Following Trump’s victory in the U.S. elections, we are observing its repercussions on financial assets. The United States has outperformed the rest of the world, with Nasdaq (which includes the renowned “Magnificent 7”[1]). standing out once again. This index has not only surpassed the rest of the world but also the almighty S&P 500. Additionally, the dollar continues its ascent, a movement that began strongly in November. Meanwhile, the yield on the U.S. 10-year bond has risen from 4.17% at the beginning of December to around 4.60% today.
I would like to highlight two aspects of the financial market that have stood out this year:
Inflation and interest rates.
We know that central banks raised interest rates due to the sharp increase in inflation following the pandemic and the war in Ukraine. Were the war in Ukraine and the pandemic really the causes of inflation? I don’t think so; they were merely the straw that broke the camel’s back. Many voices have concluded that central banks, especially the FED, have managed to control it and have thus begun a downward trend in interest rates, something that pleases short-term investors. In my experience as a manager, I have seen countless times how arguments are twisted to sell financial products by investment banks.
I remember that a private banking boss where I worked many years ago tried to sell a structured product on Lloyds Bank before the U.S. real estate crisis in 2008-2009. If I recall correctly, the condition for obtaining good returns was that Lloyds would not drop by more than 40%. He argued it was almost impossible for Lloyds to drop 40%, and if it did, the stock market would be the least of our concerns, and he would leave the bank. The stock fell by 40%… not once, but four more times, ultimately dropping 93% between October 2007 and January 2009. And… he just retired.
But the question I wanted to address is this: Is it true that central banks have won the battle against inflation? Honestly, I don’t know, but there are signs in the market suggesting otherwise. If you remember in a previous commentary, the FED (the U.S. central bank, but applicable to others) manages short-term interest rates, while long-term rates are at the mercy of the market and depend on the state of the economy and especially on expected inflation. Well, if the FED lowered rates by 0.50% in September, 0.25% in November, and another 0.25% in December—a total of 1%—why has the 10-year U.S. bond yield risen by 1% since September? The chart shows the evolution of the U.S. 10-year Treasury yield, and you can see that since the FED lowered rates by 0.50% in September, the 10-year yield has risen by 1%.
Source: Bloomberg, own elaboration.
The market is indicating that inflation will rise or is already rising. For some figures, the 30-year mortgage reference rate in the United States has risen to 7.30% when three months ago it was 6.58%[2].
Therefore, if inflation is still above the target, the economy seems to be doing well, financial conditions are loose, and employment appears solid, why are rates dropping? As I mentioned before, central banks are no longer independent. Governments worldwide need to spend or at least maintain their spending levels, and for that, they need financing. Moreover, a significant amount of government debt is due in 2025 and 2026 that needs refinancing, making it crucial to keep interest rates low.
The immediate consequence is more liquidity in the system when they wanted to reduce it, and the less immediate consequence is the potential for inflation to rise again.
So, what should we do to protect ourselves? Invest in real assets, either directly or through shares of companies with financial strength and solid business models. If we want to maintain liquidity, the most advisable substitute to preserve value could be gold.
Small and medium-sized enterprises versus large ones.
I don’t want to bore you with this topic, but I think it’s important to understand this situation. I already mentioned that the increase in passive management (replicating an index regardless of the valuations of the companies that weigh more in the index) has caused large companies to rise more strongly than medium and small ones.
This chart shows the valuation difference between large and medium-small companies in terms of long-term PER (CAPE)[3].
Source: Bloomberg, own elaboration.
Large companies are trading at 31.4 earnings, while medium and small ones trade at 20.7 times, a large difference that could reverse over the years. When will this happen? I don’t know, but I think it’s unsustainable. When people tell me that we don’t understand the market and should follow the wave of big companies, I remember the situation faced by one of the greatest managers in history, Warren Buffet. Buffet achieved an annual return of over 23.6% from 1965 to 2000, compared to the S&P 500’s 11.8% annual return—a huge difference. However, from 12/31/1998 to 03/01/2000, he achieved a return of -37.57% compared to 12.2% for the S&P 500 (Bloomberg). He was criticized for not investing in the new paradigm emerging at the time, the internet and its economic implications, and many people stopped trusting him. Well, from 12/31/1998 to 12/27/2024 (today), Buffet has achieved 874% compared to the S&P 500’s 384%. Buffet didn’t invest in this new paradigm because 1) he didn’t understand the technology and 2) he saw excessive euphoria in valuations and even in the indebtedness of many investors to invest in these types of companies.
Of course, I’m not saying we are as good as Buffet, far from it, but one must persevere with the investment decision made if one believes in the prior analysis. There are many companies in the field of artificial intelligence of great quality, but we sincerely believe they are trading at very demanding valuations.
We wish you a happy and prosperous 2025.
[1] Microsoft, Amazon, Google, Nvidia, Meta Platform (Facebook), Tesla and Apple.
[2] Bankrate.com US Home Mortgage 30 Year Fixed National Avg (Bloomberg)
[3] CAPE=Pº actual index/Media real Bº (adjusted by inflation) of last 10 years.
Altum Faithful Investing EAF, SL, a financial advisory company financial advisory company with registration number 219 with the Comisión Nacional del Mercado Securities Market.
We have been recognized as part of the International Network of accredited Social Enterprises.
Altum Faithful Investing EAF. SL. in the framework of the Icex Next Programme, has been supported by ICEX and co-financed by the European ERDF fund, to contribute to the international development of the company.
