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Strategies
Sizzling returns well may continue, but our columnist suggests that it would be wise to prepare for the next storm.
Financial markets have been choppy since the November election, and for good reason. With the next presidential administration promising sharp policy changes on a broad range of economic issues, there is plenty to be nervous about.
The new proposals are dizzying. The president-elect says he wants to deport millions of immigrants; impose tariffs on all countries, especially China; slash taxes; expand the use of cryptocurrency; eliminate wind-powered electric generation; and increase production of fossil fuels.
It’s impossible to know which policies are fanciful, which will be carried out or what all the economic and market consequences might be. No wonder the markets are confused.
Still, if you need solace, most investors need only check their portfolios. If you have held stocks since the end of 2022, when the market picture improved radically, there’s a good chance that your portfolio has had a spectacular performance. All you really needed to do was hold a piece of the broad U.S. stock market in a cheap, diversified index fund. Bond returns have been mediocre, as the final annual numbers on the portfolio performance of ordinary investors reveal, but U.S. equities have paid off handsomely, with annual returns for the S&P 500 of roughly 25 percent, including dividends, for each of the last two calendar years.
While those gaudy returns are comforting — especially after the calamities of 2022, when inflation soared, interest rates rose and both stocks and bonds sank in value — they aren’t predictions. No one knows where will the stock, bond and commodity markets will end up when 2025 is over.
But history suggests a sobering lesson: Stocks and sectors go out of fashion. What worked over the last two years may not work in the next one. Periods of outsize returns are followed by market declines, sooner or later.
