Since the elections, bond and equity markets have been bolstered by strong fund inflows across most sectors of the market universe. The United States is truly the oasis of investing on a global basis with the appetite for U.S. dollar-based assets by investors very robust. The notion of the government cutting spending while increasing growth through deregulation is being fully embraced by forex markets buying dollars hand over fist and is being met with great appeal by Wall Street.
The shocking statistic is that as the stock market has rallied to record highs and the bond market has seen the benchmark 10-year yield fall to 4.15% from 4.50%, there is an historic amount of cash and cash equivalents on the sidelines. Total money market fund assets increased by $95.86 billion to $6.77 trillion for the eight-day period ended Wednesday, Dec. 4, the Investment Company Institute reported. Among taxable money market funds, government funds increased by $89.40 billion and prime funds increased by $5.14 billion. Tax-exempt money market funds increased by $1.31 billion.
In light of the Fed kickstarting the rate cutting cycle back in September with a 50-basis-point cut, and the powerful move higher for stocks since Nov. 5, it is remarkable that cash assets have increased during this four-week period. The reasoning behind this buildup in cash is three-fold: Election uncertainty that opens the door to major economic and geopolitical policy changes so as to avoid volatility, waiting for clearer signals on interest rates and the risk of inflation reigniting and waiting through the lame duck period until Donald Trump and Congress are sworn in.
The setup is one where there is nearly $6.8 trillion of dry powder on the sidelines that can be deployed as some of these uncertainties resolve themselves. Granted, there are significant issues and challenges outside U.S. borders that investors are all acutely aware of, the latest of which is the sacking of Damascus by rebel forces, and some of which seem to have no end in sight. Most concerning to financial markets is the slowing of the European and Chinese economies, where Europe is, by definition, in a recession and China’s latest massive stimulus has not had the impact intended.
The European Central Bank will have to keep cutting rates, which will devalue the Euro, and Peoples Bank of China (PBOC) will continue to manipulate the yuan and offer further extensions of debt repayment to the fragile commercial real estate market and the shadow banking industry to avoid a tsunami of loan defaults. China has historically used the real estate market to stimulate the economy, but not this time around.
With growth outside the United States in pivotal economies questionable, sovereign bond yields in developed countries lower than that of U.S. Treasuries, save for the UK, Australia and New Zealand, a commitment to energy independence, a new fiscal attitude on Capitol Hill regarding federal budgets and debt reduction, one can easily argue that the table is set for further disinflation, lower short and long-term interest rates and rising asset prices in 2025.
There is a lot of performance pressure on fund managers who stayed out of the market and are now playing catch-up to show, by month’s end, they were weighted properly in bonds and equities. The fourth quarter and first quarter are historically when the majority of market gains are realized. This year is holding true to that pattern. The first quarter was led by the Magnificent Seven stocks and the AI revolution. The second and third quarters showed see-saw, choppy price action and the fourth quarter has been a gem of a move up.
It is a customary practice among brokerage firms to produce new investment themes for the year ahead. The 2024 AI bull trend is not a fad as some would believe and 2025 will likely be another year of bullish performance for those companies building out AI infrastructure. With the Trump administration coming aboard as of Jan. 20, there will be a push for tariffs on products made in China, Europe and other countries where tariffs on American-made goods are high. Energy exploration will be high on the agenda as will shrinking the federal government. Stopping illegal immigration, fentanyl imports, child trafficking and fighting inner city crime are also high on the priority list.
Staying with domestic businesses should be a primary consideration for investors, as the world outside our borders is teeming with economic uncertainty and geopolitical risk. 2025 is set be another good year for U.S. markets and not so much for global markets. To this point, enjoy the blessings and prosperity of this year that is rooted in American exceptionalism and look for the bull market to continue its winning ways.
