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Roula Khalaf, Editor of the FT, selects her favorite stories in this weekly newsletter.
For the markets, US Federal Reserve chief Jay Powell is the Grinch who stole Christmas. But the festive shakeout of bonds, currencies and stocks that has started now after the latest statements of the US central bank is a mini-crisis of the investors’ own making.
Fed meetings, and the minutiae of its public statements, are often marquee events for investors, setting the tone for all major asset classes. Wednesday’s meeting, the last in 2024, always had the potential for more punch, given the timing – at the end of Donald Trump’s second stint in the White House.
The decision on prices itself – a quarter-point cut to the benchmark – was in line with expectations. But it’s all downhill from there, as the central bank’s apparent freeze on further cuts next year — an allusion to the potentially inflationary impact of Trump’s economic policies — fell like a mold. mince pies
US stocks nosedived, erasing almost all of the gains in the S&P 500 benchmark index since the day of Trump’s re-election. The next morning also brought the same sea of red to stocks in Asia and Europe. The dollar surged higher, sending the euro and yen plummeting, and US government bonds weakened, sending the yield on 10-year Treasuries strong above 4.5 percent.
The Fed chair is facing some flak here. His comment at the post-meeting press conference that the year-end projection for inflation had “kind of collapsed” was not the kind of self-assertion that investors are looking for in a Fed chair, and the pick-up of some inflation measures comfortably. ahead of Trump’s reinauguration.
But markets are going through the wringer in no small part because the consensus among investors about next steps for markets has become more tenuous — holding tightly to themes of American exceptionalism in stocks and the beating inflation that supported bonds so much. The path to volatile markets in 2025 has become narrower and more crowded with like-minded views, and it only took a gentle nudge from the Fed to get it off balance.
The annual view of the coming year’s market outlook from major banks and asset managers shows an almost unanimous view. Deutsche Bank is at the top of the pack with its assessment that the benchmark S&P 500 index of heavyweight US stocks will rise to 7,000 by the end of next year. After the overnight shock, that projection is 20 percent above where we are now. It’s punchy, but not wildly out of line. Mainly fundamental differences of opinion are hard to find. “The level of consistency in year-ahead projections has broken all previous records,” says TS Lombard’s Dario Perkins.
The problem with this is twofold. First, it means a lot, if not all, of the narrative is already cooked. Second, crowding into core themes tends to exaggerate the size of market reactions when things go wrong. Enter Powell stage left.
“Everyone’s portfolio is geared towards the exceptional US,” said Mike Riddell, a portfolio manager at Fidelity’s Strategic Bond Fund, who spoke with some perspective in the week before the Fed’s decision. “The consensus will be right, and we don’t see much derailing it. But if you see anything that moves the narrative, you can get violent market action.
We’ve been there before, in a variety of different markets, but that doesn’t stop investors from making the same mistake over and over again. This time last yearPowell caught the market in the opposite direction, dropping a hint of an interest rate cut that investors continue to blow wildly out of proportion.
Crowded bets among investors were also hurt in early August, when a low report on the US labor market exploded into some popular and relevant market bets. In late September, much-loved Chinese stocks soared to record highs after Beijing unleashed stimulus measures to try and revive its faltering economy and markets. Investors gave China a wide berth as stocks jumped 40 percent in just a few days as funds piled into a narrow channel.
The latest ructions are a useful reminder that despite the disarming simplicity of the American exceptionalism theme, the rakes are scattered throughout the market for investors next year.
The assumption that the US economy will sail through the first year of Trump 2.0 is bold. Ignoring (actually pretty obvious) banana peels, especially around inflation, is “the ultimate ‘trust me’ trade,” says Greg Peters, co-chief investment officer for PGIM Fixed Income. “It seems like nothing to me.”
Now, investors should not think that the Christmas holiday season will put all worries. As shown in the last days of 2018, portfolios can and do swing around even when many major markets are closed, for half a day, or slowly. If anything, reduced trading volumes this time of year could make things worse.
Some fund managers feel sad about this year-end blow. But Powell did us all a favor by reminding us that next year is not for the faint of heart, and the wisdom of crowds is not always your friend.
