Is the Market Preparing for a Crash? 2025 Market Update

Let's talk about if the market is quietly setting up for a correction or a full crash in 2025 and 2026. You’ll see what current economic data might be signaling about the months ahead. We’ll compare today’s conditions to past market cycles and talk about the key numbers a lot of investors are missing.

Resources:

- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com

- Find us on Facebook: https://www.facebook.com/friendstalkfinancialplanning

TRANSCRIPT:

John: The most important thing about having an investment philosophy is having one. We're not going to guess if the market’s too high right now. We're going to have a diversified portfolio for some of those reasons that we just talked about. And then we're going to stick to that and not try to decide are interest rates going up, what's going to happen with inflation?

Bridget, we've been getting a lot of questions from clients in our meetings about the stock market and how things are going and how their performance is going and how their portfolio is doing and how their investments are doing. And I thought it'd be a really interesting topic for our conversation here today to share how we're looking at things and what sort of resources we share. I'm interested to know how you have this conversation with clients and curious if maybe it's been coming up in your client meetings as well.

Bridget: Yeah, well, we got two things going on. One is we'll talk a little bit about the stock market being up, but then we have some people thinking, “Oh, is it a good time to sell?”

John: Yeah.

Bridget: So let's talk this through. First off, the stock performance. What's been going on in the stock market. I watch the news, and it tells me everything in the world is terrible. But, if we get past that, they might have a little note about the stock market being up. So what are your thoughts?

John: Right. Well, it's been interesting for us. We've had several clients who have come in, and when we get to that point in our meeting about investments, we just take a look. How are the investments doing? Oh geez, we haven't looked. All that bad news. How bad are things going? And so, one of the things that we espouse here, just in general, is, well, let's look at the facts. Let's start from there. Feelings play a big part in how we all act and do things, but we need to know where the basis is. And so, I use a resource from a company called First Trust.

We'll put a link in the show notes, too. But let’s pull up this data. It's current this week here, so a year to date. And I'll just point out a couple of places, because there’re 9 million numbers on this thing and not every one of them is super important. But on the second line down here, look at S&P 500 in that year-to-date column. So far this year, the market, when you hear that on the news, that’s what they're generally speaking about the S&P 500, and that's been up 15% on the year. And for some people just seeing that completely changes their perspective, because we've got tariffs, we've got Ukraine, we've got, I mean, fill in the blank, all these things going on.

And it feels so disjointed, and it probably is. But then when you look at the S&P 500, the market as we think about it, that's doing pretty decent. And that's not even a full year. That’s two thirds of the way through the year, whatever it is. So that's one of the things to remember. Oh, wait a minute, stocks as we generically think about them are doing pretty well. We had one client where we looked at their specific performance, and it wasn't quite what they were expecting. They said, “Geez, great, John. We see that the S&P 500 is up 15%, and we're a fair amount lower than that. Why is that?” I know that your portfolios are at least kind of similar to ours.

We don't just buy US large-cap stocks. We've got some small company stocks, we've got some international, this whole diversification thing. So take a look here. And then there's also a thing which I don't need to get into the details, but inside of the S&P 500, there's a growth component and there's a value component, kind of two ends of the scale. So we use value things, because over time we expect them to outperform. But take a look at small company stocks here. That S&P small-cap value. What's that number year to date? 2%.

And you can kind of look up a little bit whether it's small-cap growth or mid-cap. Those non big companies are down in the 5% or even lower range on the year. So when somebody says, “Well, how are stocks doing?” One answer could be, “Hey, they're up 15% on the year.” Another answer could be, “Geez, they're at like 5% on the year.” That’s still not a bad return, but those are two very different things. So because we invest in some smaller companies and because we invest in some value companies, it's not exactly the same answer for everyone. That was the answer for that client. What are stocks doing? And I'll just point out the other thing here is that that's all US stuff.

Bridget: Right.

John: International stocks. And it's this one, it says, MSCI World (ex US), meaning the world not including us. That number year to date is literally double what the S&P 500 is doing. So when we hear, “Hey, how are stocks doing?” I think S&P 500. But wait a minute, small companies, they're terrible. International companies. And when clients ask, “How are stocks?” I'll say, “Oh, you mean international?”

And they’ll say, “No, no, no, that's not what we mean.” But look at that stuff. And so, there isn't one answer. Actually, the numbers across the board look pretty decent. Some smaller, some higher. That's the reality of where it is. And just knowing that basis, a lot of folks go, “Oh, I thought it was going to be terrible. That makes me feel better about things.”

Bridget: Absolutely. And a lot of people know the stock market's been doing well, and they just see their overall net worth going up. And the bond market isn’t shabby either. When I'm thinking about bonds, I want to know what's the interest? And I really like US Treasuries just because they're safe, and they'll pay their interest. But sometimes they make more money than that. And that's kind of the situation this year. And that’s cool too. The stock market and the bond market are both doing well. That's not a sentence I say very often.

