By "volatile," we mean markets moving both up and down (rather than what people usually mean when markets fall). We experienced a brief "Santa rally" leading up to Christmas, but optimism quickly faded amid thin trading. The new year began on a positive note, only for sentiment to sour as attention shifted to the incoming U.S. administration, with investors bracing for a leadership change in the world’s largest economy.

In the last few days, markets have recovered somewhat, spurred in part by a slightly better-than-expected core inflation number for December. Market reactions to Donald Trump’s November victory have been anything but uniform, leaving investors grappling with an increasingly complex and uncertain outlook. Rising inflation expectations had previously put markets on the defensive, but while year-on-year figures remain stubbornly around 3%, the latest data has helped ease fears of a repeat of the 1970s, when looser monetary policy after an initial inflation surge triggered a second wave.

The next major hurdle comes next week, when we may gain insight into the potential speed and scale of U.S.-led tariffs. For the domestic U.S. economy, there is overwhelming consensus among financial experts that both tariffs and large-scale migrant expulsions are likely to be inflationary.

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Diverging Regional Trends: European, UK and Australian stocks have defied predictions to emerge as surprising out-performers since November 6th, with the European market now up by over 4% (in local currency terms at least). 

Meanwhile, U.S. small-cap stocks the MAGA trade elect, represented here by the Russell 2000 has fallen by 8% over the same period, after an initial spurt of optimism. This is just short-term noise to some extent but it is striking how much more volatile the US market, tech titans and minnows alike, have been relative to other developed markets. Much of this is valuation based and related to interest rate moves (certainly for the tech stocks) but there have also been notable moves in healthcare and industrial stocks that are seen to be vulnerable to regulatory changes and tariff/currency wars respectively. 

Emerging markets have also faced challenges, with China struggling to convince investors it can revive its economy without devaluing its currency (a move that might be necessary but is likely seen as a strategic opening gambit in a trade war). Other emerging markets are feeling the pressure from a strong U.S. dollar, although it remains unclear whether this is merely a reflexive market reaction based on previous cycles or if the impact will be as significant as in the past. Regardless, the Dollar's elevated value is creating headwinds globally, including for many U.S. companies.

The theme of 'US exceptionalism' will face its first real test of the year in the fourth quarter earnings season which has just started but the early signs are positive, if a swathe of large bank results so far are an indication. In particular, the market will be looking for signs of a return on investment on AI spend by the tech majors as well as a broadening of economic strength from those companies to the rest of the economy.

‍Australian Resilience: In Australia, banks and materials stocks have acted as a drag on the overall market performance but most other sectors, with the notable exception of healthcare, have managed to post reasonable gains. However, stocks like Ramsay Healthcare and Premium Investments point to some of the and challenges the domestic economy faces. In the former case staff shortages have compounded more stock specific issues while Premier (and Myer) suffered this week after early guidance of lack-lustre holiday season sales. While this will make analysts nervous the domestic market outside and materials and banks (especially) have generally better valuation support.