Markets start new year on high note, but what comes next

Financial markets began the new year just like they ended the old one, heading up. Stock prices climbed during January’s first trading session, keeping alive a trend that ran through most of last year.

Things stayed positive throughout the previous year. Excitement about artificial intelligence, lower inflation, and central banks stepping in kept the rally going. Trade fights, global tensions, and expensive stock prices? Investors shrugged those off. The takeaway was simple enough: taking risks paid off.

But what really stood out wasn’t just the gains themselves. It was how everything rose together. Stocks went up. Bonds went up. Credit spreads got tighter. Commodities climbed even as inflation cooled. The profits came from all directions and kept coming. By year’s end, financial conditions had loosened to nearly their easiest levels of the whole year. Stock valuations climbed and investors seemed to agree on what was driving it, economic growth and AI.

When you look at global stocks, bonds, credit, and commodities as one big picture, the previous year delivered the strongest combined performance since 2009. That was the year markets were in crisis mode and governments had to step in big time.

All this moving together made diversification look almost too easy. Which is actually the problem. It masked how much depends on those same conditions sticking around. When investments that are supposed to offset each other all go the same direction, you’re not as protected as you think. Sure, returns stack up. But there’s less room for things to go wrong.

Wall Street still betting on same playbook

Wall Street analysts are still banking on the same things, massive AI spending, solid economic growth, and central banks cutting rates without lighting the inflation fire again. Forecasts from more than 60 firms show pretty broad agreement that those conditions are still in place.

Thing is, markets have already baked in a lot of good news.

“We are assuming that the torrid pace of valuation expansion we have seen in some sectors is not sustainable nor repeatable,” said Carl Kaufman, a portfolio manager at Osterweis, referring to AI and nuclear-related stocks. “We are cautiously optimistic that we can avoid a major collapse, but fearful that future returns could be anemic.”

The numbers tell the story. U.S. stocks returned about 18%, marking three years in a row of double-digit gains. Global equities did even better at roughly 23%. Government bonds climbed too, global Treasuries were up nearly 7% as the Federal Reserve cut interest rates three times.

Volatility dropped hard and credit markets followed suit. Bond market swings recorded their steepest annual decline since after the financial crisis. Investment-grade spreads tightened for a third straight year, leaving average risk premiums below 80 basis points.

Commodities got in on the action. A Bloomberg index tracking the sector rose about 11%, with precious metals out front. Gold hit one record high after another, helped by central bank buying, easier U.S. monetary policy, and a weaker dollar.

Inflation remains the wildcard that could flip everything

Inflation’s still the big wild card. Price pressures eased through most of the previous year, but some investors warn that energy markets or policy mistakes could flip that around fast.

“The key risk for us is whether inflation finally returns,” Mina Krishnan at Schroders told Bloomberg. “We envision a domino of events that could lead to inflation, and we see the most probable path beginning with a rise in energy prices.”

You can see the disconnect beyond just markets. As reported by Cryptopolitan previously, the world’s 500 richest people added a record $2.2 trillion to their fortunes last year. Meanwhile, U.S. consumer confidence fell for five months straight through December.

Old-school Wall Street strategies made a comeback too. The 60/40 portfolio, splitting money between stocks and bonds, returned 14%. An index tracking the risk parity strategy jumped 19% for its best year since 2020.

Most investment managers aren’t sweating it yet. They say economic momentum and policy support are strong enough to justify higher prices.

“We are looking to spend as much cash as possible to take advantage of the current environment,” said Josh Kutin, head of asset allocation for North America at Columbia Threadneedle Investments. “We really are not seeing any evidence that we should be concerned about that downturn in the immediate future.”