John: Right.

Bridget: Usually, if one's going up, the other one's going down. But that's why we have a well-diversified portfolio. It's cognitive dissonance for us financial planners right now because there's a lot of people that are worried about a lot of things. And they're worried about the finances. But the stock market is doing well. So one of the things that I've gotten is people saying, “The stock market's doing so well, I want to sell. Is now a good time to sell?”

John: Absolutely. Unless it goes up further, then you shouldn't sell. If it's going to go down, you should sell first.

Bridget: Right. Yeah. I have a story about this. In 2002, I realized that the real estate market was overheated. I had a tax practice at the time, and so I decided not to work with any more real estate clients, like people that were flipping houses and stuff, because I thought it was a house of cards. I saw it in 2002, but it took until 2008 for that bubble to burst. And so, if I was investing and I had gotten out in 2002, I would have lost a lot of run up. And I haven't looked at the numbers, but I probably would have been worse off than if I just held on and dealt with the up and down.

So if you're thinking about selling, I think it says something different about your approach to the stock market at this point in your life. Because that to me is a red flag, meaning you're not a long-term investor right now. Because a long-term investor realizes their emotions are okay with the stock market going up and down and the amount that the stock market is going up and down. And it’s much better to realize that you're not comfortable with it when the stock market's up than realize it when the stock market is down, because that’s not a great time to sell. So what are your thoughts?

John: Yeah, a lot of great pieces in there. One of the things that you made me think of is a client long ago. I can't remember if it was 10 years ago or so, but I do remember that the Dow Jones was at something like 20,000, maybe it was at 22,000. I think they had sold a business or something to that effect. And we had some money to invest, maybe it was an inheritance. And the client said, “Geez, with the market so high,” and again this is a decade or more ago, “I just can't see investing in the market today.” And I remember the conversation because I said, “Geez, I think you're right. It feels really high.” But here's the philosophy to explain why we do this. Looking at First Trust, Dow Jones is now at 46,000.

Bridget: Right.

John: We thought it was really high at 22,000. And that for me is critical. It kind of circles back to, the most important thing about having an investment philosophy is having one and sticking to it.

Bridget: Right.

John: We're not going to guess if the market’s too high right now or not. We’re going to have a diversified portfolio for the reasons we just talked about. And then we're going to stick to that and not try to decide things like, are our interest rates going up, what's going to happen with inflation, is the market too high?

Bridget: What about the tariffs?

John: Right. And so, it's that rebalancing. And we've talked about that on our show before. This year we just looked at international stocks have gone way up. What does rebalancing mean? Oh, let's sell some of those and buy the things that haven't gone up so much. This diversification thing is very interesting. We can show it on the First Trust document. A year ago, S&P 500 was up 25%. International stocks were up 5%. Last year you should have been mad at us, saying, “Why didn't we just put all our money in the S&P 500? Why do we do all this stuff?

We could have got five times the return.” Oh, that's right. This year we're getting double the return going the other way. We just don't know that. And hey, having a system, rebalancing, selling the things when they go up, and buying things when they go down and not making a prediction based on what we think is going to happen in the future. That's the key to success. So that's my answer when people ask, is it a good time to sell? If my risk profile has changed, not because the market's high, but because, oh, I'm retired now, I feel differently that for the next 20 years I don't want to take as much risk. Hey, let's make that change today and not wait for the market to go down.

Bridget: Yeah.

John: In that case, it's not because the market's high.

Bridget: And I would add to that. Sometimes I get people who say, “But I don't want to stop spending. I'm spending too much, but I don't want to take any risk.” That's a tough situation for us because the people who are de-risking and not worrying about it are the people who could be spending more if they wanted to.

John: Right.

Bridget: And so, they're fine. They don't need to try to meet any financial goals by being in the stock market. One of the tenets of modern portfolio theory is that investors are risk averse. And the way I describe this to people is you're not doing it for fun, you're doing it because you need to. And so, if you're somebody who doesn't actually need to, and you would live just fine with having all your money in bonds or maybe just 20% in stocks, because that actually is less risky than having zero based on the research I see.

John: Right.

Bridget: And you’re seeing that this is making you feel nervous. The stock market's too high. Why is it so high? Maybe I should get out. Those are all factors that you’re changing. As people get older, it's normal for their risk tolerance to change. And again, it's great if you see it ahead of time. It's great if you see it when the market's high, not when the market's tanked, because then you’re not in a great opportunity zone.

John: Yep. I think that's a great place to wrap things up here. Again, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.

Bridget: And I’m Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both taking clients and if you want to reach out to us, you can find our information on YouTube. We also belong to the Alliance of Comprehensive Planners or acplanners.org. If you prefer to have an advisor in your area, you can check that out and find somebody there.

John: And don't forget to hit that subscribe button.

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.