Trump's policies are a wild card in the market. Taking the following portfolio adjustments may help smooth your investment journey.
Markets could be headed for a volatile, unsettling end to 2024. Stocks fell sharply after the Federal Reserve cut rates on Thursday but was muted about the prospect of further rate cuts in 2025. Bond markets were also hammered. The question now is: Will markets climb back up, and will the policies of a Donald Trump presidency help or hinder markets in 2025?
Many investors expect Trump 2.0 to be different. Trump's agenda for a second term is more ambitious than when he first took office in 2016. However, even if the president-elect follows the same strategy, UMB Bank's chief investment officer Eric Kelly said, "The conditions of the economy and the market are different than last time."
What is the outcome? Investors are grappling with unprecedented uncertainty in recent years. The S&P 500 has risen 23% this year, increasing the balances in 401(k) accounts, but the future direction of the market remains difficult to predict.
The good news is that you can prepare your portfolio. Most of the adjustments investors should consider now are more related to market performance than to who will occupy the Oval Office. You may make some adjustments based on how Trump's planned tariffs or deregulation affect certain industries, but most of the operations at year-end should be regular portfolio maintenance.
Market performance tends to be similar under Democratic and Republican control. According to (retirement researchers) data, from 1926 to 2023, the average annual return of the S&P 500 was 14.5% during Republican control of the White House and Congress, while during a unified Democratic government, the average annual return was 14.0%.
Ensure that your stock and bond portfolio remains aligned with your goals. A significant rise in stocks means your stock allocation may be higher than expected, especially after the S&P 500 rose 24% in 2023 without any adjustments.
Specifically, you may be overexposed in large tech stocks, which account for nearly one-third of the S&P 500. The so-called "Magnificent Seven" have driven the market up in recent years and may continue to play a role as artificial intelligence expands.
Therefore, maintain your positions—but adjust as needed. Perhaps your target allocation is 60% stocks, but it has now reached 65% or 70%. Consider selling some well-performing stocks and reinvesting the proceeds into less-favored areas of the market. Remember that if you sell appreciated securities in a taxable brokerage account, you will face capital gains taxes.
If your stock holdings are entirely large-cap growth stocks, consider buying some small-cap stocks. Lamar Villere, partner and portfolio manager at Villere & Co., stated that with increased mergers and regulatory easing under Trump, small-cap stocks could have a nice rebound.
You can also reinvest the proceeds into bonds. Although bonds have performed poorly recently after interest rate cuts (including a 0.25 percentage point cut on Wednesday), yields are now more attractive, providing additional income above expected inflation. The yield on 10-year Treasuries has rebounded to 4.5%, and long-term bond yields have also risen slightly.
A balanced portfolio is the best choice to cope with the volatility that many professionals expect to return. Aside from a brief downturn in August, investors enjoyed a very smooth year until Thursday. But volatility is normal, and as consumers and companies respond to new policies and other cross-factors in the economy, we may see more fluctuations.
If you have an asset allocation that makes you comfortable, you are less likely to panic and rush to cash at the first sign of turmoil.
Kelly from UMB said: "This could be the year when we truly need a lot of discipline."
Article reposted from: Jin Shi Data