We’ve Got a New Mobile App

If you’re an existing online and mobile banking customer, we’ll send you an email to let you know when you’ll be able to download and use the new app. New online and mobile banking customers can download the app now.

The Private Bank

Navigating Financial Opportunities and Strategies to Thrive in a Changing Economy

Reading time: 7 minutes

January 23rd, 2025

woman walking in a bamboo forest woman walking in a bamboo forest

The inauguration of a new president invariably ushers in changes to the United States economy. During such transitional periods, it is crucial to remain agile while maintaining a steadfast focus on wealth management. While a shifting economic landscape may present opportunities for financial growth, it also poses potential challenges and setbacks in the near and distant future. From market outlooks to prospective tax reforms, several factors could shape your wealth management strategy in 2025.

Key Policy Changes to Monitor

The Tax Cuts and Jobs Act, enacted by the previous administration in 2017, introduced significant modifications to the U.S. tax code. These changes included reductions in tax rates for both corporations and individuals, an increase in the standard deduction, enhanced family tax credits, and higher exemption amounts for estate taxes, among other adjustments.

Many of these individual provisions are slated to expire at the end of 2025, with business-related cuts expiring in 2028. However, new legislative proposals may seek to make several of these cuts permanent. For instance, the basic exclusion amount for estate tax credits, which the IRS increased from $13.61 million in 2024 to $13.99 million for a single taxpayer in 2025 (double for couples), may be solidified by the new administration.

Investors contemplating asset sales this year might benefit from a potential reduction in the long-term capital gains tax rate, which could decrease from 20% to 15% for single filers earning over $518,901 ($583,751 for married couples filing jointly). While these prospective tax cuts are welcomed by businesses and individuals alike, they are counterbalanced by areas of concern. For example, anticipated regulatory changes, such as the rollback of emissions regulations and the cessation of consumer EV tax credits, could render electric vehicles more expensive and less attractive to consumers and automakers. The potential repeal of the Inflation Reduction Act could further eliminate several clean energy incentives, impacting investments in sustainability-oriented industries. Additionally, shareholders in healthcare and insurance companies might face repercussions from proposed cuts to Medicaid and the Affordable Care Act.

The discussion of additional tariffs on foreign imports has raised concerns among businesses about the potential impact on prices and profitability. Protective tariffs on imported automobiles from Mexico and Canada could threaten the U.S. auto industry by increasing the cost of parts and finished vehicles. Consumers might also experience higher prices for everyday goods as companies pass on increased operational costs.

Market Outlook for 2025

Do presidential elections significantly influence the stock market? Historically, stock market returns tend to be higher in the months leading up to a presidential election compared to non-election years. However, post-election periods, such as the one following last November's election, often see lower stock market performance over the subsequent six- and twelve-month periods compared to non-election years. According to the presidential election cycle theory, U.S. markets typically perform weaker during the first two years of a president's term, peak in the third year, and decline in the fourth year.

In 2025, the equities market may benefit from several positive factors, including a favorable U.S. economic backdrop characterized by low unemployment and resilient consumer spending. The prospect of tax cuts and deregulation across various industries could also support higher returns. Additionally, advancements in corporate leadership and AI-driven products are accelerating corporate growth, potentially benefiting the market.

For fixed-income investments, such as bonds and mutual funds, 2024 was marked by volatility due to fluctuating interest rates, political uncertainties, and economic instability. The bond market in 2025 is likely to experience similar dynamics, caught between the potential lowering of interest rates and the risks of higher inflation and federal debt. Certain commodities, such as gold and silver, appear poised for price increases due to limited supply, while the agriculture market may face greater volatility amid U.S. trade uncertainties.

Wealth Management Strategies

Effective wealth management extends beyond merely acquiring assets; it also involves safeguarding your wealth through tax-efficient strategies. Making informed investment decisions is critical to preserving your financial resources.

Consider the following strategies:

  • Tax Efficiency: Maximize your deductions by utilizing tax-advantaged accounts, such as 401(k)s or IRAs, which allow investments to grow tax-deferred until retirement withdrawals. On the other hand, a Roth IRA offers tax-free withdrawals after five years if you are at least 59-1/2, despite not allowing deductible contributions.
  • Portfolio Diversification: Diversifying your investment portfolio can mitigate risk while opening new financial opportunities. Tax-efficient investments, such as index funds and ETFs, can be used in taxable accounts to minimize capital gains distributions.  Real estate investment trusts (REITs), taxable bonds, and some mutual funds are best held in tax-deferred accounts to defer income taxes on interest payments and capital gains distributions.  
  • Estate Planning and Philanthropy: Comprehensive estate planning involves more than drafting a will or setting up a trust; it includes creating a plan to manage and preserve wealth for your family's future. The annual exclusion allows for tax-free gifts up to $18,000 per person or $36,000 per couple (increasing to $19,000 and $38,000, respectively, in 2025). Qualified charitable distributions up to $105,000 ($110,000 in 2025) out of an IRA can be donated tax-free, along with paying for a loved one's medical expenses or education. Various trusts, such as living trusts, testamentary trusts, revocable and irrevocable trusts, and charitable trusts, can be utilized for estate planning to support important causes and provide tax benefits for the donor.

Building Long-Term Resilience in a Dynamic Economic Climate

Financial markets fluctuate, tax laws evolve, and economic uncertainties persist regardless of election cycles. Building long-term resilience is essential to weathering future economic storms and ensuring your legacy. Diversify your portfolio across various asset types, including stocks, bonds, real estate, and other investments, to mitigate risk over the long term.

As economic conditions shift, be prepared to adjust your investment strategy, saving, and spending habits. Collaborate closely with your relationship manager and stay informed about economic trends to anticipate market changes and make well-informed decisions about your portfolio. Preparedness and agility are key to wealth preservation and growth.

To explore your options for building your legacy, please consult your Relationship Manager at Bank of Hawaii’s Private Bank.

Bank of Hawaii does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or investment advice. You should consult your own tax or accounting advisors before engaging in any transaction. 

You're about to exit BOH.com

Links to other sites are provided as a service to you by Bank of Hawaii. These other sites are neither owned nor maintained by Bank of Hawaii. Bank of Hawaii shall not be responsible for the content and/or accuracy of any information contained in these other sites or for the personal or credit card information you provide to these sites.

Sorry, this PDF is currently unavailable

There is a temporary system outage preventing this PDF from loading. Please try again later.