Check out our latest episode of Friends Talk Financial Planning, where Bridget and John dive into their predictions for 2024. They discuss what's in store for the stock market, interest rates, I Bond rates, and taxes, providing valuable insights into what the future might hold for your financial planning. Join the conversation as they explore how historical trends can impact the stock market, the potential trajectory of interest rates, and the relationship between inflation and I Bond rates. Plus, get a sneak peek into the upcoming changes in tax laws. Don't miss this insightful and informative discussion with Bridget and John, two experienced fee-only financial planners. Subscribe to our channel for more valuable content on financial planning and stay ahead of the game in managing your finances.
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TRANSCRIPT:
Bridget: What's going to happen in 2024? Today we're going to talk about what's going to happen in the stock market, what's going to happen in interest rates, what's going to happen with I bond rates, and what we think will happen with taxes. Join us for Friends Talk Financial Planning. Hi, I'm Bridget Sullivan Mermel, and I own a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I own fee-only financial planning practice in Middleton, Wisconsin. And before we get into our predictions for 2024, I want to remind you to hit that subscribe button. Subscribing helps others find this content on YouTube, and I'm excited to learn all the things that we know about 2024, Bridget. This should be fun.
Bridget: Okay, first, let's talk about the story behind the stock market with predictions. John, talk about the story.
John: Yeah, the story behind the stock market. It's funny, whenever I talk with people and they say, “What do you think the market is going to do?” What I usually say is, “Well, I think there's about a 75% chance that we see the market go up next year. Probably somewhere in there, we'll see about a 10% decline, maybe middle of the year or so.” And it's got nothing to do with what the economy is doing or the presidential election or anything else. The reason for that is because that's what always happens. On average, the market goes up about three out of four years, and usually we have around a 10% decline on average. And so, you just think, historically speaking, that's what goes on. So that's my story about the market.
Bridget: So you're saying that from beginning of the year to the end of the year, 75% of the time, it goes up. But at some point, during the year, you'll have a one- or two- or three- or nine-month blip where it goes down. So beginning to end it’s down 10% or 15%.
John: Exactly. And the story will be about some new world turmoil. One of the wars and it's getting worse, or the interest rates or the president. And here's the story. The market's down 10% because fill in the blank. Apocalypse du jour I call it. And sometimes that's right. Hey, that's really affecting it. But it's also the idea that this happens all the time. On average, the market goes down about 10% sometime during the year.
And when you think about it from that perspective, you go, “Oh, as normal, the market went down.” And yes, it was because of this conflict or that thing or this factor. But it's not like, “Oh, this new thing came up. We've never seen this before. The market's down. What’re we going to do?” No, the market goes down about 10% every year at some point in time, but it ends the year up three out of four years, historically speaking.
Bridget: Yeah. And the stats I've seen say that the market typically, regardless of who gets elected, maybe goes up not as much during election year, or maybe not as much as usual.
John: Yeah. And those are the things. Well, the other thing about the stock market prediction. I love Warren Buffett's view on things. He said, “I don't know anything about what's going to happen next year, but I know a lot about what's going to happen in the next 10 and 20 years.” So what happens this year doesn't make a whole lot of difference if you have a long term vision on things. When you're invested in stocks, that money shouldn't be to buy your house next year. That should be 10-year, 20-year, 30-year money. The long-term things.
Bridget: The other thing I like to think about is that the market does not like uncertainty. So anytime that things seem uncertain, what's going to happen with COVID, then the market's going to say, “Oh, I don't like uncertainty. I'm going to react.” But then the market seems to get over it. Once things become certain, then it's okay.
John: When you know that and you see that we've got this uncertainty and whatever it is, the political elections fill in the blank, and then the market kind of goes like this, it shouldn't be like, “Oh, my gosh, the market's going like that.” It should be, “Oh, yeah, that's what happens.”
Bridget: Right. Okay, so next, let's talk interest rates. All right. I think what's interesting these days is that the Fed really tries to telegraph what they're going to do. And again, I think that they're trying to tell the markets, give them some certainty by saying, “This is what we want to do.” And so, when we go to conferences, the people from the Fed, et cetera, will come and tell us, “This is what we're going to do,” so that we tell people and our viewers. And so, what I've heard is that they might start reducing interest rates, if the economic factors indicate it, sometime between March and May. So that's what I predict; what they say they're going to do, they will do.
John: I think it's a really interesting point also, when you talk about, well, everybody expects this, whatever this is. And in this case, when the Fed says, “Hey, here's what we're going to do,” and then they do what they said they're going to do, there's not a whole lot of surprises. But then sometimes people say, “Well, jeez, everybody knew that inflation was going to be a thing. Everybody knew they were going to raise rates. Why didn't you react to this or why didn't somebody get out in front of this?”
And when you think about what that means, if everybody knows what's going to happen, then where are the actions to take? It's easy for me to think about it in terms of an individual stock. Sometimes we'll have people say, “Oh, here's this local company, it's going public or something, and it's going to go way up.” And you go, “Okay, well, if we know that, if we know this about interest rates, who doesn't know this about interest rates, who doesn't know that about the individual stock?”
