During election seasons it is easy to become short-sighted. Anxiety, fatigue and overwhelm all seem to be common emotions around the current election and it is natural to wonder how election results and government policies will affect our money. Below you will find the 5 things that we are focused on right now. Hopefully these help with maintaining a long-term perspective.
Historical performance around elections
This year has already been a great year for stocks. If history is on our side, then the election shouldn’t bring down the positive year that we are experiencing. Even if there is some short-term volatility around the election results, this year is tracking to be a good performer. Consider the following 2 slides that explain historical performance and volatility (always keep in mind, past performance is not an indicator of future results).
Investment results can be surprising
I have seen headlines lately that predict drastic market movements depending on who gets elected as president. Please keep in mind that market predictions are usually wrong. For example, back in 2016, there were thoughts that U.S. technology companies would suffer under a Trump presidency and energy companies would flourish. His candidacy vowed to be tough on companies that derived profits from overseas and also to make America energy independent. Similarly, in 2020, some investors feared that Biden’s environmental regulations would derail our energy sector and banking regulations would hurt financials. In fact, in both scenarios the opposite results came true. Under Trump, info tech was the best performer and energy was the worst. With a few months remaining in Biden’s tenure, Energy is hands down the best performer and financials have been stellar. (See the chart below)
Ultimately, the stock market has increased long-term under both political parties. While there has been a positive performance edge under democratic presidents, the control of congress has been a performance factor as well:
Markets are focused on other factors
While there will be market reactions in the short-term around politics, drivers of performance are centered on macro-economic factors such as monetary policy/interest rates, private sector earnings, and valuations. As we consider the current investment environment, we see some positive trends for the future.
Recently, The Fed’s Beige Book referenced uncertainty among businesses and consumers created by the election. Businesses are delaying investment plans and hiring and consumer spending has been reduced. There has even been some manufacturing weakness blamed on uncertainty. There are also reports that some businesses expect a significant increase in activity in 2025 once the election is behind us.1
Earnings have been strong so far. 37% of S&P 500 companies have reported earnings and of those, 75% have reported a positive earnings surprise.
We feel these trends are positive. With muted activity around the election, we feel that there is still progress and positive momentum to be seen in the coming year.
Policies in our focus
Once we get past the election results, the focus will be on what policies we can expect. The policies that may have the most impact on our portfolios are often not a focus on the election trail because the solutions required are not popular.
At some point, the government will have to confront the growing national debt and budget deficit. The result of this issue may be higher costs, higher taxes, and changes to government programs.
Here is some commentary from Fidelity’s research team:
Both parties have contributed to a ballooning fiscal problem that could be a long-term burden for future generations. As noted by Fidelity’s Asset Allocation Research team, U.S. federal debt has been rising for decades. This was the case even before the COVID pandemic. Servicing the federal debt is now at par with defense spending and is the largest part of the U.S. budget after Social Security—and is an important investment issue for the future.
One of the first orders of business for the next president will be renegotiating the U.S. debt limit in January 2025, which may set the course for the year.
The U.S. is not alone. A global debt issue could continue to worsen in the coming decade. Rising global debt could lead to greater experimentation with both fiscal and monetary policy and be a catalyst for a more inflationary economic environment. This could potentially tax the long-term performance of equities and other asset classes, warranting specific changes to strategic asset allocation decisions.2
With a growing deficit, another question is what the next administration will do about the 2017 tax act that is expiring next year. Here is some commentary:
Some perspective: as much as we’re hanging on every word the presidential candidates say, it’s important to remember that Congress holds the power of the purse. Any changes in tax policy will need to get through Congress and congressional committees. That’s a long and complicated process that has historically required a lot of negotiation and compromise.
It's not clear whether the new president will enjoy working majorities in both houses of Congress. And even if the election produces a “red wave” (in which Republicans win the White House and Congress) or a “blue wave” (in which Democrats do the same), thin Congressional majorities rarely have the cohesion to rubber-stamp broad presidential initiatives. It’s worth remembering that Democrats controlled Congress and the White House after the 2020 election, but still couldn’t muster the momentum to pass tax legislation.
