Around this time every year I take stock and reflect on last year’s financial markets’ performance with the portfolios I manage. It was a great year! See A thousand roads lead men forever to Rome | North Bay Nugget to review my outlook for last year. The outlook was predicated on decreasing interest rates being the most crucial factor that would affect financial markets in a positive way. This year, I believe investor psychology, may be the biggest factor that affect financial markets valuations for 2025.
In the long run, fundamental analysis is truly the most valuable tool in assessing valuations in financial markets. However, in the shorter run (i.e., one year or less) shorter term factors may play an outsized role in determining market direction. I believe this year, the shorter-term factor of investor sentiment and the subsequent investor behavior that goes along with it, will be the biggest factor affecting financial markets! The following link from my firm - Global Insight 2025 Outlook - provides the fundamental outlook for the year ahead in markets.
In the U.S., the two key words I would use to characterize this upcoming year are optimism and uncertainty. With American markets starting the year with high valuations and investors starting the year with a high anticipation of another upcoming strong year in the U.S., coupled with a high degree of uncertainty, the surprise for American markets direction may be to the downside. A high degree of uncertainty surrounding Trump policy as it relates to tariffs, immigration, government spending, not to mention the general uncertainty regarding Trump’s unorthodox approach toward geopolitics around the world, may lead to outsized negative effects on financial markets – especially as it relates to excessive government spending, resulting in high deficits and debt levels the U.S. will incur this year and beyond, under a Trump administration. This scenario, coupled with a loss of patience by investors over the lack of tangible earnings as a result of the very large Artificial Intelligence spend by “hyperscalers” and the like, may lead to a 2025 selloff in the technology heavy S&P 500 and Nasdaq stock markets in the U.S. Of course, neither of these issues are new to investors, however this may be the year investors switch from a mindsight of greed to fear as it relates to their investor behavior. The net result of the above, may be a down year for American financial markets.
In Canada, the two key words I would use to characterize this upcoming year are pessimism and uncertainty. With investors starting the year with much more reasonable valuations in the Canadian market, but with a low anticipation of another strong year for financial markets in Canada, coupled with a high degree of uncertainty, the surprise for Canadian markets direction may be to the upside. A high degree of uncertainty surrounding a Canadian federal political void, potential upcoming Trump tariffs, and a mortgage renewal “tsunami” unfolding over the next 18 months, leads me to suggest, the surprise for Canadian markets direction, may actually be to the upside. The reason being, most of these issues are well known and understood by investors. In fact, in the end, Canada will elect a new federal government, Trump tariffs may prove lower than expected and more targeted rather than “across the board” and short lived in duration. This scenario, coupled with a less harsh future mortgage renewal environment as rates are expected to continue falling in Canada throughout 2025, may lead to the Canadian economy performing somewhat better (or at least not as bad) as what is currently expected. The net result of the above, may be an up year in 2025 (or at least a relatively better year than U.S. markets) for the Canadian financial markets.
If the above unfolds, it will be because the biggest factor affecting financial markets in 2025 will be the shorter-term factor of investor behavior, as opposed to fundamentals, which may take a (temporary) back seat in determining financial market directions for 2025. We will have to wait and see!
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Mike Candeloro, Senior Portfolio Manager and Wealth Advisor with RBC Dominion Securities and the head of The Mike Candeloro Wealth Management Group supplied this article. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. Member CIPF. Mike can be reached at Michael.candeloro@rbc.com You can also visit his website at www.michaelcandeloro.com To read Mike’s archived articles please visit Mike Candeloro / Special to The Nugget | National Post