Market Comment - December

December was almost a perfect repeat of November, where equity indices traded sideways, with a sell-off mid-month following a recovery during the last week, that was slightly less successful this time than during November, as stocks could not find strong bids during the last two trading days and dropped once again. While the MSCI World posted its 9th consecutive monthly gain, the S&P 500 lost 0.05%, ending its 7-month winning streak.

If we look at the 3-month performance table, Europe has considerably outperformed the US and investors have to assess if this is a sustainable trend. Looking at existing long-term and medium-term trends for the Stoxx 600, we are witnessing a market trading at extremely extended levels. It is a bull market, no doubt, but it is overextended. Our study shows that the market has more room to run, but investors adding exposure at current levels need extraordinary confidence.

The uptrend of the S&P 500 vs. the Dow Jones Global Index is still intact, but certainly in a correction phase. The last big downturn took place in 2003, which was the beginning of a US-Dollar bear market.

Looking at sectors, the healthcare sector is still the most appealing. Following a prolonged underperformance of biotech and pharma, the cycle for those industries could turn in 2026. In recent reports, we have mentioned the “technical revolutions and financial capital” theory from Carlota Perez. Could it be that the AI revolution will have a much different timeline when it comes to the trajectory from the installation to the deployment phase for certain industries? The healthcare sector is certainly a candidate for an early-stage deployment.

BlackRock’s CIO Rick Rieder in an interview recently said he thinks healthcare technology to be a “super interesting” field for investors. BlackRock is a cesspool of smart money and big money. ETFs and funds are highly impacted by big institutional money flow. BlackRock does not have to research for good ideas, as they receive them for free.

A stunning event during the last week of December happened at the Chicago Mercantile Exchange, one of the world’s largest trading floors for commodities. Margin requirements for gold, silver, platinum, and palladium got hiked two times in a row. Liquidity was already very poor, especially during the second increase, which happened on December 31st. Traders now need to hold more capital in margin accounts, which led to liquidation of long positions. It was basically a bailout for institutional investors holding short positions.

We see the best potential for price appreciation in platinum, palladium, and copper. In a recent research report, S&P wrote that the expansion of AI and the defense boom will increase demand for copper by 50 percent by 2040. But supply will not be able to meet demand without more mines and more recycling. The US has currently ten copper mining projects running, but remember, it will take at least five years until they become operative.

Now that the year has passed, fund managers reset their performance sheet to zero, and another run in the hamster wheel is starting. Going into the new year, risk allocations are high, resulting from high confidence. The framework is good, as GDP growth remains solid, deficit spending continues, inflation does not pick up again (yet), while the jobs market is a bit soft, but not concerning. As long as this current structure holds up, investors remain in a good mood.

A worry is the rising geopolitical turmoil Donald Trump is forging. One could think that the January 6 riots on Capitol Hill, that was clearly instigated by the US President, could go on a world tour. Acting out of anger and a strong will for revenge is a dangerous path to follow. In that case, rational thinking is left behind and the results are prone for chaos.