The Wiser Financial Advisor: 2025 Financial Forecast #141

In this episode host, Josh Nelson along with Jeremy Busch will be talking about their forecast for 2025. This is something they do at the beginning of each year. They take a look at what last year gave us and analyze what we might be able to expect in 2025. 

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Podcast Editing: Tim Leaman/info.primegen@gmail.com

Transcript

Wiser Financial Advisor – Forecast 2025

Hi Everyone, and welcome to the Wiser Financial Advisor podcast with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money. This is Josh Nelson, Certified Financial Planner, founder and CEO of Keystone Financial Services. Let the financial fun begin! 

Josh: Today I’m joined by Jeremy Bush. We are Certified Financial Planners and we're going to be talking about the forecast today, which we always do at the beginning of the year. So welcome, Jeremy.

Jeremy: Thank you, Josh. Good to be here to go through some good data.

Josh: Just like if you're talking to the weather man or weather woman, it's a forecast, with our opinions of what we're seeing and what we're hearing from the experts out there.

Jeremy: These are our disclosures, which are always important to put up for compliance sake, but the important thing to remember is that all this forecast stuff is pretty much just our opinion. It’s not meant to make any recommendations to anybody specifically. 

Josh: And  as always, there are no guarantees, right? These are our opinions, but we do pay a lot of attention to the experts. The experts are not always right, but like a weather forecast, they're paid to give an opinion. They're analyzing data. However, it's always good to take that with a grain of salt, no matter who it is. 

During forecasts, we go through where we've been, where we are, and where we may be going. First thing, this last year was a good year. The last couple of years were really good years for the stock market. If you were invested in a broad basket of stocks like the S&P 500, you probably did quite well. We don't know if that's going to repeat in 2025, but it has been a good run; in fact the best two year run since 1998. So that was great. Certainly a lot of that was driven by technology stocks. Many of you have heard the term “Mag 7” which is Apple, NVIDIA, Microsoft, Amazon, Alphabet, Tesla, and Meta. That was about 33% of the market. Those companies are all trillion plus at this point. 

Jeremy: It’s important to notice that in 2024, these magnificent 7 led the way in the first quarter, but then after that first quarter, the rest of the S&P started catching up to them. So, yes, they started it out. And yes, they're big players in this. But the S&P 500 overall throughout the last 3/4 of 2024 came on strong, driven by earnings of course, which is ultimately what drives the market.

Josh: Surprisingly, a really boring sector of the S&P 500—utilities—are one of the best sectors. In Q3 this past year, much of that was driven by demand for energy, but also by AI. Still, you know, having all your money just in those seven stocks would not be a great idea. 

The economy obviously did well to avoid recession. A couple years ago, most experts were saying we were going into a recession but it never really happened. All the dire predictions didn't come to fruition. The economy continued to chug along at 2.9%, which is right about the historical average over the last 100 years or so. 

Many of what we would call developed markets like Western Europe, Canada, Japan, Australia, have economies that continue to underperform the U.S. Even though we're not perfect by any means, the U.S. continued to outperform the rest of the world other than some emerging markets which obviously have a different level of risk. One thing to note, is that it's always good to have international diversification, even though you have to understand that international stocks haven't done as well as your U.S. stocks. But historically, it's good to have that diversification in your portfolio and also in crypto. Crypto continues to be grabbing headlines and it has become a lot larger part of the market. There's a lot of risk there, a lot of volatility. Bitcoin got up to about 108,000 in December, and now it's gone way down, to about 90,000. So we do see some pretty dramatic swings, even though that asset class probably is not going away. 

Jeremy: The deployment of ETFs means that pretty much anybody can invest in cryptocurrency now. It's still volatile, so that crypto part of a portfolio is maybe 1 to 3%. It could be a future diversifier, but just understand that the volatility is not going to go away anytime soon.

Josh: That extreme volatility is like the extreme turbulence you might have on a plane flight. Crypto is about as far out there as you get. Only people with high risk tolerance should be looking at that as an asset class to include in their portfolio at this point. And again, it's good to have your money in lots of baskets.

