Each December, the financial world turns its attention to identifying the year’s “X-Factor”—an unexpected force that significantly influences investment outcomes. This year, the X-Factor for 2025 has been unveiled, marking a departure from tradition. Instead of a single factor, it is the combination of two powerful forces: the potential need for tighter monetary policies across several countries, including Australia, and the precarious balance of elevated geopolitical risks with asset prices hovering near historic highs.
The concept of the X-Factor dates back to 1974 when Don Stammer, a seasoned investor and former Reserve Bank official, coined the term. At that time, Japanese life offices and pension funds were purchasing Australian bonds in large volumes, prompting Stammer to describe these unexpected market influences as “Factor X,” which later evolved into the “X-Factor.”
Understanding the X-Factor
The X-Factor does not replace traditional analysis of economic conditions, shares, interest rates, property, or currencies. Instead, it underscores the reality that markets are often swayed by unforeseen developments. Identifying these early can enhance returns, although sound diversification and prudent risk management remain essential, particularly for retirees.
Historical X-Factors: A Look Back
Over the years, numerous events have been labeled as X-Factors, both positive and negative. Positive surprises have included the floating of the Australian dollar in 1983, Paul Keating’s 1986 “banana republic” warning which spurred fiscal reform, and Australia’s resilience during the 2008 global financial crisis, buoyed by strong Chinese demand. More recently, the post-COVID market recovery and the rally in US technology stocks from 2023 to 2025 have been notable X-Factors.
Conversely, negative shocks have included the 1994 bond yield surge, the Asian financial crisis, the September 2001 terrorist attacks, and the collapse of Enron. Today, heightened geopolitical risks are considered among the most severe since World War II.
Recent Experience and Predictions
Stammer’s X-Factor selections were largely uncontroversial until 2021 when he predicted the fracturing of the belief in permanently low inflation. His foresight proved accurate as inflation rose to 4-5%, aligning with his projections. This year, the finalists for the 2025 X-Factor include economic disruptions from President Trump’s tariff policies, the risk of US inflation exceeding expectations, and concerns over the valuations of US technology and AI-related stocks.
Key contenders for the 2025 X-Factor:
- Economic disruption from President Trump’s tariff policies
- Risk of US inflation exceeding expectations due to fiscal deficits
- Australia’s inflation outlook with potential price increases
- Concerns about valuations of US technology and AI-related stocks
- Record-high gold prices as an inflation hedge
- Rapid escalation of geopolitical risks
And the Winner Is…
Breaking from tradition, 2025 does not have a single X-Factor. Instead, it is the confluence of two forces: the growing likelihood that many countries, including Australia, will require tighter monetary policy to counteract the inflationary impact of large budget deficits, and the uneasy coexistence of elevated geopolitical risks with asset prices near historic highs.
Don Stammer, with over six decades of investment experience, has been instrumental in identifying these trends. Recently, he has partnered with Ashley Owen and Shani Jayamanne to establish the Dr Don Academy, which aims to provide investment guidance, particularly to young investors, drawing on the founders’ combined 124 years of experience.
Looking Forward
The identification of the X-Factor for 2025 highlights the complex interplay of economic and geopolitical forces shaping global markets. As countries navigate these challenges, investors must remain vigilant, adapting their strategies to manage risks and seize opportunities.
This article serves as general information and does not consider the specific circumstances of any investor. As the global economic landscape continues to evolve, the lessons from past X-Factors remind us of the importance of staying informed and prepared for the unexpected.
