Ep. #129 - Election Aftermath: What to Expect from Investments in 2025

There’s a common question asked pre and post-election; “How will this affect investments?” It’s also that time of the year when we naturally reflect back on how the market’s performed this past year and what that may mean for next year. Put those two things together and “voila!” – you have a podcast! Tune in as Adam and Ben provide some historical context for post-election market movements and share some commentary for expectations going forward. Spoiler alert: investing for the long-term and staying diversified are highly recommended in this podcast.

Chapters:

• 00:00 Introduction to AB Conversations 
• 00:42 Reflecting on the Election and Market Reactions 
• 02:08 Historical Market Trends Post-Election 
• 03:47 Investment Strategies Moving Forward 
• 07:16 Market Outlook for 2025 
• 15:05 Advice for Conservative Investors 
• 18:55 Closing Thoughts and Holiday Wishes 
• 19:30 Disclaimer and Final Notes

Listen on Spotify: 

Full Transcript:

[00:00:00] Ben Haas: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts…. now.

Adam Werner: Happy holidays, Ben. 

[00:00:30] Ben Haas: Same to you my friend . We are knocking on the door at the end of the year. 

[00:00:35] Adam Werner: It just feels very surreal. But yeah, here we are. 

[00:00:41] Ben Haas: All good things. 

[00:00:42] Adam Werner: The election is behind us. I feel no matter where you stand politically, the fact that it is behind us and just being in Pennsylvania, not seeing political ads being a bombarded the text that that feels good to be behind us.

We've had a lot of conversations with clients, not only just around the election before and now after what does this mean, but then really bigger picture now that there is a change of administration, what, if anything, should we be doing differently with our investments now, kind of knowing that there's change? And we all kind of know that the markets don't typically like change.

Any uncertainty is typically a spark for volatility, but we'll kind of talk through maybe some of the historical context around the elections or just elections in general. And then we can kind of talk about our outlook, kind of moving forward for 2025. 

[00:01:38] Ben Haas: Yeah, and I think that's so important because as much as, I would venture to guess anyone listening may be politically charged in one way or the other, it's really important for us to kind of zoom out from all of that, which is why I think even before the election was done, I just did a little research and I know I shared that with you in different spots, just to feel like we were prepared that whatever the response was going to be from a client, that we would be able to give some context on.

Well, what typically happens right after the election? So I didn't go too far back, you know, just going back to 2000. So more recent history will say, the last six elections, the immediate move in the S&P 500 from election day to the end of the year has been on average, like 7%. And if you think about that, you know, if we look at the yearlong average return of the S&P 500 being like 8% to have that big of a move in what is what less than two months.

That says a lot for volatility. And this year has really been no different. I'm not going to nail the number on the head as we stand today, December the 12th, but I think the S&P is maybe up about 5%. So, whether you were rooting for blue or red, when Biden won, it went up pretty sharply 13.5%. When Trump won the first time 4.7%. So I think maybe to you, the first point that you made on this podcast, just getting on the other end of things is getting the market now it's room to run in whatever direction it's going to run. 

[00:03:10] Adam Werner: Think of that just on your, on your own terms as an investor.

It's a variable. The election and the outcome is a variable. And until you have maybe a more definitive answer on what the rules of the game may look like now moving forward. It's hard to feel confident one way or the other, especially how polarized we are. You know, you look at all the polling information, everything seems so evenly split.

It was hard to feel confident to say, I'm going to make an investment strategy change based on a what if? That's a gamble at that point and they could be educated gambles, but that's certainly not our approach. So yes, I think just getting the election behind us, no matter who won was an important step kind of in just letting this not market now move forward 

[00:03:56] Ben Haas: Yeah, and certainly we would always caution anybody from making a gut reaction to these things? And that may be supported by just a little more data when you look at how is the market moved immediately after the election but then you look at the first year of a presidential term.