Certainly, there are always parts of the market that get into a bubble. Sometimes that comes up in the conversations we have now. People are worried about this being like the late 90s, when the entire stock market got way overvalued. Then we saw a terrible bear market when the bubble burst. OK. We can't guarantee that’s not where we are right now. But if you take out the Mag 7, especially the tech sector, there are a lot of parts of the market that are not in bubble territory and don't look particularly expensive. That’s another reason to stay diversified and not too concentrated in one area. Some are elevated right now. It's not something that we're considering a bubble. We usually will measure that based on price to earnings ratio. Really, a stock is just worth its earnings or its future earnings. That's why earnings reports are so important. Are earnings in line with what the current stock price is reflecting?

Jeremy: The market is trying to look out about six months and say, where do we think this is going? What throws volatility in there, is when there's uncertainty. And there's always uncertainty, sometimes more than others.

Josh: Yeah, just like a flight on a plane. You can have the best pilot in the world, and if there's unsettled air, you experience turbulence. The key, though, is knowing that being a long term investor means that although turbulence is not comfortable, you don't react drastically to it. Balance your portfolio, make some adjustments along the way, but dramatic moves in and out of the market is not a sound strategy for investing.

Jeremy: Absolutely. So where do we find ourselves? Obviously, some factors are influencing the market. We started out the year to some initial declines across the board. But I would say that's fairly normal in January.

Josh: Most people don't remember something that's not comfortable at the time, unless it’s very dramatic like 9/11. Most of the time, the turbulence happens and we move on.

Jeremy: At the time we're doing this, the S&P 500 is up about 2.5 to 2.9%. Still on the positive, but we're definitely seeing more volatility this year. High inflation and interest rates are on everybody's mind. Last week, the Fed said they’re going to do a pause on interest rate reductions at this point. All right, when they started doing this, the general consensus was that they would put us into a recession, and we scoffed at the whole idea of a soft landing, right?

Josh: Usually, when the Fed tightens, there's a recession. Historically, that's a pattern.

Jeremy: Absolutely. But we should probably give them a little credit in arrears because they've done a pretty good job. 

And then, politics comes up in meetings all the time. Short term politics can definitely drive volatility, especially when we're talking about tariffs and taxes. You know, they call Trump the Disruptor In Chief for a reason. He likes to throw wrenches out there. But no matter which side of the aisle you sit on, the markets are just trying to figure out which direction to point. And when that’s unclear, it adds volatility.

Josh: Yeah, money is not really political. Investors want to make money, and we believe it's important to know what season you're in, what environment you're in. If you've got a lot of uncertainty because of policy changes like tariffs, or taxes, it’s good to be aware of that.  You know, interest rates are one thing, taxes are another. At the end of this year, many of the tax cut provisions from the 2017 tax bill are set to expire. More than likely it's going to take all year until you see legislation passed. We have no idea what that'll look like. So that's certainly a thing at any given moment. Whether it's crypto or bonds or stocks, any kind of investment at any given moment in the market, everybody's trying to figure out. People are asking, “What does this mean?” So when you're seeing the market jump up and down even within a day, that's collectively everybody trying to figure out  on a large scale, what it means for the future as far as money goes. 

Jeremy: Absolutely. And then, regarding the forecast, we like to take a look at various economic indicators. Employment data is one of those moving targets, with really mixed job reports as they come out. But overall, we're still very low on unemployment, historically very low. So, not too bad with that. Of course, that can change depending on what's going on. Right now there's a big federal workforce reduction. 

Josh: Yeah, it's unbelievable. Another uncertainty. I would say for this year, just get used to uncertainty generating turbulence.

Jeremy: And then we add in Gross Domestic Product (GDP). So GDP was at that annual rate of about 3.1 or so. We’re projecting more of the same. When we look at it globally, we’re not seeing a lot of change there. Consumer confidence was at an all-time high pre-COVID in 2020. And really, consumer confidence has never gotten back to that pre-COVID era. It's had its ups and downs. It has a lot of volatility in and of itself.

Josh: Yeah, there were huge disruptions to supply chains. Toilet paper. Remember toilet paper being rationed?

Jeremy: I heard today that eggs are the new toilet paper.

Josh: So yeah, consumer confidence is a big deal. Day-to-day, 70% of the economy is people spending money on stuff, right? And if you need to go to the airport, the planes are full. You go to a concert, the seats are full. People are doing stuff, largely because people have jobs. You never get to a 0% unemployment rate; it’s always moving around; some industry is always cutting back and making adjustments, but historically we're at very low unemployment rates.

