February 1, 2025
Happy February everyone! Where does the time go? As we’ve turned the page from 2024 and are “frigidly” underway in 2025, I’m sure all of you are relieved to be done with the “politicking” and constant barrage of TV commercials that dominated our screens for months on end. I know I sure am!
As we look back on the closed chapter of 2024, I had written about a few key topics last January – the Federal Reserve and their pursuit of aggressively lowering interest rates as well as the potential negative behavioral impact that the election would have on investors. I wanted everyone to Fight Through the Noise that all the uncertainty would bring. If that’s of interest to re-read, the link can be found HERE.
The market ended 2024 at historic all-time highs, interest rates were cut (although not as aggressively as the original plan entailed), and we have a new administration that just entered office.
As you all know, I prefer to remain as politically neutral as I can, but my themes/talking points this year do relate to some political outcomes – therefore, I will do my best to stick to the facts of the situation and the impact that it can have on all of us going forward. I’m not here to say what is right/wrong, only what “is”.
My theme of 2025 – control what you can control.
With a new administration in the mix, there is a lot that remains to be seen regarding policy implementation. Given that the Republicans hold majority in the House, Senate and Oval Office, I would expect certain things to move quicker than normal.
Tariffs
To me, the biggest x-factor of the year will be how the implementation of the tariff agenda will play out. At the time of me writing this, we’ve already seen tariffs be slapped on Columbia for not accepting the plane of migrants being returned south. Those same discussions (threats?) have been placed at the feet of Canada and Mexico, as well.
Tariffs have been a part of U.S. trade policy for some time now, but a widespread increase with numerous trade partners could have varying impacts on our U.S. economy.
Personally, I think there is a larger agenda at play. Again, I’m not saying it’s right or wrong, but what I see is posturing by Trump to attempt to achieve other political agendas through the threat of tariffs, specifically around border protection and NATO agreements.
Canada knows and has admitted they aren’t paying their fair share toward NATO, yet Trudeau said they wouldn’t be able to pay their fair share until 2032. Clearly, that wasn’t an acceptable response in the eyes of our new administration, and they called the bluff. Also, the border security issue that is at the forefront of the Trump campaign is another key element to the tariff threat becoming a reality: lower tariffs for a more committed border security plan of migrants coming through Canadian borders into the U.S.
As a Canadian, I know a lot of people north of the border are extremely nervous to see how this plays out. The tax rates in Canada are much higher than the US, and Trump knows it. 25% added tariffs on Canadian products, when over 65% of Canadian exports go to the U.S., would severely impact the profits of many Canadian businesses to the point of potential relocation. That possibility could be damaging for the Canadian economy. This led to the resignation of Trudeau – a loss of confidence that he can help navigate this relationship and a solution going forward.
If Trump gets what he wants on the borders and with NATO, perhaps the tariff discussions will end up being overblown. Like the rest of my commentary, we’ll have to see how this plays out.
Tax Cuts and Jobs Act (TCJA)
Our team has been reminding all our clients about the sunset of the TCJA (Tax Cuts and Jobs Act) that expires on December 31, 2025. As it stands today, the tax code is changing starting on January 1, 2026, where anyone who makes over ~$18k/year of income (most people) will see a tax increase. The administration has been pretty vocal during the campaign about trying to extend the TCJA into future years.
With congressional majority held for Republicans, I would imagine this will be extended at some point this year. Political issues aside, do I think this will have a short-term benefit for Americans? I do – generally speaking, more after-tax dollars for Americans will stimulate economic growth.
With that said, we’re back to the x-factor: generally, tariffs are contractionary on economic expansion. The million-dollar question is this: will the TCJA extension, combined with reduced government spending, stimulate enough economic growth to offset the short-term negative impact of tariffs. The Republicans in office are certainly optimistic about it – again, we’ll have to see how it plays out.
It’s worth noting that with our national debt continuing to climb, whether the TCJA gets extended or not, eventually our massive “tax bill” is going to come due. There’s an argument that we as a country are kicking the can down the road of having to deal with this later. Eventually, I see tax rates having to climb in order to accommodate the interest on the debt and other spending agendas. Economic growth will always help combat that, but we have a lot of debt in this country, as well. (I promised no political conjecture, so I’ll end here!)
Based on all the speculation, the Federal Reserve is holding rates at the existing level, ultimately to feel out these changes and the impact they will have on inflation.
What Can I Do?
That’s why my message is “control what you can control.” If you’ve read this far, everything I’ve shared is all educated guesses at this point. With that said, we’re going to get clarity on many of these topics as the year plays out.
Political opinions aside, I feel like the mainstream news media always paints a “fear-based” picture. That makes people nervous.