And we can talk about the specifics here of other circumstances, but after Biden won, if you were kind of on the red side and saying, well, this can't be good for the markets. The S&P went up close to 27% percent in 2021. We'll flip it the other way. If you were on the blue side, not looking for Trump in 2016 and said, well, Trump's a wild card. I got to get out of here. He's never been in politics. You would have missed out on close to 22% in 2017. Okay. Flip it back again. When Obama wins a second term in 2012. You know, “Hey, this can't be good for the markets.” It was up 32% in 2013. 

You can't just play one side or the other - blue versus red. We need to stay in the markets. We need to be there to be a part of long-term returns. And at least in recent history, we've had some very strong returns in the first year of a presidential four-year cycle. 

[00:05:04] Adam Werner: Yeah. And I think it's JP Morgan, who had some research done just tracking, depending how, how somebody feels politically, and the party that that controls the administration and controls the white house, right?

It's a complete dichotomy. If there's a democratic leadership, then republicans generally have a less favorable outlook on investments. And if there's a republican control, then there's a less favorable outlook if you are democratic 

[00:05:31] Ben Haas: Yeah.

[00:05:33] Adam Werner: And that all makes complete sense. But even some of that research that you shared the point is the market usually goes higher over time, the market goes higher.

So we just want, I mean, it's part of our fundamental approach. Just stay out of your own way. Try not to let your bias cloud your vision, knowing that it's time in the market and diversification should be your friend over time. You don't want to get yourself twisted in knots just based on how you feel politically because the market is not the economy.

The economy is not the market and politics certainly have influence, but are only one of many, many variables that go into it. 

[00:06:13] Ben Haas: Yeah. And even longer-term research shows that, can give Hartford some, you know, some of this credit. But if you break out every four years. You know, first year of a presidential cycle, 6.7% on average return. Second year, very muted, closer to 3%, third year, 13%, fourth year, closer to 7%. So maybe the back end of a presidential terms, I guess there's reasons for this, but to your point, that's always positive, right? If we just zoom out, the party does not matter. If we just zoom out there, I'm going to throw another one out there because I'm just on a roll with these stats.

We've only had three times since Eisenhower, we've only had three presidents in their four-year term where the S&P was negative. If we look at their first day in office to their last, only three times in 18 cycles, right? So again, it doesn't matter blue or red. If we zoom out to a longer period of time, the market always goes up. 

So case in point, you know, we're happy this election's behind us. We can't know exactly where this is going to go, of course. And maybe we can just move this into some, some more commentary on what we expect for next year. But the moral of the story has to be stay diversified, stay in the market.

Whether you're feeling really good or really bad about where we are as it stands today, markets work over time and we can't get in our own way with that. Right. 

[00:07:35] Adam Werner: Well, and maybe just to drive home that point, and you can fill in the exact details, but because I believe those, those three occurrences where it was negative over an entire presidential term, those were some pretty extenuating economic circumstances.

Yeah, I think the first one is, is that the late, late 70s, early 80s, essentially we had this hyperinflation, and that needed to be dealt with, and that led to multiple recessions. Maybe there was some political aspect to that, but that that was mainly economic. Then It was, well, it was both of Bush's terms.

[00:08:12] Ben Haas: Well, Bush Junior twice. Yeah, 

[00:08:14] Adam Werner: The tech bubble bursting, then it was 911, and then the great financial crisis at the very tail end, you know, 2007 and 2008. So yeah, that certainly there were political aspects to that, but yeah, a lot of at least that data really does show those are economic drivers more so than they were just who was in political power at that time.

[00:08:38] Ben Haas: So with all of that kind of like historical context around some of these elections and moving into the first year of a presidency. I know this isn't back to back terms for Trump. We do have a little bit of a playbook, I guess, from the last four year period that we had. You're so very good at about staying plugged into like commentary, not only from investment partners, but news outlets.

How does that historical context kind of lead into some of the things you're reading about or thinking about for 2025? 

[00:09:05] Adam Werner: Well, I think it's a good point that you just made. It's not a back to back, you know, terms for Trump, but we do have, and I think that's why the market maybe has responded the way it has over the last, I don't know, two, two months here at this point, or month, month at this point.

