A quick look-back at 2024 showed another “buy everything” rally where nearly all major macro asset classes showed positive returns across the board. Equities outperformed everything on both an absolute and risk-adjusted basis, though Gold was a surprisingly strong performer on the latter given its steady rise on minimal volatility all year. JPY and JGBs were the lone underperformers as the BoJ refused to tighten even in the face of rapidly rising inflation in Japan.
We are stepping into 2025 with a market that remains unanimously bullish with most Wall Street banks calling for a further 10% upside with a forward PE of around 24–25x and index EPS to come in at ~$270 by year-end.
Meanwhile, on the fixed income side, bond investors are expecting <2 interest rate cuts in 2025 as inflation remains sticky, with the Fed making overtly reverting back to their hawkish bias in December.
“I think there is more upside risk than downside risk,” Barkin said Friday to reporters following prepared remarks in Linthicum Heights, Maryland. “So I put myself in the camp of wanting to stay restricted for longer.” — Richmond Fed Barkin
Furthermore, Trump 2.0 initiatives are largely expected to have net upward pressures on prices, though the extent of the passthrough will be dependent on how many of the policies can be enacted. Our expectation is that the administration will face more resistance than what the market is expecting for now.
Meanwhile, global investors are beginning the year with the smallest % of cash holdings on hand as most folks are fully-invested, leading to a bit of a rough start in 2025 as markets are still reeling a bit from the Fed’s unexpected hawkish turn. 10yr yields are fast approaching peaks last seen in 2024 before the Fed embarked on their recent rate cuts.
With that being said, market volatility is expected to stay low until NFP on Friday, which should officially kick-start the new trading year with decision makers fully back at work. The highest volatility event for the month is priced to be FOMC at the end of the month as the economic stats are priced to show ‘soft landing’ signs in the near future.
One potential source of volatility might be in China, where 30yr bond yields have now collapsed to less than Japan’s (!!) as deflation concerns set in and the PBOC is largely expected to go on a more aggressive easing mode. This will have important repercussions on CNY FX as interest rate differentials continue to widen vs the US and developed markets, and heavy expectations are riding on how successful the PBOC’s reflationary policies will be this year.
Over in crypto, the significant correction in Microstrategy (Wall Street banks managed to top-tick their customers again) has led to trading margin increases and significant ETF outflows on the macro correction. Investors pulled a record $333M from IBIT for the largest 1d withdrawal since the ETF launch, the 3rd consecutive day of outflows and the longest streak on record. Futures liquidation were much more modest, suggesting that the selloff is more TradFi macro led and a reaction to MSTR’s aggressive correction, with the company’s NAV premium trading back to ‘just’ 1.8x.
Finally, on an activity basis, on-chain (DEX) trading has recovered to break new ATHs thanks to the altcoin surge, though TVL remains far away from 2021 highs on lower DeFi dominance. With Trump’s policies promising a new dawn on crypto adoption, will this be the year that crypto VC funding finally returns?
Happy new year and may everyone enjoy a profitable year ahead!
