most unlikely path to 2025, in my view,” wrote Henry Neville, a portfolio manager at hedge fund group Man. in a recent blog. “I can see a 1970s scenario of dormant, not dead, inflationary pressures reawakening. Both stock and bond markets strange as 2022. But equally, it is conceivable that we have more Trump good in the market (deregulation, tax cuts, government efficiency, peace agreement in Ukraine) than bad in the market (policy volatility, tariffs, labor market restrictions ) and then we can party like it’s 1996.” Neville leans toward pessimism, but the fireworks are ahead anyway.

Adding to the anxiety, Trump likes to make policy statements, sometimes with significant market impact, in seemingly random social media posts. This strategy keeps rivals and opponents off balance, but also unnerves money managers and injects volatility into asset prices. Fund managers generally say they know this is coming and are better prepared to ignore the noise than they were in the first Trump administration. I’m not so sure. His first few months in the White House will be the test — so investors can try to figure out what flavor of president they’re really dealing with.

The good news is that while bonds face a potential danger from inflation, equity hedges are reasonably good. Gold – a bull in bearish times – now appears to be on an all-time high. Its growth of 26 percent last year exceeded the S & P 500. The think-tank OMFIF says that gold in official reserves is on track to reach the highest point since 1965. The result: the prudent investors could screen. They may need it.

“We have to be humble and say, ‘I don’t know where it’s going to break,'” said Peter Fitzgerald, head of investment for macro and multi-asset at Aviva Investors in London. “The key is, don’t have too much confidence.” Good Fortune.

katie.martin@ft.com