But over the last, six weeks or so, a lot of what we're seeing that that very quick reaction after the election was with, at least on the stock side, was with the thought that there's going to be more pro growth, pro business, deregulation, like that type of an approach should bode well for companies, should bode well for many stocks. The bond side of the market was not so enthusiastic after the election. And part of that can be back to, you know, policy rhetoric. If there's going to be tariffs, that could impact inflation, that could have economic impact.

Right. And the bond market is just more calculated, I will say, than the stock market in general. It's just that they function very differently. But even since then, stocks have kind of moderated to some degree, and even bond yields have started to decrease a little bit, which is a little bit of a tailwind to bonds.

So, it was interesting to me to just kind of see those very quick reactions on either side of the market, and they were kind of taking very different approaches. Which in my mind is, is a good thing, because that all comes back to diversification. We've been telling a lot of people recently in thinking forward to 2025, 2023 was a great year for stocks.

And I was not expecting 2024 to be more of the same. I would have said back in January, temper your expectations. 2022 was really bad across the board. 2023 was a good rebound, but oftentimes the market needs to take a breather before it can kind of get back on track and look back at the fundamentals and continue higher.

And here we are, the S and P 500 has had back to back 20 plus percent return years. And while that's great, a lot of the question I keep getting from, from clients is, Okay, but when's that going to stop? It needs to at some point. But the environment right now is still set up pretty pretty nicely for stock returns going forward, but I would not anticipate again, but market will probably make me look like a fool. I would not anticipate another extremely strong year, but we still have expectations of at least a positive year in the stock market.

I'll be it with probably more volatility than we certainly saw this year. This year with all of the initial, you know, AI and technology and growth and all of that has kind of driven the market for the most part. And you think of some of the issues that the market has kind of overlooked or just been able to work through.

The election uncertainty in and of itself is one thing to get beyond and we've kind of talked about that. Geopolitics and wars and tension, I don't see that going away. But we had a lot of that this year and the market has continued higher. Stock valuations are incredibly high, historically, and that can end up being a hurdle moving forward 2025 and beyond too. So there, there's a couple things that we're watching, but for the most part, we feel like the stock and the bond market are in a pretty good spot to at least give us average returns, which we would be perfectly fine with at this point.

[00:12:37] Ben Haas: Yeah. So do you, in your opinion, then as, as we speak to a broad audience here, clearly we're not speaking to any specific client and every specific client we should have a more direct conversation with. But broadly speaking, then do you see, do you see moving into a new calendar year, necessitating some sort of change? Is there an anticipation of if things may get more volatile? Do we need to lean one way or the other? If we expect positive returns, is it just all right, we feel versified already so set it and forget it like what is it to you? 

[00:13:06] Adam Werner: Yeah, I go back to what I said earlier. We're not in the game of making big, bold bets in any direction. So clearly, yeah, we believe in diversification. And at this point, because if we're wrong and stocks continue to climb, then we're going to be happy with diversification and kind of having your bets hedged a little bit.

Having some stock, having some bond. If stocks continue to climb, you're going to be happy. If there is some economic weakness, if inflation does come back and now the stock market falters and the economy maybe isn't doing so hot at some point. Bonds should actually do their job as a diversifier, that they did not play in 2022 because that was an interesting environment where there was high inflation. There was some economic weakness and because of that high inflation interest rates needed to skyrocket to be able to start to bring that inflation down.

Well, here we are on the other side of that, where if the interest rate environment is still elevated historically to where we were the last decade plus, where we were essentially at zero, zero percent interest rates for an extended period of time. So our bonds should have some shock absorber built into them now, because you're getting paid to own them where again, over the last few years, you weren't really making a whole lot on your bonds, let alone, you know, cash, CDs, savings at the bank, there is a way to at least try to get some growth with minimal risk. But in that environment, if stocks are starting to falter, bonds should at least hold their value. If not even increase, if there is major concern economically, and then there could be, a flight to quality.

