During the past four weeks, rising interest rates put a break on the stock market rally. Investors have been deceived by recent inflation data, which erased the prospects of further rate cuts in the US. In the UK, the narrative is a much different story. British government bond yields have climbed steadily since September, reflecting reduced expectations of Bank of England rate cuts, but also extra borrowing in the new government's budget. Government spending and supply pressures have been blamed for moving UK interest rates up sharply. Similarly, the French government and its bonds are under pressure from the European Commission for overspending. Looking at the US, the new administration is facing budget issues as well and envisages a bold plan that includes government cuts, tax cuts and tariffs. The United States run a budget deficit of USD 1.8 trillion in 2024, reaching almost 7.00% of GDP. As discretionary spending is the smallest part of the US budget, it is hard to believe that the DOGE agency can cut big chunks of spending without hurting the economy. The new Treasury Secretary Scott Bessent is facing a big refinancing cycle, that starts in 2025, with almost 25% of Government Debt needs to be rolled over. His predecessor, Janet Yellen, moved over 12.00% of US debt into short-term bills, avoiding coupon payments. Now that almost 25.00% of US debt is financed through short-term paper, Mr. Bessent will not be able to push this agenda further, forcing him to sell longer dated bonds. Unlike in France and the UK, investors currently don’t seem to be worried about a lingering budget problem in the US. We view the policy map of the new US administration as extremely challenging. Not only are interest rates on the rise, but also the total amount of debt. Too many tariffs could spark a trade war, while too much down-sizing will hurt the economy. Still, a certain amount of tariffs will be needed to allow tax cuts. While global equity indices only lost around 2.50% in December, some industry groups saw spectacular selling. Metals and Mining Companies, measured by the ETF XME, lost 17.37%, Regional Banks (KRE) lost 10.28%, Biotech 9.61% (XBI) and Oil and Gas Companies on an average of 8.50%.
The Semiconductor Sector completely avoided any losses, with the Semiconductor Index SOX trading up 1.08%. Surprisingly, defensive sectors, such as Consumer Staples (- 4.81%) and Healthcare (- 6.23%) did not provide any shelter and underperformed against benchmark indices strongly. Consumer Staples have been under enormous pressure for the past two years, seeing Pernod-Ricard and Campari losing more than 50% since the 2023 highs. If the global economy continues to do well, investors will not have big appetite for defensive companies.
Finally, the first market outlooks appear in the inbox and there is hardly any that has a modest outlook. Expectations range from – 35.00% to plus 20.00%. We view both extreme predictions as doubtful. If and how the new US administration will implement new policies remain to be seen, and the market will react accordingly. The US economy is doing very well, and too much of a change might not improve things at all.
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