A year ago, global markets were waking up to a historic victory in the US presidential election as the 45th President returned to the White House as the 47th President. Many thought the election victory and resulting ‘Trump Trade’ 2.0 would be broadly positive for the US dollar and equities, but challenging for bonds if US inflation pushed higher. The picture that has emerged since is less clear cut and still leaves questions for investors.
US markets have performed well over the past 12 months, boosted by strong growth in the tech and communications sectors while energy, materials, and healthcare have struggled. Financial markets remain focused on the key metrics which underpin recent market gains: profit margins, earnings growth and potential revisions. We have seen this play out over the last fortnight with recent earnings announcements from big tech firms delighting some, disappointing others and proving a further catalyst for questions about lofty AI and tech valuations. These questions won’t go away any time soon.
US dollar depreciation has also been a standout theme for global markets since the election. Few would have predicted 12 months ago that the dollar’s 14-year bull run would come to an end, but US policy uncertainty, concerns around economic growth, and the reshoring of manufacturing to the US have put pressure on the greenback.
As a result, the U.S. Dollar Index (DXY) which tracks the strength of the dollar against a basket of major currencies is down over 7% year-to-date. We believe the performance of the US dollar’s will continue to dominate markets as a theme going into next year, leading investors to reevaluate their investment portfolio’s dollar exposure.
Looking ahead, investors should pay close attention to the fiscal and monetary decisions taken by the Treasury and Federal Reserve as this will set the underlying picture of easing or tightening, laying the roadmap for the economy. While the US economy has escaped a recession, costs generated from rising tariffs are starting to be felt in the economy. As a result, inflation is a key risk to the world’s largest economy especially as the true impact of tariff announcements has been difficult to assess. We will be closely watching to see what impact this has on the rate cutting cycle and US company earnings.
For investors, this past year has highlighted the benefit of global diversification and taking an active approach to managing geographic exposure in a portfolio. The MSCI World Index, a commonly used tracker for global markets, has a weighting of over 70% to US equities after several years of impressive American stock market returns.
While US exceptionalism remains intact, this period has led more investors to reconsider how much their wealth is concentrated in the S&P500 and Nasdaq markets which are heavily exposed to the performance of a handful of technology leaders. This has boosted other equity markets, but returns have been distributed unequally, a reminder that portfolio management is a careful balancing act for investors who don’t want to miss out on some markets outperforming others.
By Bola Onifade, Portfolio Manager at J.P. Morgan Personal Investing
