HAMISH MCRAE: Is the US dealing with a Trump bust?

So will the US indeed have a calm and measured end to its boom – the hope I expressed last week? I fear – and gosh, I hope I am wrong – that it won’t. The Biden bonanza will end in a Trump bust.

This is a minority view. Bloomberg has gone through Wall Street expectations, noting that nearly all are on the side of another positive year. BlackRock Investment Institute, for example, says: ‘We are staying pro-risk. We see the US still standing out versus other developed markets thanks to stronger growth. We up our overweight to US equities.’

JP Morgan Chase agrees: ‘We are positive on US risky assets in a world where US exceptionalism gets reinforced.’

Citi says: ‘For the US, we are watching developments closely but are broadly encouraged. We stick to the risk-on stance into year-end with a US exceptionalism flavour.’

Over in Beverly Hills, Bel Air Investment Advisors is quite explicit: ‘We expect the bull market in global equities will likely continue in 2025, with the US again likely to outperform the rest of the world.’

Naturally, after two stunning years, with the S&P 500 index up more than 20 per cent in both 2023 and 2024, there are notes of caution. Most investment advisers warn people not to expect another year of top-end returns like that.

Fidelity thinks: ‘We are mid- to late-cycle, and not end-of-cycle, creating a volatile environment that should generally be good for risk assets but puts a premium on getting investment choices right.’

Goldman Sachs warns of ‘heightened tension’, but still forecasts ‘modest positive returns across the key asset classes’.

But the only really negative view I have spotted comes from London-based Legal & General Investment Management, which says: ‘We believe markets are mispricing a host of risks – and opportunities – regarding the outlook for 2025.’

So what might go wrong? There are certainly concerns about Donald Trump’s proposed tariffs, but I am less worried about these than three other features. These are a resurgence of inflation, distress in over-borrowed parts of the economy, and a simple animal sense among investors that they have done very well and it is time to take some money off the table.

Most economists agree that inflation is likely to subside more slowly than seemed likely even a few weeks ago. So there will be fewer interest rate cuts from the Federal Reserve, and long-yields will remain relatively high.

The yield on ten-year treasury notes was 4.6 per cent on Friday. But suppose inflation, currently 2.7 per cent, pushes well above 3 per cent. It is already way higher than the 2 per cent target, and so-called core inflation is 3.3 per cent. At some stage the Fed would have to acknowledge its rates can’t come down any further. Fiscal policy will remain very loose, powered by tax cuts, and I could see the yield on those ten-year treasury notes above 5 per cent.

That pushes up the cost of borrowing for everyone else, which in turn slows the economy. It also leads to distress for specific over-borrowed groups. For example delinquency rates on office loans are running at the same level as they were in the financial crisis years of 2011 and 2012.

Credit card defaults are at a 14-year high. Distress on car loans is almost as high as in 2008-9. That is rough on borrowers in trouble, but so far the boom has been strong enough for the lenders not to worry too much.

But moods shift, and that is my third point. There could be a moment when those who have done well think, wait a moment, let’s take some of our profits and hold more cash. You can never predict that shift in sentiment, but we have seen it happen time and time again. Bubbles pop.

Don’t get me wrong. The US economy will continue to outperform the rest of the developed world for a host of reasons. Never underestimate the power of American business.

However, at some stage during Trump’s term, I am sure that financial markets will turn down sharply. And I think the balance of probability is that it will happen this year.