Where maybe more of the tactical investors who are making very short term decisions may leave stocks for the safety of bonds or the safety of cash, and that will help your existing bonds that you own. 

[00:15:05] Ben Haas: So then what would you say, knowing that we've had a couple conversations here over the last couple weeks, to those investors that maybe already have a conservative approach, have seen great returns, but are certainly in that withdrawal phase of life where they may listen to all of this and say, yeah, but you know, I don't need to be too risk on like, how do I hedge my bets?

[00:15:26] Adam Werner: Yeah, yeah. For those that are not taking withdrawals or not relying on investments for income, stay diversified. Our approach would be, we rebalanced for our clients back in August. We will review that again because we have had a little bit of a run here, but the bonds have at least held their own.

So the drift right how much of my target on stocks where am I actually at? Am I too far out of whack? That's something that we would review. Rebalancing is a prudent thing to do once or twice a year as the market dictates. So for people that are not taking withdrawals, that would be at least at a bare minimum, that's something that we will keep an eye on moving forward.

But, for people that either need to take RMDs next year or just relying on their investments to help supplement their income in retirement, it wouldn't necessarily to be to make major changes to our investment approach. It would really come back to our bucketing, the three bucket theory.

The prudent thing may be, Hey, let's, let's just generate a year's worth of your withdrawal or essentially next year's RMD, let's sell some of our winners, essentially you're, you're acting, that's acting as a rebalance, but you're pulling out a year's worth of your cashflow need, then no matter what happens in 2025, good, bad, or indifferent, you have at least the next 12 months of your income need safe.

You're buying yourself time that, yeah, if we do see some economic weakness, which we would, I shouldn't say we expect economic weakness, but I expect volatility in the stock market. And even just since the election, the VIX, which is a measure of implied volatility in the future, is incredibly low right now, and it was incredibly low for a long time leading up to COVID too.

But often times that pendulum swings too far in both directions. So I would expect just the uncertainty of policy next year and what may come. That there will be bits and pieces of volatility throughout the year that may be opportunities, for those that maybe are adding to accounts or are saving into their investments.

But for those on that withdrawal side, the prudent thing is to at least have, in our mind, our goal is to have at least 12 months worth of that need in cash so that no matter what happens, you have access to what you need and you buy yourself at least the next 12 months to kind of see how things play out.

[00:17:52] Ben Haas: Yeah, nothing would surprise me at this point. I think that's the beauty of having to separate ourselves from the advice that we give, you know, kind of prepare people on both sides. But what I heard was stay diversified, generate some cash through essentially a rebalance.

You know, if you're in that phase of life, insulate yourself, because here's the whole point, I guess, that I want to take away, next year is just one year. Like any other, just one year. And if we're kind of prepped for the potential for things to be volatile, and then we hopefully psychologically by ourselves some time to wait that out, just like we did in 2022. Congratulations to everybody that hung in there. 

[00:18:26] Adam Werner: Yeah, it's the phrase, you know, we're going to hope for the best, but prepare for the worst in that scenario. We're going to stay diversified, but if you're taking withdrawals, let's at least prepare that if things aren't as rosy as they have been these last two years, you're still prepared to continue to meet your needs in the future. 

[00:18:46] Ben Haas: But let's celebrate another positive year in the market, you know certainly makes things a little bit easier around here to focus on financial planning like we want to. Appreciate your feedback here. Anything else you kind of want to throw out there as we close the door on 2024? 

[00:19:03] Adam Werner: I don't think so 

[00:19:05] Ben Haas: Well, wishing you and everybody out there that's going to listen to this or plug in in any way, shape, or form, watch it, listen, whatever.

Happy holidays, happy new year. Can't believe we're saying this, but, looking forward to health and happiness in 2025. 

[00:19:19] Adam Werner: Agreed. See you then. 

[00:19:21] Ben Haas: Thanks pal. 

[00:19:23] Adam Werner: Bye.

[00:19:24] Ben Haas: Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening. 

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Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.