By Elizabeth O'Brien
The market may be heading to a bumpy end in 2024 and it's causing some unease. Stocks sold off sharply after the Federal Reserve cut rates on Wednesday but gave a tepid outlook for additional cuts in 2025. Bonds also took a beating.
The question now: Will markets resume their climb, and will the policies of President-elect Donald Trump help or hamper things in 2025?
Many investors expect that Trump 2.0 will be different. Trump's agenda for his second term is more ambitious than it was for his first term in 2016. But even if the president-elect were to follow the same playbook, "the economy and the markets are in a different spot than last time," says Eric Kelley, chief investment officer at UMB Bank.
The upshot? Investors are grappling with more uncertainty than they've known in recent years. The S&P 500 index's 23% rise this year has plumped 401(k) balances, but where the market goes from here is anyone's guess.
The good news is you don't need a crystal ball to prepare your portfolio. Most of the moves investors should consider now have more to do with market performance and less to do with who will occupy the Oval Office. You might make some tweaks based on how Trump's planned tariffs or deregulation might affect certain sectors, but the bulk of your year-end moves should be regular portfolio maintenance.
The markets tend to perform similarly under Democrats and Republicans. From 1926 to 2023, the annual average return of the S&P 500 under a Republican sweep of the White House and Congress was 14.5%, while the annual return of the index under a unified Democratic government was 14.0%, according to Retirement Researcher.
Rather than plotting big moves based on tea leaves, make sure your mix of stocks and bonds is still aligned with your goals. Stocks' big run-up means you could have a higher equity allocation than you bargained for, especially if you didn't make any tweaks after the S&P 500's 24% gain in 2023.
Specifically, you might have too much in Big Tech stocks, which make up nearly a third of the S&P 500. The so-called Magnificent Seven have powered the market's gains for the past few years and may continue to do so as artificial intelligence continues to expand.
So keep your position -- but right-size it. Maybe your target allocation is 60% stocks, but you now have 65% or 70%. Consider selling some winners and plowing the proceeds into less-loved corners of the market. Keep in mind that if you sell an appreciated security in a taxable brokerage account, you will face capital-gains taxes.
If your equity position is entirely large-cap growth, consider buying some small-cap stocks. They could see a nice bounce with increased mergers and acquisitions and a regulatory easing under Trump, says Lamar Villere, partner and portfolio manager at Villere & Co.
You could also plow the proceeds into bonds. While bonds have struggled of late despite rate cuts -- including a quarter-percentage-point reduction Wednesday -- yields are more compelling now, offering a bit more income above expected inflation. The 10-year Treasury yield is back up to 4.5% and longer-term bonds yield a little more.
A balanced portfolio is your best bet for riding out the volatility that many pros expect will return. Aside from a brief August slump, investors enjoyed a very smooth year until Wednesday. But bumpiness is normal, and we'll probably see more of it going forward as consumers and companies deal with new policies and other crosscurrents in the economy.
If you have an asset allocation that you're comfortable with, you'll be much less likely to panic and rush into cash at the first sign of turbulence.
"This year could be the year when we really need a lot of discipline." UMB's Kelley says.
Write to elizabeth.obrien@barrons.com
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(END) Dow Jones Newswires
December 20, 2024 21:30 ET (02:30 GMT)
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