Volatility in times of uncertainty

While we await the publication of the growth data for Q4 2024, with few developments in the economic information published in recent weeks and with the financial markets maintaining the inertia of the end of last year, all eyes remains focused on how Donald Trump’s return to the US presidency will affect the world economy. The disruptive potential of an unbalanced combination of some of the measures that are on the table (tariffs, restrictions on the labour supply, disorderly fiscal expansion), combined with a much more complex geopolitical environment than that of four years ago, leaves us with the biggest challenge for economic and financial forecasting in a long time.

However, there are also factors that mitigate the riskiest scenarios in the short term. These include the continued strength of US economic activity; the positive effects on innovation of the proposed deregulation policies; the traditional checks and balances of the American political system (the Republican majority in the House of Representatives is still small); the profile of some of the main appointments of the new administration, such as that of Treasury secretary; the Fed’s ability to respond to any unexpected increase in macroeconomic imbalances, and the counterweight role that the bond markets can play, among other factors.

For now, the markets’ verdict is that short-term nominal growth will remain highly buoyant. However, given the cyclical position of the American economy, the weakness lies on the inflation side, and this is translating into an increase in short- and long-term interest rates (the yield on the 10-year bond has increased by over 100 bps since October), as well as shifting expectations regarding the Fed’s next moves (now only one more interest rate cut is fully expected) and an appreciation of the dollar (7% in its effective exchange rate), which would offset part of the potential positive effects of tariffs on the balance of trade.

Nevertheless, despite all the noise generated by the new administration’s communication policy, investors seem confident that the economic policy programme (Maganomics) will be deployed in a reasonably orderly manner, avoiding a deterioration in the fiscal situation, with growth and employment as the main priorities, while the Fed will remain vigilant to any impact on inflation expectations. That said, investors are also aware that maintaining a balance while pursuing all these objectives could entail some volatility, especially given the high valuations of some financial assets. The good news is that we will not have to wait long to get answers to many of the questions that will test the soundness of most economic projections, which are already threatened by alterations in the patterns and paradigms of recent decades, in a context subjected to a continuous process of change.

Therefore, whether or not we are witnessing a paradigm shift with Trump’s coming to power, 2025 will be a year in which the globalisation process that the international economy has been immersed in for the past five years will continue to be reordered. Most notably, protectionism and industrial policy will gain prominence under the mantle of that new concept of open strategic autonomy. This will be a year in which the ability to question the assumptions behind the economic projections will once again be key, as will be the ability to adapt to changes in the environment and to be flexible when making investment decisions. It will be a year of change, of transition between a world that has not quite died yet (globalisation, multilateralism, liberal democracies) and another that has not quite been born and which nobody knows what shape it will take. The hope is that, when 2025 ends, we will get the same feeling as we had in 2023 and 2024, when the reality was much better than the baseline forecast scenarios had predicted at the start of the year. For this to happen, we must rely on the resilience demonstrated by the business cycle since the pandemic, as well as on the transactional benefits of economic and commercial relations taking precedence over ideology. Meanwhile, the advice is to fasten our seatbelts in order to safely navigate the volatility in uncertain times.