To beat the stock market, you need to know important things that others don't know.
When you're lucky enough to take advantage of this fundamental investing truth, don't be afraid to stick your neck out. I made a forecast for 2023 and then a forecast for 2024. Both were bullish and very accurate.
But overconfidence is always the enemy. So now I find myself in a slightly uncomfortable position in the middle of a vacation. Despite all our efforts, we have yet to find evidence for a definitive prediction for 2025.
Still, some things are clear, and more will be revealed soon. Let me explain.
Good forecasting relies on economic, political, and sentiment evaluations. But stock prices factor in all such widely known information and opinions almost instantly. Success requires examining possibilities and discovering great decisive forces that others are unaware of. Next, assign probabilities. If the probability of one possibility predominates, it becomes a prediction.
To me, three outcomes for 2025 seem equally likely. The market could grow another 20% or more. Or soak it a little. Or you can shave off low single-digit profits. At the beginning of 2025, one of these trends will become dominant.
Thirty years ago, I demonstrated that the consensus forecasts of professional forecasters reflect what is pre-priced in stock prices up to a year in advance, and therefore does not actually happen. This eliminates several possibilities. As of now, their expectations are centered around low-double-digit gains. If I remove that, my three scenarios still run, but there's still no way to rank them.
The problem: We are ending 2024 with politics and emotions in a state of flux.
The best-case scenario, an increase of 20% or more, would shock most investors. Will it be amazing for the third year in a row? Legendarily rare. But almost no one expected it to happen, but it could happen if economic and political realities are slightly better than expected.
The crash on December 18th was super bullish, if only on one side. Since World War II, the S&P 500-day index has fallen 2.5% or more 114 times immediately following a bull market high. The stock was up 87% of the 12 months, delivering an average return of over 20%.
Also, since 1925, stock prices have increased on 60% of presidential inaugurations, almost always significantly positive.
Of course, there were times when this was not the case. Enter the 2025 downturn scenario.
The Republican Party, elated by Trump's victory, may perhaps be paving the way for another trick I proved decades ago: “perverse inversion.” Investors overall lean more toward Republicans than Democrats, with Republicans seen as pro-business and Democrats as anti-business. So when a Republican wins the White House, mood increases, with election-year returns averaging 15%. When Democrats won, concerns averaged less than 8% a year.
However, as expectations rise, there is also a risk that the newly formed Republican administration will be disappointed. The president is not a king. Rarely does he achieve what his supporters expect and his opponents fear. Therefore, since 1926, all but four of the Republican Party's inaugural years have been negative (Trump in 2017 was one of those four years). In the coming first year, there is a possibility that President Trump's hopes will exceed reality, especially in the tight margins with Congress.
Third scenario: Stocks rise slightly amid conflicting geographic sentiment. A weak Europe fears its own shadow. US bulls tout American exceptionalism as propelling AI, technology, and cryptocurrencies skyward. These can cancel each other out, making them wiggle, wobble, or net a little.
what to do? Two of the three scenarios will dissipate during the first quarter, with one remaining dominant due to yet unforeseen factors. A lot will happen soon, both politically and emotionally, like how the Trump administration will ultimately function. Once we see which scenario will prevail, we hit the table again with clear predictions for the rest of 2025.
On the other hand, if you want growth, stocks remain the default. why? It goes up almost 75% of the calendar year. Betting on odds of 3 to 1 without any other solid advantage is a bad game. To rationally exit a stock, you need to see something big or bad that others don't.
If you don't have that, follow Jack Bogle's advice. “Don’t just do something, stand there!”
Ken Fisher is the founder and executive chairman of Fisher Investments, a New York Times bestselling author, and a regular columnist in 21 countries around the world.