Here is what we can control:
1. We know the tax code for 2025:
We have the same opportunities this year as we did in 2024. Under the existing TCJA sunset assumption, those strategies were going to become significantly less attractive in 2026. I project that there will be more runway of opportunity for tax planning that will extend beyond this year, which is good news for all of you.
- We can explore withdrawing more in the earlier years of your plan (pre-RMD age) from the less attractive pre-tax accounts at lower tax rates to save on future forced distributions at higher rates.
- We can look at extending Roth Conversion strategies beyond this year to save even more long-term for yourselves and/or your families.
2. We can choose our risk score:
Everyone should agree with the principle that more risk equals more return over time. The concern for many retirees is how much time it takes to reap the benefits of that approach.
- All our clients have different risk scores. Some are very risk averse, and others are risk takers. There is no right/wrong strategy for your custom retirement plan
- We revisit this with you on a regular basis to ensure your comfort remains. It’s easy to have comfort when the market is doing well – it’s imperative that you understand your risk score for when the market isn’t performing well. (If you feel like you are unsure about this, reach out to our team so we can discuss it with you personally.)
3. We can insulate our retirement income from large market swings:
While the short-term often brings unexpected outcomes, the five-to-ten-year market assumption remains positive. This brings an important reminder about our philosophy of “bucketing” your assets into different time horizons:
Our newer clients will be a lot more familiar with this concept than our more tenured clients, but we think of your assets in different time horizon buckets:
- Money I need “Now” (no risk to low risk)
- Income you are going to need consistently and immediately. These dollars shouldn’t be affected by market movements.
- Money I will need “Soon” (low to medium risk)
- You don’t need to access these funds within the next 1-5 years. The market gain or loss on these funds won’t be at the same rate as the movement of the market itself. Additionally, we may have buffers and/or hedges on these investments to minimize short-term losses.
- Money I don’t need until “Later” (medium to high risk)
- You may never utilize these funds for income in your retirement plan. Therefore, we can afford to withstand some short-term market volatility for the sake of long-term wealth building.
- Money I will “Never” use (no risk or high risk)
- Relates to specific estate planning strategies
*Risk goes from up proportionately from money you need to live on immediately to money that’s earmarked for the future.
If we play out the negative 2025 scenario of a poor U.S. economy and inflation comes roaring back, we may see some losses in our “later” and “never” buckets. Your plan should be structured so you don’t need to rely on those funds for your retirement income. This allows you the luxury of maintaining a long-term investor mindset and not make the emotional mistake so many retail investors do – selling off portfolio investments after every negative news article or Trump press conference (ha-ha!).
4. We can choose our asset allocation:
You entrust us with this responsibility, but it’s still important you are as involved as you want to be in understanding this philosophy. I love the quote, “true diversification means never being 100% satisfied with your entire portfolio at the same time.” You want assets that aren’t entirely correlated to one another – this has a trickle down from your risk score and figuring out which asset classes or financial tools fall into your now, soon & later buckets.
Two things that we have our eye on this year:
Exploring Private Equity & Private Credit Opportunities
(*must have accredited investor status)
Over 85% of companies in the United States that earn $100M a year or more of revenue are private (non-publicly traded companies). This has created a large opportunity for diversified returns in that space, which can help drive stronger performance without necessarily having to significantly raise your risk score. There are a lot of nuances and details that are critically important to know about before investing in this space, so we are going to start having this discussion with clients where we think there may be a fit for this strategy (technically and behaviorally). You are always welcome to reach out to us about this if you want to learn more.
International Markets
Many people associate non-US markets with unpredictability and underperformance. Recent research illustrates that if we remove Nvidia from the S&P 500 returns since 2022, European markets have actually outperformed U.S. markets. It’s fascinating when looking under the hood, especially when following the Israel conflict and Russia/Ukraine war.
These are items our team is monitoring and adjusting as needed based on each individual risk profile.
In Summary
History tells us that the first year of a new presidential cycle is often a good one for market returns. Given all the factors at play, I am cautiously optimistic about 2025 market outcomes, but that will come with a lot of volatility. As I sit here and ponder that very sentence, when do people ever say there isn’t going to be volatility? That’s why it’s the stock market!
If we can control what’s in our control – our financial plan, our investment and tax strategies, and our mindset, I don’t have a lot of concern for all the “mess” that may come from politics. Certainly, politics will influence markets maybe now more than ever before, but I’m confident in our forward-looking planning with each of you and the methodologies we practice together.
If any of the “control” items are outside your comfort zone, lean on our team to help you navigate through those challenges. We take great care and pride to ensure that not only is the money math for each plan correct, but that you feel mentally prepared for any future outcome that presents itself – good or bad.
Here’s to a confident, reassuring and healthy 2025. My team and I are grateful for all the partnerships we have with you and look forward to serving you this year.
Best,
Aaron
Read your information and comments today. I don’t understand everything, but I thought
that the information was current, accurate and non-partisan. Good stuff!