2024 has been a challenging year for investors, particularly for those with a global focus. While U.S. markets posted impressive gains—27% for the S&P 500 and 32% for the NASDAQ—many other markets faced headwinds, exacerbated by a strengthening U.S. dollar (USD) in the latter half of the year. Non-US indices ranged from -5% to +20% in local currency terms, but when converted to USD, their performance narrowed to between -10.3% and +13.6%.

These results pale in comparison to U.S. markets, potentially frustrating investors seeking diversification. However, it’s essential to consider the drivers of U.S. performance. Much of the S&P 500’s rise was fueled by a few large companies, leading to a disparity between the index’s overall gain and its equal-weighted version, which rose by 11.88%. While still higher than many of their counterparts, this figure paints a more balanced picture. With U.S. valuations becoming increasingly stretched, the question remains: how much longer can this rally continue?

MAGA 2025

The re-election of Donald Trump has reignited enthusiasm for U.S. stocks heading into 2025, fueled by expectations of lower taxes, protective trade policies, and a renewed focus on domestic growth. Yet, only a year ago, sentiment was quite different. Analysts anticipated at least five rate cuts while doubting another strong year for U.S. markets. While fewer rate cuts materialized and concerns about the U.S. economy persisted, stock prices continued to climb.

Interestingly, Germany’s stock market emerged as Europe’s top performer in 2024, despite the country facing significant negative media coverage about its domestic politics and economy. However, similar than what is true for the U.S. market, the Dax’s performance, Germany’s main index, was mainly driven by the company SAP. This contrast underscores the complexity of markets, where headlines and sentiment don’t always align with outcomes.

Despite the optimism surrounding U.S. markets, cracks have appeared. Retail investors kept pace with the S&P 500 until mid-2024, but by year-end, their performance lagged significantly. This divergence coincided with the largest weekly outflow from U.S. equity funds since September 2009, amounting to $50.2 billion during the Fed’s rate decision week. While there was a brief inflow near the end of the year, the typical “Santa Claus Rally” failed to materialize.

Looking ahead to 2025, it’s crucial to consider U.S. market valuations. The S&P 500’s trailing 12-month price-to-earnings ratio stands at 27.2x, nearing the pre-dot-com bubble high of 29.9x, while its price-to-book ratio has reached an all-time high of 5.3x. By comparison, Europe’s STOXX 600 index trades at a 47% P/E discount and a 61% P/B discount. These disparities highlight potential opportunities outside the U.S.

The Mar-a-Lago Accord

The USD had a remarkable year, strengthening by approximately 7% and putting pressure on many currencies, including the Japanese yen, Norwegian krone, and Swiss franc, which fell 6.75% against the dollar. This dollar strength runs counter to Trump’s ambitions to reduce the U.S. trade deficit. Appointing Scott Bessent as Treasury Secretary signals a potential shift, as Bessent has advocated for a new "Plaza Accord" to weaken the USD.

Despite this possibility, a coordinated effort to devalue the dollar faces significant obstacles. In 1985, the original Plaza Accord led to a rapid strengthening of the Japanese yen and other currencies, supported by sharp interest rate cuts. However, Japan’s resulting asset bubble and subsequent “lost decades” serve as a cautionary tale.

Today, Trump may aim for a similar agreement focusing on China, yet China’s struggling economy and weak domestic demand make participation unlikely. Moreover, the USD’s current strength is less extreme than in the 1980s when it appreciated 50% between 1980 and 1985. Another key difference lies in global dynamics; a coordinated devaluation today would be far more complex given geopolitical tensions and the push toward a multipolar world.

If the USD remains strong, U.S. companies may face pressure to lower prices abroad, squeezing profit margins and raising further questions about current valuations. Meanwhile, Switzerland could revisit negative interest rates to curb a potential currency surge if a global recession looms—particularly if U.S. stagflation materializes, as expected by 55% of U.S. fund managers.

Insights from the Bond Market

The bond market reflects ongoing uncertainty. Following the Fed’s decisions, U.S. 10-year yields rose further while 2-year yields stabilized, widening the 10-2 treasury yield spread. Inflation expectations also ticked higher, with the 5-Year, 5-Year Forward Inflation Expectation Rate increasing to 2.3%.

Europe’s bond markets tell a similar story of heightened risk. France’s 10-year bond spread over Germany’s widened by 60% since mid-2024 amid political instability. This is particularly striking given Germany’s own challenges, illustrating the broader unease in European fixed-income markets.

Higher yields indicate rising risk premiums demanded by investors, suggesting that bond markets are pricing in challenges that some investors, central banks, and policymakers may still be underestimating.

Precious Metals: A Long-Term Perspective

Gold and silver delivered impressive returns in 2024, gaining 27.17% and 23.75%, respectively. These metals continue to appeal as a hedge against uncertainty, but their history of volatility underscores the need for a disciplined approach.

During the Global Financial Crisis, gold’s rally already began in 2005, accelerating in 2008, and peaked at nearly $2,000 per ounce in 2011 before correcting by 45%. It took nearly a decade to return to those highs. Silver’s trajectory was even more dramatic, surging 526% between 2008 and 2011 before losing 73% in the following years.

Currently, silver trades around $30 per ounce, still 40% below its 2011 peak. Investors considering purchasing precious metals today should either set clear stop-loss levels or adopt a long-term strategy, allowing them to buy during downturns and lower the average cost of their holdings.

A Time for Reflection

The quote by Robert H. Schuller, “Tough times never last, but tough people do,” aptly describes the current investment landscape. While U.S. markets dominated in 2024, history suggests that such imbalances are often unsustainable.

The U.S. has attracted nearly five times more investment inflows over the past five years than the rest of the world combined, creating a stark divergence. A similar pattern preceded the dot-com bubble in the mid-90ies. Today, the U.S. stock market comprises an outsized portion of the MSCI World Index, reminiscent of Japan’s dominance in the 1980s before its prolonged decline.

Although the U.S. is unlikely to experience a similar trajectory, its current weight in global markets suggests room for other regions to gain prominence. For discerning investors, now may be the time to explore undervalued opportunities abroad, where attractive valuations and growth potential await.

Ready to explore opportunities beyond the familiar? At WHVP, we specialize in helping U.S. investors safeguard their wealth and unlock global potential through tailored offshore strategies. Contact us today for a free consultation and take the first step toward a more diversified and resilient financial future: