Research.LeutholdGroup

Economic resilience that prompted the Fed’s pause is consistent with past cases. Equities and bonds have largely followed historical patterns. The exceptions—gold’s outsized return and the dollar’s weakness—highlight the unique risks introduced by the current political environment.

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On the whole, the probability of an imminent recession has declined since our last update in April and now stands below 50%. Only two signals changed in this update, the most significant being the S&P 500, which improved from yellow to green.

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We turned constructive toward higher-quality credit.

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Despite heightened uncertainty from shifting trade policies, credit markets remain relatively stable—at least for now. While bank lending standards are tightening and loan demand is softening, market-based indicators like credit spreads and bank stock performance suggest credit risk is contained. If that holds, the broader economy may avoid serious damage, even as tariffs rise.

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While the “Trump put” materialized in May, the markets are again becoming complacent toward both policy uncertainty and geopolitical risks.

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In exploring how cross-asset behavior differs between recessionary and non-recessionary market selloffs, a more striking conclusion emerged: The presence of a Fed put—or the absence there of—looks to be the more powerful force in shaping market dynamics across assets.

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Despite recent policy back-pedaling, volatility is liable to stay elevated for the time being.

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Uncertainty surrounding Trump’s second term and the risk of escalating tariffs have shifted market focus from inflation to growth, raising fresh concerns about a potential recession. Our updated Recession Dashboard shows a delicate balance, with risk now slightly above 50%—driven largely by weakness in equities and full-time employment. While some indicators have improved, the market remains the most important signal to watch. A sharp selloff could tip the economy from slowdown into recession territory.

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Within fixed income, we remain defensive toward credit, especially the low quality segment.

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Despite volatile headlines, the German DAX index has staged a stellar double-digit rally since the start of the year—outpacing even the most “exceptional” S&P 500. In fact, over the last year or so, the DAX has now pulled ahead of the S&P 500.

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Our Risk Aversion Index moved higher in February and triggered a new “Higher-Risk” signal. A mechanical indicator can experience a prolonged period of whipsaws as there is a much greater amount of noise in the market these days.

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Bond market reactions are consistent with the historical norm, so far, and suggest that a reversal of the current bear steepening is more likely than not.

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Our Risk Aversion Index ticked lower again in January and triggered a new mechanical “Lower-Risk” signal.

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We present our favorite charts from the past year and examine some of the key developments poised to have a significant impact in 2025.

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Overall, most patterns suggest a decent year for global equity markets. Expectations are already very high, though, and that leaves much less room for error. We strongly caution against extrapolating U.S. equities’ 2024 performance into 2025.

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While the policy regimes in both the U.S. and China are likely to support risky assets, today’s level of optimism doesn’t allow much of a cushion for disappointment.

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The Trump rally was the dominant theme in November, with the U.S. dollar playing a big part. Over the past few weeks, the dollar has appreciated significantly. The latest surge in the DXY index, both in magnitude and velocity, bears a striking resemblance to that which followed Trump’s unexpected win in 2016.

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The Trump win, the Fed’s easing cycle, and favorable seasonality should support risky assets. However, expectations are very high and there is little room for disappointment.

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Given the beginning of an easing cycle in September and the Trump Trade in October, the lack of steepening in the yield curve is intriguing. While tighter financial conditions are likely a challenge to the steepening move, policy regimes and the term premium are favorable toward further curve steepening.

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The market keeps brushing aside the increase in geopolitical risks and we continue to believe the risk is underpriced. On the other hand, the Trump win and favorable seasonality should support risky assets at least in the near term.

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