Famous economist John Kenneth Galbraith once opined: “The only function of economic forecasting is to make astrology look respectable.”
This Taurus recently attended our local financial planning association’s conference and was very interested in what a panel of economists had to say.
With all the hubbub about the election, David Kelly of J.P. Morgan reminded us “presidential terms are short, investment time horizons are long.” Whether you popped champagne or Valium on Tuesday night, it is useful to remember while the president affects many things, the economy is something the leader can only influence, not control.
The most important changes on the horizon will develop in 2026 regarding income tax rates and estate tax exemptions, and there are many more players effecting change than the president. Sit down with your estate planning attorney or financial planner next year to get ahead of these potentially significant modifications.
Kelly also pointed out our current economy is in part from “consumers that can’t say no, and employers that can’t say yes.” The consumer is continuing to spend money, and, while wages have recently been increasing faster than inflation, this is not expected to continue. According to the Bureau of Labor Statistics, a declining workweek resulted in year-over-year hourly wage growth from September 2023 to September 2024 of less than 1%. Increasing late payments on auto loans and credit cards might necessitate a spending slow down. Unemployment is creeping up, and workers are facing a more difficult job market. If consumers begin to only spend money on what they need, the economy won’t continue on its current path.
Matthew McLennan of First Eagle expressed concern about the growing deficit, reminding us “government debt is a promise to print more future money to be paid back with taxes.” There seems to be a correlation between government debt and price levels, meaning there might not be room to lower interest rates as far as originally anticipated.
While economists might lack prescience with their forecasts, they still provide valuable insight into our planning. Here are some steps you should be taking right now.
The U.S. stock market represents 64% of the world’s stock market. You don’t need to have 36% of your investments in international stocks, but I suspect most of you own far more U.S. stocks than the world does. Europe seems to have a better handle on their budgets than the U.S. (thank you, Germany), so it is not unreasonable to have at least 20% of your investments exposed internationally. Diversification works whether you want it to or not. In the past few years, owning anything other than the biggest U.S. stocks dragged down portfolio returns. The stars will align for other areas to begin to outperform those expensive stocks, but you can’t predict when. Diversification means you give up maximizing gains (and losses) in return for somewhat more predictable results.
