Looking back at 2024, the market once again showed a comprehensive upward trend, with almost all major macro asset classes achieving positive returns. Stocks performed outstandingly in terms of absolute returns and risk-adjusted returns, while gold steadily rose throughout the year with very little volatility, performing excellently. In contrast, the performance of the Japanese yen and Japanese government bonds lagged, as the Bank of Japan refused to tighten monetary policy even in the face of rapidly rising domestic inflation.
As we enter 2025, market sentiment remains unanimously bullish, with most Wall Street banks predicting that the SPX index will rise another 10% this year, pushing the forward P/E ratio to around 24-25 times, while EPS is expected to reach approximately $270 by year-end. In the fixed income sector, due to persistently high inflation and the Fed showing a clear hawkish inclination in December, bond investors expect that the number of interest rate cuts in 2025 will be less than two. "I believe the upside risks are greater than the downside risks," Richmond Fed's Barkin said during a talk in Maryland last Friday, "Therefore, I think it is more appropriate to keep rates restrictive for a longer period." Additionally, the Trump 2.0 policy is expected to exert upward pressure on prices, although the extent of the transmission will depend on the implementation of these policies. We anticipate that the resistance faced by the new government may be greater than the current market expects.
Meanwhile, most of the capital from global investors has already been fully allocated, with cash holdings at a low point, leading to a challenging start in 2025. The market is still affected by the Fed's unexpected hawkish turn, and the 10-year U.S. Treasury yield is rapidly approaching the peak before the Fed's rate cuts in 2024. Nevertheless, it is expected that market volatility will remain low before Friday's non-farm payroll report, which will officially kick off the trading activities of the new year. In the short term, economic data is expected to show signs of a "soft landing," with the highest volatility event this month expected to be the FOMC meeting at the end of the month.
A potential source of volatility may come from China, where the 30-year bond yield has fallen below that of Japanese bonds for the first time. With deflationary concerns intensifying, the People's Bank of China is expected to adopt more aggressive easing policies. The interest rate differential between China and the U.S. as well as developed markets continues to widen, which will have a significant impact on the RMB exchange rate. The market has high hopes for whether the People's Bank of China's policies this year will be successful.
In the cryptocurrency space, a significant pullback in Microstrategy's stock price has led brokerages to raise trading margins, and there has been a substantial outflow of funds from ETFs, with IBIT setting a record for net outflows of $333 million in a single day, marking the largest single-day outflow since its launch, and it is the third consecutive day of net outflows, the longest continuous outflow record. In contrast, futures clearing has been much milder, indicating that this adjustment is more driven by TradFi and is a reaction to the sharp decline in MSTR's stock price, with the company's net asset value premium now falling back to "only" 1.8 times. Lastly, based on on-chain activity data, thanks to the altcoin frenzy, the trading volume of decentralized exchanges (DEX) has surpassed historical highs, but DeFi's dominance has declined, and the total value locked (TVL) is still far from the 2021 peak. With the Trump policy expected to bring new hope for mainstream adoption of cryptocurrencies, will this year become a year of renewed inflow of venture capital into cryptocurrencies?
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