Here’s an edited transcript of my recent conversation with our Chief Investment Officer, Bob Weisse, on our Wealthy Behavior podcast. We talk monthly what’s going on in the investment world that we think you need to know now. This month we looked back at how markets performed last year, shared our thoughts on the 2025 market outlooks we’ve read recently, and discussed what we expect from major asset classes going forward.

Recapping 2024

2024 was a good year, as was 2023. We’ve had back-to-back really strong years for investors. The MSCI USA (U.S. stocks) was up 24.58% in 2024. Developed international markets (MSCI World ex USA) up 4.7%, still positive, but certainly not 25%. Emerging markets did a little better, as the MSCI emerging markets index was up 7.5%.

The Bloomberg US Aggregate Index (bonds) was only up 1.25%. It was up more most of the year, but in the 4th quarter interest rates rose and bond prices declined.

Wrapping up with global equities, the MSCI ACWI (all country world index), which is 60+% plus U.S. and has developed international and emerging markets was up 17.5%. That’s the index we look at most since we think people should be global stock market investors.

2025 Market Outlooks

The outlooks are coming out fast and furious. We’ve read them and have our own process.

Most published academic research shows that you have a much higher chance of an accurate outlook if you use valuations and a time horizon of around 10 years. When you go shorter term like 1 year, or to use an extreme like one day, you have no idea. You might as well be flipping coins. It’s nonsense trying to put 1 year price targets on indices.

Something we looked at recently is what happens when the S&P 500 comes off 2 consecutive years of 20+% returns. The last time the S&P it happened was 1996. After that we had 33% in ’97, 29% in ’98,’ 99 was a good year, and we know what happened in 2000. And then the time prior to that was the mid-80’s. ’85 and ’86 were up more than 20%, which leads you to 1987 and Black Monday where the Dow went down 22.6% in a day. So, if you want an outlook, this year will probably be somewhere between the mid 90’s and a Black Monday drop. Not exactly a bold outlook, but that’s because when we look at historical averages, the market doesn’t usually hit near the average in a calendar year. The averages are built out by a wide range of outcomes. You don’t get 7-10% every year. You get the plus 20’s and minus 20’s and average out in the middle. But when you look at forecasts, people frequently pick that 7, 8, 9% annualized return, which is an infrequent outcome.

I would add that when you have these big runs like we’ve had, you typically do get more outsized outcomes. So, I think it’s likely that we’ll be in one of two situations. A really strong year and things remain good, or a big correction. Our investment consultant had a theme last year, Prepare not Predict. And that’s prepare for volatility, but don’t predict it because it’s a fool’s errand, but it will come at some point so have the right amount of risk in your portfolio. Tthat line of thinking remains.

Our Outlook

U.S. Stocks

For U.S. stocks we have a ten-year annualized return expectation of 5.6%, a low return and lower than what we’ve been seeing. The main reason is valuations. Part of the U.S. market’s return over the last 15 years has come from multiple expansion, meaning the market’s gotten more and more expensive and that’s not a sustainable path for delivering returns to investors.

You can’t just indefinitely get more expensive. Typically, valuations are mean reverting, so you get expensive, then you get cheap. And now we’re on the higher end of historic valuations. So, we have 5.6% for U.S. stocks.

U.S. Bonds

US bonds ten-year expected return is 4.7%, so the spread between stocks and bonds is .9% in our outlook. For that bond outlook, we’re basically just taking the 10 year yield which historically has been a fairly accurate way of forecasting bond returns.

Stocks vs. Bonds

With that narrow gap between stocks and bonds, the question is how much bonds should I own and should I buy more given that they come with less risk. Remember that this is the 10 year outlook and before you pile into bonds there is momentum in markets. Winners keep winning, or tend to keep winning. And what you see when markets are expensive is that they’re typically expensive for a good reason. It’s because things are good. Risks are not that high. An asset class being expensive can persist for a while, and that’s what we saw in the mid-90’s. The market looked expensive and hedge funds went out of business shorting U.S. stocks in ’97-’98. They were three years early. This market could keep moving for a while.

That’s one of the reasons why when we have an outlook we move in measured ways, not shifting 10-20% of the portfolio because while the 10 year picture might show something, current trends could persist for a while.

International Stocks

International developed 10 year return expectations are 7.3% and for the emerging markets it’s 8.4%.

The case for investing internationally based on valuations has been there for a while. It hasn’t delivered compared to the U.S. (although on a relative basis it’s becoming more attractive), because U.S. stocks have gotten more expensive through multiple expansion and have seen strong earnings growth. We’ve seen that in the big tech names, but it’s more than technology. The financial sector is strong in the U.S. If you compare the U.S. to Europe, European financial companies like Credit Suisse and Deutsche Bank haven’t been good places to invest, whereas U.S. banks have done well. The U.S. economy has been strong, its companies have done well, and labor productivity has increased at a healthy rate.

Something else that has hurt international markets is currency.

When you invest in foreign stocks, let’s use BMW as an example, you take your $10,000, exchange it to Euros, and then you buy your shares and they trade on the German DAX in Euros. And every day if you’re looking at that individual stock on your Schwab statement the price is getting converted back to dollars. So, even if that stock is flat, it’s moving based on currency moves. If the euro weakens relative to the dollar, then your position goes down in dollars. There’s very clear currency exposure when you invest in foreign markets, and the U.S. dollar has been strong relative to a basket of foreign currencies for the last 15 years, but we wouldn’t expect the US dollar to win indefinitely because that not sustainable.

Inflation Protection

Some policies being discussed could have an inflationary impact, which would cause yields to rise and bond prices to drop. Inflation has gradually come down but not all the way to the Fed’s 2% target and that last drop is proving to be harder to get than they expected. We could see higher yields, so we’re likely to target this risk by increasing inflation protection in portfolios. We have a third pillar of our portfolio besides stocks and bonds, and that’s real assets, and it provides the inflation protection that bonds don’t and stocks don’t always.

Be sure to Listen to the Full Episode here, or wherever you get your podcasts.

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