Bridget: Well, a lot of people don't pay attention. So that's the thing. That's why I thought it was worth talking about, because a lot of people have other things to do, but they are listening to us.
John: But the people who are making trades. The people who don't pay attention aren't going to go out and make trades. What I'm talking about is the people who are paying attention to it. The pension fund managers, the mutual fund managers, everybody. So, hey, this is going to happen; interest rates are going to flatten or go down. So what do we do about that? Well, everything is already baked into the pricing on things. And again, it's easier for me to think about in terms of if everybody knows this stock is going to go from 50 to 100, well, who are the dummies that are going to sell it to us at 50? We already know this.
It's when the surprises come in that there're changes. So as far as what do you predict is going to happen? Well, if it goes the way everybody thinks it's going to go, there's nothing to really do about it. And if it doesn't go that way, then it's a surprise. And when you have surprises, there's nothing to do about a surprise in advance. So it's one of those things where it's interesting to think about and kind of be prepared for what goes on, but when it comes to actionable things, so often I feel like we want to go, “Well, what can we do to get out in front of this?” And the answer is no, there's not an actionable thing. It's a matter of being prepared.
Bridget: Well, and with interest rates. Say you bought a house recently. Actually, interest rates have come down a little bit from their top. And so, it might be worth saying, “Okay, can I get a half a point or a point better?” Start taking action now. And you don't have to wait.
John: Yeah, that's great.
Bridget: All right. Next issue is I bond rates. Okay. So I bond rates are tied to inflation. And there're two parts of them. There's the fixed part, and there's the variable part. And the variable part is totally tied to inflation. And the fixed part seems a little mysterious. They're a little mysterious about what the fixed part is, but as an I bond watcher it seems to be tied to the going rate for the money markets at the time.
John: Sort of interest rates.
Bridget: Yeah, exactly. Because if the inflation rate is much lower than the prevailing rates that money markets are paying, they'll give you the fixed rate to kind of make it up. So right now, the fixed rate is high, and the variable rate is just the inflation rate, which is 3%. So inflation is not that high right now, but money markets are paying a little higher, so the fixed rate is high, which, as we’ve talked about a previous episode, means it’s a good time to buy.
John: Yup.
Bridget: They’re trying to get inflation down to 2%, and they seem to be pretty good at it. It's slower. It doesn't happen immediately, but it seems to all be working, all the things that the Fed's doing, and it seems like the broader environment is cooperating. So I don't want to give all the credit to that, but it seems to be working. This is just a prediction. I just think it's going to be about the same. Maybe money market rates will start coming down and then I wouldn't count on that fixed rate being high.
John: Yeah. It's interesting, as we have this conversation, we think about predictions and what goes on. My mind keeps on going to what do we do about this stuff? And I talked about it a little bit with interest rates, and it's just so hard. The actionable side of me wants to know, what do we do with this stuff? And the answer for me so often is well, wait and see what happens. There's nothing to do and fit into your plan, which isn't sexy when it comes to making market predictions.
Bridget: Well, also, if you're thinking about buying I bonds for the year, it’s not a bad time to buy. That's what I would say. When we're making predictions, there's a bias. It's called recency bias. And I'm like, recency bias, because our brains are a little buggy. They're not perfect for our environment right now. So one of the things that our brains just do is think what's happening now is going to always happen. I'm going to take whatever situation it is and project it out forever. And that's not actually how the world works. So that's what I'm doing with my prediction, but a lot of times what is happening now does keep happening.
John: There is some momentum to it.
Bridget: But anyway. And I'm calling myself on recency bias with my bold I bond prediction.
John: You made a great point from an actionable standpoint. I don't think that waiting is likely to provide you with any additional benefit. If you want to buy I bonds, you can buy $10,000 a year per person. I don't think that you're making a bad decision if you do it now as opposed to hey, inflation is really ramping up, maybe you want to wait till later sort of a thing, or there's going to be interest rates are going up and so waiting gets you a higher base rate. I wouldn't think that's the case either.
Bridget: Also, last prediction is taxes. And my prediction is that not much is going to happen with taxes until the end of 2025. So bold prediction. And again, a lot of people aren’t paying that much attention to this. The last major round of tax plan taxes changed in 2016, and there's a sunset at the end of 2025. So that means that Congress has to do some work.
John: Yeah. When you think about what's going on, politically speaking, we’ve got the presidential election coming up here this year, and then the following year is when the tax law is going to change no matter what. There is going to be a change whether Congress enacts it or it just sunsets back to the old rules. There will be a change in some fashion, so I would say we’d be hard pressed to have any actionable change in tax law this year with the campaigning and those sorts of things. And so we can look for it in 2025, I would suspect.
Bridget: Absolutely. Okay, so great place to wrap it up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients, so we'd love to hear from you if you're interested in finding a financial advisor. But we also are members of the Alliance of Comprehensive Planners, which is a nationwide group of fee-only, tax focused planners that think similarly to the way that we do. So if you like what you hear on our show and want to find an advisor in your area, check out acplanners.org.
Bridget: And please subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.