We won’t bore you with the reasons inflation is likely to make an unwelcome comeback next year (if you want an explanation, take a look here and here).
The Fed’s hinted at fewer cuts ahead, and so while you’ve likely been full throttle on the stocks-will-rally-no-matter-what narrative for the past two years, now’s probably the time to ease off the gas. US stocks and bitcoin were sinking on Friday, extending this week’s slump as the change in rate cut outlook dampened sentiment.
Personal consumption expenditure data –– the Federal Reserve’s key measure for its 2% inflation target –– climbed to 2.4% from 2.3%. 2025 could be a lighter version of 2022 — think inflation, a hawkish Fed and turbulence. Stocks are pricey, and the Donald Trump+inflation+Fed trifecta isn’t doing markets any favors.
Here’s the quick and dirty:
- Trump loves rallying stocks. Good for now.
- He also loves a strong dollar. This would mean rates need to stay higher. Not so great.
- Tariffs for China, Europe, and everyone else? Yeah, that’s BAD.
Tariffs will be the inflation accelerant. Add the Fed’s hawkish vibe, and it’s time to rethink your portfolio strategy.
Take shelter
Let’s start with the obvious one: gold.
The yellow metal has been the ultimate safety play for centuries. And with more uncertainty brewing, gold might once again be the go-to move for investors looking to take cover from volatility, Arun Leslie John, chief market analyst at Century Financial, tells MONIIFY.
It’s not just a crisis hedge — it’s also the inflation shield investors run to when protecting their $$$. Gold’s already been flexing its muscles in 2024, up 26% since January and outperforming the S&P 500.
Meanwhile Bitcoin, the digital gold, is also worth a look, considering its ongoing Trump-inspired bull run. Bank of America recently called it a “bubble” hedge.
And with rates staying higher, banks are also looking like winners.
The Financial Select Sector SPDR Fund is already up 27% this year. The fund’s top five holdings are Berkshire Hathaway, JP Morgan Chase, Visa, Mastercard and BofA. Expect more juice for financial stocks as Trump rolls out deregulation.
Safety first
Another way to hedge risk could be shifting into safer sectors that aren’t so closely tied to the economic cycle.
“With the Fed now signaling a slower pace of cuts, investors may consider rotating into defensive sectors like utilities and consumer staples,” Charu Chanana, chief investment strategist at Saxo Bank, tells MONIIFY.
$XLP (consumer staples) and $XLU (utilities) fell less than the overall market on Wednesday after the Fed shock.
There are more ways to make money when there’s fear in the market. Buying VIX, the Wall Street “fear” gauge is one of the options to consider after the current explosive move cools and it settles lower. (Buy the fear?)
Deepak Mehra, chief economist at Commercial Bank of Dubai, expects higher volatility in 2025 across all asset classes compared to this year.
But it’s not a “set it and forget it” move. You’ll need to stay on top of swings.
Cash is king?
Putting money into money market funds, which hold cash and pay interest, has long been a star attraction for investors, with assets in US money market funds now nearing $7 trillion.
According to Will Denyer, partner and chief US economist at Gavekal Research, these yields could stay high for longer, making cash a solid choice for investors seeking peace of mind during the holidays.
Consider the iShares Ultra Short-Term Bond Active ETF, or the Invesco Ultra Short Duration ETF as your stress-free picks. That’s increasingly looking like the smart play.
After all, Goldman Sach’s complex math suggests the US stocks might return a measly 3% annually over the next decade — well below the 19% of the last ten years, and the long-term average of 11%. The S&P’s glory days might probably be over.
2025 is shaping up to be a bumpy ride with tough new realities. Play smart, be nimble, and don’t bet it all on yesterday’s winners.
