As we settle into 2025, we might think this is a repeat of 2016; however, this time really is different. The financial markets had a robust return in 2024, and we closed out the year with a few other interesting takeaways:

Election year: Former President Donald Trump won a second, nonconcurrent term as president of the United States. Yet, his incoming administration will look entirely different than his first term, with Republicans gaining control of the House and Senate.

Stock market returns: The market rallied after the election, and interest rates rose, just like in 2016—but this year the market tells a very different story.

We invite you to watch and read our 2025 economic outlook below.

What’s different this time?

Economy

The economy was relatively healthy and improving during the first Trump administration, so there was plenty of room for aggressive fiscal changes. This time, the economy looks to be decelerating, so there is likely a bit less room for maneuvering. It’s a much different environment that could be quite a challenge for the second Trump administration.

Inflation

In 2016, we had a low, stable rate of inflation – with some even claiming that inflation was “dead.” Today, inflation has re-emerged as a threat, with high uncertainty about its outlook. Inflation was the number one concern for voters in 2024, giving Trump a popular mandate to ease the cost-of-living pressure Americans have been feeling.

Interest rates

Interest rates are dramatically different than they were for Trump’s first term. Back in 2016, interest rates were essentially zero after the Great Recession. Now, as they come into office for a second term, the administration faces a world of dramatically higher rates. In late 2024, the Fed began to lower interest rates, but the environment is much more restrictive and volatile than it was during the first administration.

In addition, real rates (after inflation) were negative during the first Trump administration, which led to one of the most accommodative monetary periods in our history. Now, since real rates have increased, it is a much more restrictive environment, which can actually hamper economic activity.

Labor market

There are many signs that point to the economy decelerating, especially when looking at the labor market. When looking at the unemployment rate, during the first Trump presidency, the economy was quite healthy and unemployment was steadily falling.

Unemployment was falling for the entire first Trump term, meaning the labor market was getting stronger and stronger. The second Trump administration is inheriting a different situation. The unemployment rate has been low, but has started to climb. Typically, if the unemployment rate goes up more than 50 basis points, the economy is on the cusp of a recession—or at least a slowdown.

That is the current situation as the new administration takes office. There are serious questions around the strength of the labor market and the economy.

Tariffs

Tariffs were a defining characteristic of the first Trump administration, but now the environment is very different for his second term. The economy is not as resilient as it was the first time, and the initial suggested magnitude of new tariffs appears to be much more draconian.

The impact of aggressive tariffs is complex and potentially volatile. Other countries could (and most likely will) retaliate, igniting a trade war. Economists are trying to estimate what the impact will be on the average household, and the broad presumption is that it could cause more inflation in the short term, which is the opposite of what voters expect. In the long run, it could become deflationary, as global trade conflict reduces GDP for everyone.

Markets

The equity markets have been on a phenomenal run for the last two years, and valuations could easily be described as “stretched.” Price/earnings ratios currently sit around 23 times, versus a long-term average of roughly 17 times. During the first Trump administration, the stock market was on top of the long-term average. This time around, market valuations are much richer, making the market much more likely to experience volatility when faced with high levels of uncertainty in Washington D.C. (tariffs, trade wars, etc).

Review of key differences

  • Inflation 2016: It was dead and not an issue.
  • Inflation 2025: It is resurrected from the dead. It’s going to be an ongoing risk and the number one voter concern.
  • Interest rates 2016: Rates were zero.
  • Interest rates 2025: Rates are much higher and restrictive.
  • Labor market 2016: Unemployment was declining
  • Labor market 2025: Unemployment is climbing
  • Economy 2016: Steady and expanding.
  • Economy 2025: We see signs of deceleration, with threats of tariffs and trade war
  • Markets 2016: Average valuation multiples
  • Markets 2024/25: Elevated valuations make markets susceptible to volatility

What’s the bottom line?

We are expecting market volatility to be quite high in 2025. This doesn’t mean we are  heading into a recession, but it may be a bumpy road. The important thing to remember is to stick to your long-term financial plan. Your strategic and personal plan should encompass all your financial goals and help weather most storms. Falling back on your plan takes the emotions out of your finances and gives you the peace of mind needed to manage any volatility.

Interested in learning more about Private Wealth Management? With UMB, you have a guiding partner from financial advising and investment portfolio management, to wealth-building strategies and retirement and legacy preservation plans.

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