Mercer market review 

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments and potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

Global equities and fixed income performed positively in January. US equities underperformed international developed but outperformed emerging market equities. Global large caps outperformed small caps while US value outperformed growth. 

President Trump started his presidency with many executive orders and other actions, many of which favorable to business including deregulations, especially for energy and technology, plans to build out AI infrastructure and a push for smaller and more efficient government. Tariffs, on the other hand, are an evolving narrative and have led to inertia for business (President Trump announced tariffs on Mexico, Canada and China on February 2, with an immediate one-month deferral for Mexico and Canada following negotiations). Troops were deployed to increase security at the southern border, and deportations were stepped up. 

The second  major event was the release of DeepSeek, a Chinese-owned AI start-up with similar capabilities as US AI models but lower costs which led to a significant drawdown for NVidia, one of the largest stocks in major US indices as investors wrestled with the broader implications of cheaper and more accessible AI and whether current US tech valuations can be justified in the light of increased competition.

Economic data remains strong. Nonfarm payrolls for December were stronger than expected and unemployment fell to 4.1%. Despite the strong labor market, wage growth cooled from the previous month, reigning in some inflationary pressure. On the other hand, the potential for higher tariffs being imposed over extended periods and impact of reduced immigration over the coming years remain a wildcard for inflation. 

Headline inflation in the US rose for the third consecutive month to 2.9% year-over-year in December, mostly due to rises in gas prices. Core CPI rose below expectations. Headline inflation in other developed markets also increased for December. The BOJ increased rates from a low basis, the Fed held rates in their January meeting but noted that the labor market was stabilizing despite inflation remaining elevated. The ECB cut rates by 25 bps amid weak economic growth in Europe.

US Yields changed little, as concerns over higher- than -expected inflation were offset by central banks offering more cautious rhetoric and expectations that tariffs will mainly be used as a negotiation tool. Some non-US yields rose moderately.

In the Middle East, Israel and Hamas agreed on a ceasefire after intermediation efforts and pressure by President Trump who also began efforts to de-escalate the conflict in Ukraine. Late in the month, we were saddened by the news of the most fatal aviation disaster on US soil in more than two decades. 

The US dollar strengthened initially but weakened later in the month, as tariffs were not imposed immediately after inauguration. Rate-sensitive real assets such as global REITs and listed infrastructure still underperformed global equities in January. Commodity and natural resource equity performance was positive as oil and gold prices increased. Bitcoin kept fluctuating around the $100k mark for most of the month, as the Trump administration has expressed a constructive regulatory stance towards crypto and blockchain innovation. 

Global equity markets fell in the fourth quarter, though not enough to fully offset strong  gains over the course of the year. The Federal Reserve (‘Fed’) cut rates in December but signaled a wait-and-see approach to 2025 and decreased the number of expected cuts. Stimulus announcements in China led to a sharp rally in Chinese equities earlier in the year, but the realities of depressed animal spirits, the ailing property sector, a potential deflationary cycle, and movement of manufacturing out of China dampens the outlook. Market sentiment was mixed as the “Trump Trade” took effect. Expected de-regulations, especially for the energy sector, tax cuts and business-friendly policies in general could help spur economic activity in the US.  However, potential tariffs and immigration restrictions could dampen growth and increase inflation and thus put a floor on interest rates. Equity markets diverged as investors digested both potential tailwinds and headwinds with US equities posting moderate gains over the quarter while non-US and emerging markets that would be on the receiving end of tariffs fell sharply.   

Short Treasury bond yields fell during the quarter as the Fed cut rates by a cumulative 50 bps over the quarter. Markets priced in stickier inflation and fewer rate cuts for 2025, which led to curve steepening. The 2-year Treasury yield rose by ~59 bps from 3.66% to 4.25% during Q4, while the 30-year Treasury yield rose by ~64 bps from 4.14% to 4.78%. Credit spreads declined slightly during quarter.

The Bloomberg US Aggregate Bond Index returned -3.1% in Q4 as rising yields created a headwind for fixed income, partially offset by tightening spreads. The MSCI ACWI returned -1.0%. As a result, a traditional 60/40* portfolio returned -1.8%.