To The Moon

Investors in China, Europe, Japan, and the UK began 2025 with the same mindset they had at the end of 2024. Meanwhile, those in Global Emerging, Global Developed, and Global Developed ex-US markets, as well as in Australia and the US, experienced a slight shift in sentiment. Overall, most investors entered the new year feeling neutral, positive, or bullish, except for US investors who turned negative after the latest FOMC meeting denied their expectations for 4-5 interest rate cuts this year.

The biggest source of risk in 2024 was political change, with 54% of the world’s population, representing 60% of global GDP, voting overwhelmingly for change. In 2025, the main risks will be policy implementation by newly elected populist leaders and geopolitical tensions. Voters demanded change, and change is coming. Everything from immigration to fiscal policy is on the table, along with foreign relations and global trade.

Investors are still a week away from their first official glimpse of Trump 2.0. Until then, the only thing the ticker tape will reveal is a writhing mass of uncertainties fueled by a steady stream of contrarian policy news from both the public and private sectors. Globally, newly elected leaders are operating without a rule book, making it hard for investors to plan past January 20th.

If the stock market had a motto, it would be “It’s not that simple”. The last few years have taught investors that almost all market situations are complex, ambiguous, and shifting. There is always more information, and more emerging information, than they can process. Yet, the crudities of the valuation debate require oppositional stances, the drawing of lines in the sand.

Developing an investment thesis unmediated by context is like chasing a ghost. Investors need context to make sense of the news, not just to collect facts, but to navigate through them towards insight. Context helps remind us that the unknown and unknowable are real forces impacting the market. And right now, for investors globally, that context is Trumponomics, which won’t have its big reveal until next week.

To protect their portfolios investors should diversify their bets across various sectors and markets. However, this isn’t what many have been doing. Instead, they’ve largely concentrated on a single theme, AI, and a single market, the US. This level of concentration undermines the market’s pursuit of togetherness offered by otherness.

Investors aim to work from speculation to certainty, gaining confidence in the process, expecting forecasted returns to turn into realized returns. Forecasts and reality are fraternal twins, one coming after the other, not because of it. Reality can be a harsh mistress, blowing away the smoke and revealing the mirrors in your forecasts. The reality is that until next week, no one truly knows what Trumponomics will entail. It’s all speculation for now. Your performance will hinge more on luck than skill. That may not stop it from being positive, of course, but it will stop it from lasting.

 Potential triggers for sentiment-driven market moves this week[1]

• US: CPI and PPI data. Q4 earnings for JPMorgan Chase, Wells Fargo, Goldman Sachs, Citigroup.

• Europe: UK inflation and retail sales data. Eurozone inflation (final), and ECB minutes.

• APAC: China Q4 GDP growth, trade balance, industrial production, and retail sales data.

• Global: Tidbits of information served as amuse bouche ahead of the Trumponomics main course.

[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.

Note: green background = bullish, red background = bearish

Changes to investor sentiment over the past 180 days for the markets we follow:

How to Interpret These Charts:

Top Charts:

The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).

• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).

• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:

The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.

• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:

The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.