Jeremy: And we alluded to this earlier: Federal Reserve policy, which is taking a sit-back-and-see approach. An important thing to remember is that not every sector feels the interest rate cuts as fast as every other sector, so there will always be parts of inflation that stick around while other parts are going down. That's why the Fed has multiple measures they use. The key numbers here though, are: Yes, inflation in general is coming down. Our grocery prices and fuel prices are still high, but the Fed policy is to closely monitor everything. Obviously, they have a new administration to work with as well, which presents them with additional challenges, but overall they've been doing a pretty darn good job so far, so we haven't hit that recession that’s been talked about for at least the last few years.

Josh: That's a good point. And regarding their inflation measures, they look at a  basket of goods and services across the economy. None of those are perfect. They come out with a 3% number and then we'll hear people say, “Well, that's not what I see when I go to the grocery store.” Absolutely, that's true. There's always some factor, like egg prices right now. Because of avian flu, egg farmers had to kill a lot of hens, and it jacked up the prices because supply is down. That's so economics 101, right? Supply and demand. 

Certainly, that has an impact on people. But one thing about inflation is that when we talk about inflation coming down, inflation never really goes backwards. So if you look back to the Great Depression that was one of the few times that prices actually dropped dramatically. And we don't want that. You don't want a depression. So when we say inflation is coming down, it's just the pace of increases that have slowed down.

Jeremy: And then the overall global economic context of this: when we look at currency markets, the U.S. dollar is very strong right now. That has pros and cons. Lastly, we look at strong service sectors, etc. The Fed rate cut affects this as well. International trade is not something that has happened overnight either. So our U.S. trade deficit, which is basically the measure of what we are exporting versus what are we importing, is high. With China and Hong Kong, the red line on there is the average, but it's quite a bit. As a country, we tend to import a lot more goods from other countries. The key is the things we’re exporting are higher end things like computer chips, et cetera. The things that we're importing are your everyday stuff you're buying at Walmart, things of that nature. But the overall aspect of it is yes, the current trade deficit is upwards. It's never been that high. But still,  the strong dollar plays into that as well, but that's been in development over many, many, many, years.

Josh: You will see that in your investments too, when you’re looking at currency alone. A strong dollar is one of the reasons why in a diversified portfolio, your U.S. investments do better than your foreign investments. But you'll see the opposite too, if things go back and forth and the dollar weakens compared to other currencies in the world. You'll definitely see that all of a sudden. It will look like your international investments are doing so great, but it's not just because the stock prices have gone up; it's also because of the currency changes, because you're probably buying it with dollars. So, when buying foreign investments, have that currency diversification as well. 

Regarding growth that we are expecting, the GDP is going to moderate. We've been running about 3%, and that might get closer to 2%. Inflation as a trend, we think is going to come down over the next few years, but probably not as fast as we originally had thought. The Fed is saying, “Hey, we're pausing on interest rate decreases.” The last thing they want, since they killed the inflation dragon, is for inflation to go really high. In the early 80s, they hit the brake and let off too early. Then inflation came roaring back. If you had mortgages or CDs or anything like that back in the 80s, you probably remember a lot of up and down there. From our historical context, 7% mortgage rate is not bad. I think my first mortgage in the late 90s was 7.5%.But a lot of you had double digit interest rates on your mortgages and other loans in the 80s. So from a historical perspective, 7% is not terrible, but certainly is high compared to what we're used to in the last few decades.

Jeremy: We got a little bit spoiled there with 2.5 and 3% mortgage rates for a while.

Josh: If you're borrowing money, it was great, right? Many of you probably have two point something or three-point something percent mortgages. Now those days are done, I think. We may never see those interest rates again. Smart investors recognize the reality of what is, and adjust their portfolios accordingly. 

And remember, inflation tends to be pretty sticky. It’s very rare that we see real deflation, although certain products do decrease in price, electronic products such as flat screen TVs or something like that. But as a trend, you don't tend to see prices actually drop as a whole, and really, you don't want to do that  to your economy. Typically if you're seeing deflation, that's a depression. 

So where might we be headed? Unemployment probably is going up over the next few years. Right now, most people that want a job have one. It may not be a job they want. When people aren’t happy with what they're doing, they end up moving. There's always going to be some gap in time, but they tend to leave on their own. 

Another thing to keep in mind here is the baby boom generation. I just read that the oldest of them is about to turn 80, and the youngest turning 60. You've got this generation with about 10,000 people a day hitting the age of 65. For many people, if they haven't already retired, 65 is a trigger because they're eligible for Medicare. Their health insurance costs will go down, maybe, or certainly could be lower than if they went  to the open market and bought insurance. So, a lot of people are leaving the workforce. We don't know how many will remain employed to shore up their own finances or because they enjoy the work they do, but baby boom retirement is a factor as far as the labor pool goes. 

