Finding Alpha as the Cycle Turns

The Federal Reserve has joined other developed market central banks, including the European Central Bank and the Bank of England, to solidify global policy easing. The US election’s red-sweep outcome will add to pro-growth policies and further support risk assets from a fundamental perspective, while introducing potential headwinds outside the US amid more restrictive trade policies. The stimulative fiscal policies will add to near-term inflationary pressures, potentially resulting in a less accommodative Fed and yield curves that remain at recently elevated levels – with the “kinked” curve persisting through 2025. By contrast, the weaker economic outlook for Europe will allow the ECB to cut rates at a steady pace, and the net outcome should bolster a stronger US dollar.

Policy rate cuts in the US and globally (even if pared back in the former) should boost wealth effects for upper-end consumers and provide rate relief to low-end consumers and small businesses, many of whom borrow on a floating-rate basis. With animal spirits being released by Trump 2.0’s pro-business policies, the year ahead could even benefit from a (net) supply-driven backdrop, despite experiencing select populist supply shocks from tariffs and immigration. A vibrant investment period should continue to support and strengthen today’s new rising productivity trend, with supply chains still relocating, a continuance of climate urgency (this time led by companies), and rising defense spending around the world – topped off by the need to invest in AI now to avoid falling behind.

This expansion will absorb higher fiscal ratcheting while allowing rates to keep drifting down. We believe China’s upcoming fiscal boost will aim for a stabilization (versus a recovery) in the nation’s real estate and banking systems, local government finances, and low-income households – all after factoring in Trump’s pending tariffs and the potential for China to lose its ability to reroute products through countries like Vietnam and Mexico amid intense scrutiny and pressure on those countries under Trump 2.0. Sustainable improvement beyond stabilization will require incentivizing the private sector once again, which would necessitate some tough political choices.