The Election Impact on Investments

October 11, 2024 –

The financial markets have performed exceptionally well so far this year amid the run-up to the presidential election, but there is no shortage of uncertainty—as a nation and in the markets. The markets are not partisan, but they dislike uncertainty. As a result, volatility increases leading up to a presidential election. Afterwards, markets often rally for a few weeks. For the same reason, the S&P 500 has historically performed best with a divided Congress, rather than one-party control. The level of uncertainty is lower when there is less likelihood of significant changes by way of major legislation. Other political issues worth watching are intentions regarding the Senate filibuster and the independence of the Federal Reserve. Each could be important for the economy and markets.

Historically, which party controls the White House has little lasting impact on financial markets. Remaining invested throughout all presidencies far outperforms the results of being invested only during the presidencies of a single party.¹

While political party affiliation is not material, government policies—at least those policies that could reasonably be expected to be implemented—do matter to the economy and the markets. Policies regarding trade, government regulation, immigration, energy, and finance impact the economy and the markets. Fiscal policies, those regarding taxing and spending, are primary among these. The critical issue impacting the long-term financial health of the country is the national debt. This is an issue that requires true leadership to address since there are no short-term political advantages to be gained. Unfortunately, in this election there has been little attention paid to the debt and deficits.

U.S. Stocks

We continue to see opportunity in U.S. stocks with an interest rate cutting cycle underway and corporate profits  expected to grow. As we mentioned last quarter, performance for the average stock is catching up to the handful of large tech names that have led the market. Small and mid-sized company stocks outperformed the S&P 500 for the quarter and gained ground year-to-date, boosted by lower interest rate expectations and a weakening U.S. Dollar. Along with this welcome broadening of U.S. market performance, we favor the stocks of quality earners and dividend payers to complement the big tech names. We maintain positions in mega-cap technology companies generally, and specifically those involved in artificial intelligence.

Foreign Stocks

We mentioned last quarter the Bank of Japan was likely to raise rates amidst economic growth, higher inflation, and higher disposable incomes. However, this resulted in a sudden fallout from large institutions rapidly unwinding positions previously taken to benefit from Japan’s low interest rates. Fortunately, Japanese markets have now recovered most of the early August selloff that resulted. In Europe, economic growth is slow and recession is a risk. Yet, central banks are lowering rates, and the Euro is expected to continue to strengthen against the Dollar helping U.S. investors. Among emerging market countries, many will likely benefit from the large stimulus measures announced recently by the Chinese government.

Fixed income

With a rate cutting cycle now having begun, we continue to review cash and money market positions looking for opportunity to move to intermediate maturity bonds and take advantage of the current higher rates by locking in yields. We continue to favor bonds with higher credit quality. To reduce interest rate bets, we “ladder” portfolios of individual bonds with similar dollar amounts in each maturity from two years to seven years.

We use tax-exempt municipal bonds when appropriate in taxable accounts. In retirement accounts and other tax-free or tax-deferred accounts, we invest in taxable fixed income securities including CDs, treasuries, government agency bonds, and corporate bonds. For a short-term objective, we may hold money market funds—with yields currently in the high 4% range—for daily liquidity. While still appropriate for short-term purposes, these cash or near-cash investments do have reinvestment risk if short-term rates continue decline over the coming months.

While we provide an overview of many areas of the market, our priority is your individual goals and creating a personalized strategy to reach those goals. Please call or stop by the office any time. Your questions are always welcome.

¹Ycharts “How Do Presidential Elections Impact The Market”

Since 1950, investing in the S&P 500 during Republican presidencies only and moving to cash during Democratic presidencies returned an annualized 2.79%. Conversely, investing only during Democrat presidencies returned 5.15% annualized. Remaining invested throughout returned 8.08%.