At a glance: What you need to know from last week

US inflation no barrier to Fed cuts
The consumer price index (CPI) rose at its fastest pace in seven months in November, the latest in a string of releases pointing to a pause in the trend toward lower inflation. The headline rate was 0.3% on the month, the highest since April, following four consecutive months of 0.2% increases. Core inflation rose 0.3% month over month for the fourth consecutive period, with the 3.3% y/y rate still not yet consistent with the Federal Reserve’s 2% target. Finally, data last week also showed producer prices rising at the highest annual rate in November since February 2023. Parts of this release feed into the Fed’s favorite measure of inflation—the personal consumption expenditures index, which comes out this Friday.

But the market reacted calmly, with the S&P 500 rising 0.8% the day after the CPI release and posting only a modest 0.6% fall for the week as a whole. We believe this measured market response reflects confidence that inflation will resume its decline toward the Federal Reserve’s 2% target, allowing for continued policy easing, including at the next policy meeting on Wednesday.

Several factors support this outlook: first, shelter costs—a key driver of recent inflation—are beginning to moderate. Second, the labor market—while resilient—shows signs of softening, with recent payroll growth averaging 173,000 over the last three months and down from 191,000 over the past 12 months. Last, top Fed officials have signaled that rates remain restrictive, giving further scope for cuts to a neutral level that neither stimulates nor impedes growth.

Takeaway: So, we continue to expect the Fed to cut by 25 basis points at its policy meeting this week. A backdrop of Fed easing combined with continued economic growth—which is our base case for 2025—has historically been positive for equities. We expect the S&P 500 to gain further, ending the year around 6,600—about 9% higher than Friday’s close.

Seek sustainable portfolio income as rate cuts continue
The Bank of England looks likely to be a rare hold-out among top central banks, keeping rates on hold at this week’s policy meeting. We also expect the UK to ease policy at a slower rate in 2025 than the European Central Bank or the Fed, with UK inflation stickier amid a large stimulus package from the new Labour government.

But, elsewhere the momentum toward rapid easing has continued. The Swiss National Bank cut rates by 50 basis points last week—its largest move since January 2015. The Bank of Canada also implemented a 50-basis-point reduction. Finally, the European Central Bank enacted its fourth 25-basispoint easing of 2024.
We expect more to come in 2025.

Our base case is for one 25-basis-point cut from the Swiss National Bank and 100 basis points of easing overall from both the ECB and the Fed next year. In Asia, we also expect a continuation of interest rate cuts, with China last week shifting its monetary policy stance from “prudent” to “moderately loose.”

Takeaway: Against this backdrop, investors should act to invest excess cash, money-market holdings, and expiring fixed-term deposits. A combination of bond ladders, investment grade bonds, diversified fixed income strategies, and equity income strategies can all play a role in sustaining portfolio income.

Consider hedges as geopolitical uncertainty remains elevated
The swift collapse of the al-Assad government in Syria provided another reminder of how fast-moving geopolitical events can be. This has been just the latest in a spree of political and geopolitical surprises. South Korea’s parliament voted on Saturday to impeach President Yoon Suk Yeol, following his failed attempt to impose martial law. In France, President Macron has just appointed his fourth prime minister in 2024, after former Prime Minister Barnier was unable to command the support of the nation's assembly to pass a 2025 budget. Meanwhile, the war between Russia and Ukraine has been intensifying.

Our view has been that geopolitical crises have historically had a relatively short-lived impact on markets, and we advise investors to avoid exiting risk assets. But we also favor strategies to improve the resilience of portfolios against geopolitically-driven volatility.

One potential hedge is gold, which typically benefits from geopolitical uncertainty. It is also supported by fundamentals in our view and should continue to benefit from strong buying by central banks and falling US interest rates—which lowers the opportunity cost of holding the metal.

Structured strategies may offer a defensive way to stay invested, allowing investors to retain exposure to further potential gains in stocks while reducing sensitivity to a correction. For example, an investor looking to shield a portfolio from short-term fluctuations in value can pursue a strategy with capital preservation features that locks in gains now or limits the magnitude of a potential loss. Finally, an allocation to hedge funds can help deliver uncorrelated returns—especially in periods of volatility.

Takeaway: While investors should be aware of the risks and complexity involved in hedge funds and structured strategies, these investments can help to smooth swings in portfolios caused by geopolitical risks.