Economic & Market Update
Recently, I was asked to describe my overall outlook, and I said I was ‘an optimist despite my better judgement’. That’s said a little tongue-in-cheek because I am an optimist at heart, but I think the sentiment is fair.
Clients who have worked with us for many years will probably recall a time that I’ve said some version of, “When the markets are bad, my job is to remind clients that they recover and have far more good years than bad. When markets are good, my job is to remind clients that market downturns will come again. We just don’t know when, how deep the trough will be, and what the catalyst for the downturn will be.”
We are entering 2025 with two positive market years behind us. So far, the markets are continuing their trend. But there are always questions about what’s next. The most relevant questions come back to corporate profitability (because that is the key driver for price appreciation) and interest rates (which are governed by the Fed’s dual mandate to keep inflation within target and to keep unemployment low). There are many more nuanced factors in the scope of investing, but those are two cornerstones.
The optimist in me says that our economy has been very resilient in the last few years, corporate earnings have been strong, unemployment is near historic lows, and inflation has come down enough to allow interest rates to decline recently. The U.S. stock market is in a strong position relative to many other markets globally.
The realist in me says eventually we will have another downturn, and current valuations are dependent upon continued growth. All eyes are on earnings reports and policy. So, what to do? The best action is to take inventory now (while markets are good) and reassess all the planning fundamentals that we base our investment recommendations upon. If any of the fundamentals have shifted, such as: core risk tolerance, life stage or major event, expenses, or other significant shifts, let’s talk early and often about how your overall plan may need to shift too!
If none of those major shifts have occurred, let’s review the stress tests we have placed within your plan. Common ones include reduced assumed growth rates, some level of long-term care in later years, or adding a spending buffer to known expenses. Often, the process of revisiting stress tests that are already built into the planning work is a comforting reminder that your plan isn't based on a best-case scenario.
Our process is designed to not be overly optimistic or pessimistic about future projections, and when in doubt to err on the side of conservative estimates. Human nature is tuned to feel a similar loss more heavily than a similar gain, so we would rather have unexpectedly positive surprises than negative ones.
If adjustments are necessary after a review, let’s make them! Not as a reaction to the market, but because we have done the work to understand the changes that have occurred in your lives.