Inflation: A battle won or a time bomb?
December ended with a decline in major markets:
Following Trump’s victory in the U.S. elections, we are observing its repercussions on financial assets. The United States has outperformed the rest of the world, with Nasdaq (which includes the renowned “Magnificent 7”[1]). standing out once again. This index has not only surpassed the rest of the world but also the almighty S&P 500. Additionally, the dollar continues its ascent, a movement that began strongly in November. Meanwhile, the yield on the U.S. 10-year bond has risen from 4.17% at the beginning of December to around 4.60% today.
I would like to highlight two aspects of the financial market that have stood out this year:
We know that central banks raised interest rates due to the sharp increase in inflation following the pandemic and the war in Ukraine. Were the war in Ukraine and the pandemic really the causes of inflation? I don’t think so; they were merely the straw that broke the camel’s back. Many voices have concluded that central banks, especially the FED, have managed to control it and have thus begun a downward trend in interest rates, something that pleases short-term investors. In my experience as a manager, I have seen countless times how arguments are twisted to sell financial products by investment banks.
I remember that a private banking boss where I worked many years ago tried to sell a structured product on Lloyds Bank before the U.S. real estate crisis in 2008-2009. If I recall correctly, the condition for obtaining good returns was that Lloyds would not drop by more than 40%. He argued it was almost impossible for Lloyds to drop 40%, and if it did, the stock market would be the least of our concerns, and he would leave the bank. The stock fell by 40%… not once, but four more times, ultimately dropping 93% between October 2007 and January 2009. And… he just retired.
But the question I wanted to address is this: Is it true that central banks have won the battle against inflation? Honestly, I don’t know, but there are signs in the market suggesting otherwise. If you remember in a previous commentary, the FED (the U.S. central bank, but applicable to others) manages short-term interest rates, while long-term rates are at the mercy of the market and depend on the state of the economy and especially on expected inflation. Well, if the FED lowered rates by 0.50% in September, 0.25% in November, and another 0.25% in December—a total of 1%—why has the 10-year U.S. bond yield risen by 1% since September? The chart shows the evolution of the U.S. 10-year Treasury yield, and you can see that since the FED lowered rates by 0.50% in September, the 10-year yield has risen by 1%.
Source: Bloomberg, own elaboration.
The market is indicating that inflation will rise or is already rising. For some figures, the 30-year mortgage reference rate in the United States has risen to 7.30% when three months ago it was 6.58%[2].
Therefore, if inflation is still above the target, the economy seems to be doing well, financial conditions are loose, and employment appears solid, why are rates dropping? As I mentioned before, central banks are no longer independent. Governments worldwide need to spend or at least maintain their spending levels, and for that, they need financing. Moreover, a significant amount of government debt is due in 2025 and 2026 that needs refinancing, making it crucial to keep interest rates low.
The immediate consequence is more liquidity in the system when they wanted to reduce it, and the less immediate consequence is the potential for inflation to rise again.
So, what should we do to protect ourselves? Invest in real assets, either directly or through shares of companies with financial strength and solid business models. If we want to maintain liquidity, the most advisable substitute to preserve value could be gold.
I don’t want to bore you with this topic, but I think it’s important to understand this situation. I already mentioned that the increase in passive management (replicating an index regardless of the valuations of the companies that weigh more in the index) has caused large companies to rise more strongly than medium and small ones.
This chart shows the valuation difference between large and medium-small companies in terms of long-term PER (CAPE)[3].
Source: Bloomberg, own elaboration.
Large companies are trading at 31.4 earnings, while medium and small ones trade at 20.7 times, a large difference that could reverse over the years. When will this happen? I don’t know, but I think it’s unsustainable. When people tell me that we don’t understand the market and should follow the wave of big companies, I remember the situation faced by one of the greatest managers in history, Warren Buffet. Buffet achieved an annual return of over 23.6% from 1965 to 2000, compared to the S&P 500’s 11.8% annual return—a huge difference. However, from 12/31/1998 to 03/01/2000, he achieved a return of -37.57% compared to 12.2% for the S&P 500 (Bloomberg). He was criticized for not investing in the new paradigm emerging at the time, the internet and its economic implications, and many people stopped trusting him. Well, from 12/31/1998 to 12/27/2024 (today), Buffet has achieved 874% compared to the S&P 500’s 384%. Buffet didn’t invest in this new paradigm because 1) he didn’t understand the technology and 2) he saw excessive euphoria in valuations and even in the indebtedness of many investors to invest in these types of companies.
Of course, I’m not saying we are as good as Buffet, far from it, but one must persevere with the investment decision made if one believes in the prior analysis. There are many companies in the field of artificial intelligence of great quality, but we sincerely believe they are trading at very demanding valuations.
We wish you a happy and prosperous 2025.
[1] Microsoft, Amazon, Google, Nvidia, Meta Platform (Facebook), Tesla and Apple.
[2] Bankrate.com US Home Mortgage 30 Year Fixed National Avg (Bloomberg)
[3] CAPE=Pº actual index/Media real Bº (adjusted by inflation) of last 10 years.
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We have been recognized as part of the International Network of accredited Social Enterprises.
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Altum Faithful Investing EAF. SL. in the framework of the Icex Next Programme, has been supported by ICEX and co-financed by the European ERDF fund, to contribute to the international development of the company.