 Interest rates will stay where they are a while longer. We probably are not going to see reductions this year. Unless those inflation numbers really come down at some point during 2025, I think we're going to be sitting at that 4 and 4.5 percent that we're at right now. And in fact, if there's really a spike in inflation, if things really take off for some reason, we might see rate increases. 

Jeremy: Which is definitely possible. Things like tariffs or uncertainty in that measure can absolutely play into it as certain sectors tick up and push it up. Yeah, the Fed right now is strongly signaling that we're just going to hold course.

Josh: Maybe that's a vote of confidence because they believe the economy can handle it. The economy continues to be OK even with rates at their current levels. That being said, there's always a potential of a market correction. Market correction would be a 10% or more drop in the market, which happens pretty routinely, about once a year. Historically about 20% drop or more would be considered a bear market. The good news is that about 80% of the time, corrections don't turn into bear markets.  

Right now, there’s uncertainty about tax policy and around interest rates. So there are some clouds out there, that appear a bit thunder-stormy. That could create some volatility this year and possibly a correction. It could be even as bad as a bear market, depending on how things go. There will be sectors that do better than others. In the stock market right now, it would be a bad idea as always, to put everything in one sector, to put it all in tech stocks or energy stocks. You always want to go with diversification. 

Jeremy: And that's really where we come in, behind the scenes and whatnot, periodically rebalancing. We listen to a lot of research and try to take advantage of those opportunities when they arise.

Josh: We're an independent firm, which is great for you as a client because we're just working for you. But we do have institutional access at Fidelity, Charles Schwab, other companies that give us some great insights as we're making those decisions. 

Now finally, let’s look at trade. Trade tension certainly bears watching. You know that it's continued to get more protectionist over time versus 30 years ago. Things were trending towards very free then. I’ve seen more tariffs, a lot more protectionist policies from a trade perspective, not just in the U.S.. Also, there are always geopolitical risks. There are always hotspots in the world. 

Trade restrictions are just one of those geopolitical things that have a lot of uncertainty. So just expect that as part of being an investor and being human in the world, you've got that headline risk of something happening. Sometimes it has a major impact on the economy and sometimes it doesn't. And as always, for people who don't have a very high risk tolerance, we would exercise caution on the stock market. If you've loaded up on stocks and not rebalanced for a while, that's something you really should look at. And if you're not working with us, possibly partner with us to look at that with you. Every year, this kind of trade back and forth looks like the periodic table of elements. If you have a diversified portfolio, it's going to be much smoother than putting it all in real estate or all in stocks or tech or crypto. If you do that, then you're going to get all the volatility that comes with that asset class. You'd be in a lot better place and still get to take advantage of those areas when they do well, and minimize the losses from things that don't do well. 

A couple quick points to wrap up. From Goldman Sachs, we believe the U.S. stock market remains a cornerstone for growth with an 80% chance of continued growth. Staying invested in 2025 will likely yield positive returns. That's our belief as well. We think that this year is going to end up being a good year. When you wake up on December 30th, if you have stocks, will you probably be up as much as the last couple years? Not that much, but I think more likely that we'll see average returns of high single digits, maybe 10, eleven, 12% for the overall stock market. I think most people could be happy with that.

Jeremy: Yeah, a pretty average year I think, is the consensus.

Josh: We'll see what happens. The world is complex, especially the financial world because the rules change. Tax policy changes, the market constantly changes, and of course, your life changes. It's our job to be looking at all this stuff with you and applying it to your situation. What does this actually mean? Based on when you're retiring, how long you're working, what you're contributing, and do you have a plan that has a really high likelihood of working out? You can't say the word guarantee. But we do like math and we do like playing with numbers and running scenarios and stress testing using the principles people have followed over the decades for successful outcomes. 

As always, we thank you for your interest. You can email us:  josh@keystonefinancial.com  or jeremy@keystonefinancial.com You can also visit our website at www.keystonefinancial.com . We have a lot of virtual capabilities, zoom and so forth, but we want to make sure you know we always enjoy getting together with you face to face as well. 

Have a wonderful week, and God bless. Take care.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered by Keystone Financial Services, an SEC registered investment advisor.