2025 has kicked off with higher investor uncertainty. A couple of key points to prepare.
Annually, we update our History Revisited blog, highlighting economic and financial market events that put pressure on investor discipline despite having temporary and minimal impact on the long-term performance of the financial markets. As we stand today on February 25, many might add at least six glaring concerns to the table for 2025:
- Expensive Stock Market Valuations: Stocks are expensive compared to the earnings they generate on a historical basis and a large part of the stock market (31% of the S&P 500[1]) is concentrated in information technology. Will stock prices fall back in line with historical valuations or has the stock market appropriately priced in future earnings of an evolving economy? Should I bail out of stocks at the expense of long-term portfolio growth potential?
- Inflation Concerns: The current inflation rate hovers around 3%[2], which is above the Federal Reserve’s target of 2%. Add in trade tariffs, supply chain disruptions and a tight labor market; will this increase prices, further eroding purchasing power for consumption and diminish real investment returns?
- U.S. Creditworthiness: The United States dollar has long maintained the position of being the world’s primary reserve currency. With the growing U.S. debt, does it jeopardize this standing, potentially reducing the strength of the dollar or value of long-term government treasuries?
- U.S. Debt Dilemma: Currently, the federal government collects $5 trillion in revenue and spends around $7 trillion annually[3]. Can we cut spending when $4.3 trillion goes towards Social Security, Medicare, Medicaid, debt payments and mandatory spending? Can we increase revenue via taxes, cutting into taxpayer dollars and weakening economic growth?
- Global Economic Health: While the above points have elevated concern for U.S. focused investors, the economic health for most developed countries is even more concerning. While the U.S. stands out as the shiniest penny in the group, does this translate to short-term confidence but long-term concern for investing in general?
- Geopolitical Concerns: Considering the escalating conflicts in Ukraine, the Middle East and China, what type of impact will this have on volatility in the financial markets given the economic concerns listed above?
Let’s all take a breath. After rereading the items above, I began to reach for the Mylanta. In fact, I almost took out the details to lessen the shock factor. After further thought, I decided to include them to emphasize the importance of an appropriate allocation for meeting your financial goals and navigating these concerns.
Just because there are these growing fears that we hear minute by minute doesn’t mean there isn’t a solution. Quite simply, these concerns should be mitigated by addressing the following:
- What Is Your Time Horizon and Required Rate of Return?
As Bo wrote in his latest blog, market risk needs to be viewed in terms of time. By understanding your destination and where you are, this can help determine how fast you need to go. These key parts can establish an objective baseline for meeting your financial needs without taking undue risks.
- What Can You Stomach?
Let’s take the vehicle analogy a step further. If you can reach your destination on time by maintaining a speed of 35 MPH, would you be content at this speed? If you get the itch to get to the destination faster, is this because you feel behind or because you want to match the speed of the fastest car in the left lane?
Depending on your risk appetite, there could be a draw to match what the stock market earns to keep pace. To temper this, take an honest look back when the stock market was in a recession, and view the decrease in terms of your portfolio’s dollars to help determine how much additional risk you can comfortably take.
Once this sits, give us a call. We look forward to discussing your current strategy and balancing your investment needs with your wants, while preparing for what might come next.
[1] S&P 500® | S&P Dow Jones Indices
[2] The Consumer Price Index rose 3.0 percent from January 2024 to January 2025 : The Economics Daily: U.S. Bureau of Labor Statistics
[3] Guide to the Markets | J.P. Morgan Asset Management