In less than two weeks, Donald Trump will be inaugurated as the 47th president of the United States. U.S. markets have whipsawed since Trump’s election, and while stocks soared in November, a year-end rally never manifested. Small- and mid-cap companies rallied after the election results and the Russell 2000 Index (IWM) gained almost 11% in November. However, the small-cap index is now on the verge of entering correction territory and is down almost 10% from its recent highs.
There has also been heightened volatility in other assets. Bitcoin (BTCUSD) has unsurprisingly soared given the president-elect’s views on cryptocurrencies. Bond markets have however been rattled amid a realization that the Federal Reserve’s rate-cut trajectory might not be linear.
Fed Looks Worried About Changes to Trade and Immigration Policies
Notably, while the Fed cut rates by 25 basis points last month and cumulatively cut rates by 100 basis points in 2024, it is expected to take a breather this year. The minutes of the Fed’s December meeting reveal that FOMC members are apprehensive about the trade and immigration policies of the incoming president.
The minutes released earlier this week referred to changes in “trade policy” nine times and “immigration” policies on four instances. The minutes said, “All participants judged that uncertainty about the scope, timing, and economic effects of potential changes in policies affecting foreign trade and immigration was elevated.”
While the minutes did not explicitly name Trump, the minutes highlight the apprehensions among FOMC members on how his policies will impact the economy. The Fed could take a wait-and-watch approach to rate cuts at least for the first half of 2025 as Trump’s economic agenda unfolds.
Brokerages Expect U.S. Stocks to Continue Their Rally in 2025
As for the broader markets though, the consensus estimate is quite bullish, and leading brokerages like JPMorgan, Morgan Stanley, Citi, and Goldman Sachs are predicting near-10% returns from the S&P 500 Index ($SPX) this year. While that prediction might not sound too tempting given what investors have been used to of late, as the S&P 500 delivered over 20% returns for two consecutive years, it is near the average returns that the index has delivered since inception. Moreover, if the markets can rise in the ballpark of 10% this year it would mean three consecutive years of double-digit returns.
2 ETFs to Consider in 2025
Overall, I believe that investors should temper their expectations for U.S. stocks this year after two years of 20%-plus gains. There is a lot of uncertainty over Trump’s trade and economic policies, and while markets priced in a less-stringent regulatory environment and expansive economic policy under his administration, it would be prudent to be mindful of some of the controversial and disruptive agenda items on trade and immigration.
1 Gold ETF to Buy: SPDR Gold Trust ETF (GLD)
Given my outlook for the broader economy, I find gold to be an asset class to keep betting on. Gold (GCG25) prices have come off their record highs in part due to the expectation of fewer rate cuts in 2025. Notably, being a non-interest-bearing asset, gold has an inverse relationship with interest rates and tends to do well in periods of low interest rates. At the same time, it is an inflation hedge. However, a stronger U.S. dollar - as we currently have - is negative for gold and other commodities.
I nonetheless see the stars aligning for gold over the next few years given the geopolitical uncertainty and ever-rising government debt – including in the U.S. where both current President Joe Biden and Trump opened up state coffers to spur growth in the world’s largest economy. Many central banks are diversifying their forex reserves, replacing some greenbacks with gold in the process. The SPDR Gold Trust ETF (GLD) can give investors pure-play exposure to gold prices and the ETF tracks the price action of the yellow metal.
1 Bank ETF to Buy: Invesco KBW Bank ETF (KBWB)
Trump backed business-friendly (and fewer) regulations in his first term. The president-elect has tasked the newly formed Department of Government Efficiency (DOGE), headed by Elon Musk and Vivek Ramaswamy, with advising him on how to “slash excess regulations,” among other things.
The banking sector, in particular, stands to benefit from easing regulations, including those related to mergers and acquisitions. Moreover, the U.S. economy has been quite steady which should keep a lid on delinquencies. Bank stocks have rallied since Trump’s election and the sector still looks attractive from a valuation standpoint. The Invesco KBW Bank ETF (KBWB) is one ETF that can be considered to bet on the banking sector. The fund has delivered around 32% over the last year and looks well-placed for 2025.