Congress will almost certainly deal with two contentious budget issues before it turns its attention to tax policy: first a continuing resolution to keep the government funded, then an increase in the debt ceiling to accommodate the ever-rising federal debt.
Those issues have become annual cliff-hanger dramas that often test Congressional leadership and demonstrate just how difficult it is for Congress to reach agreement on any fiscal issue. Congress generally passes big fiscal bills at the very last minute – or votes for extensions that delay the last minute. This means it’s likely Congress will not pass new tax legislation until late December 2025. Which in turn means the uncertainty investors feel over gift, estate, income and local taxes will likely last another 14 months and quite possibly longer. 3
While we wait to see what domestic policy changes are in store, we are also mindful of what is going on in the rest of the world. Largely, the world still looks to the U.S. for financial stability and our policies have a ripple effect on foreign economies. We are watching how policy may affect the global markets and our investments. Here is some commentary from Invesco’s Kristina Hooper, Chief Global Market Strategist that explains some of the current issues:
Last week, the International Monetary Fund (IMF) lowered its global growth forecast for 2025 while recognizing central banks’ success in tamping down inflation and avoiding recession. The IMF’s concerns about the accelerating risks of geopolitical conflicts, trade protectionism, and growing deficits led to the downward revision. Chief Economist Pierre-Olivier Gourinchas explained, “…downside risks are increasing, and now dominate the outlook.”
I was in Europe last week meeting with clients, and there was clearly concern about the potential for trade wars if former President Donald Trump were to win the US presidential election. And it’s clear there's concern about an escalation in geopolitical tensions, especially in the Middle East — just look at the sigh of relief evidenced in the drop in the price of oil last week when Israel chose not to bomb oil production facilities in Iran.
But it’s more than that. Last week, the IMF also raised concerns about global public debt, which is expected to reach $100 trillion, or 93% of world gross domestic product (GDP), by the end of the year.2 So many countries are facing debt concerns. 4
The good news
“Acknowledging the good that you already have in your life is the foundation for all abundance.” -Eckart Tolle.
Despite election uncertainty, there is a lot of good happening right now with regard to the investment environment. Here are some things to focus on:
First, the inflation factor that has plagued the economy and investments over the last few years is contained. The markets have moved past this and are focused on growth. This change brings us back to an environment that makes sense where markets reward good economic activity. 5
Second, despite what some may say, the U.S. economy is really strong right now and is dominating the global economy. In the Wall Street Journal, on October 31, 2024, it was reported that:
U.S. Economic Growth Extends Solid Streak. GDP rose at a 2.8% annual rate in the third quarter, easing slightly from the previous quarter. The economy has outperformed expectations over the past couple of years under the Biden administration. A much-anticipated recession has yet to materialize, even though the Federal Reserve raised interest rates aggressively to curb inflation in recent years. Wednesday’s report points to an economy that is still humming, with strong consumer spending supported by a robust labor market, and business investment that remains solid… Current economic growth is also well above the pace economists see as the long-term trend. Fed officials put the U.S. economy’s longer-run growth rate at 1.8%, according to projections released at their most recent meeting in September.
“The economy is doing really well,” thanks in part to an artificial-intelligence boom and government spending through programs such as the Inflation Reduction Act, said Torsten Slok, chief economist at Apollo Global Management.6
Third and lastly, U.S. Stocks will continue to do their job in producing average returns above inflation to help us meet our long-term investment objectives. Regardless of the outcome of the election, we are confident in the United States to lead the world in innovation and growth, and we are focused on staying invested for our goals.
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Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.
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1- Invesco. Markets and Economy. October 29, 2024. Kristina Hooper Chief Global Market Strategist
2-Fidelity. Anu Gaggar, CFA®, FRM
3- Capital Group. In an Unprecedented Election, 3 precedents still matter. Leslie Gellar and Reagan Anderson. October 31, 2024.
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