08/2024 - The Election and Your Portfolio
Full written article below.
Every four years the same line of questions arise from clients and whether you are asking it or not, you’re likely thinking…. “How is the Presidential election going to impact my portfolio?”
Unfortunately, there’s always a grouping of people in this country who make what I would consider to be irrational, short-term investment decisions based on an unknown outcome. The reason I say “irrational” is because I’m using history as a guide, and yes, I realize that the future is always unknown. This time could be different, right? Let us also remember the famous words from Sir John Templeton “The four most dangerous words in investing are: ‘this time is different.’”
Every four years there are numerous articles and statistics that show presidential elections don’t really matter to the broader market, as well as it doesn’t really matter who the person of President is either. One such simple and beautiful example of this comes from Truist.
Just pause for a moment and study this simple chart and ask yourself these two questions…
- Does the market seem to care what political party is President?
- If the market doesn’t seem to care who is President, should you be concerned about your portfolio? Do you really think you know something that the broader market doesn’t know?
At the risk of piling, it on, here’s a second chart which I think hammers home the point, don’t worry so much about the time period cited because the data can be twisted and turned based on the start year. The concept rings true that staying invested regardless of who’s in the Presidential office has historically been the right decision, in my experience. Always keep in mind that past performance is not indicative of future results.
https://www.schwab.com/learn/story/emotional-rescue-markets-fed-policy-and-elections
But let me take this a step further. Let’s assume that whoever goes into office makes it harder for the companies we invest in to make money, create profits, and create value for us shareholders.
We can again thank history for providing us with a clear example of how rational companies respond to changing market conditions. I think we all need to be reminded that the companies invested in are in business to create profits and return those profits to their shareholders. If companies cannot shift and change over time with changing economic conditions, then these companies will likely be out of business in the future.
My case study is of Apple Computers and how they adjusted over the years because of the passage of the Tax Cuts and Jobs Act. To remind everyone, the corporate tax rate before the TCJA was 35%, now, under the TCJA which is set to sunset soon, the corporate tax rate is 21%. To make a long story short and not bore everyone to tears with the details, before the passage of the TCJA, Apple was able to take advantage of lower international tax rates. Then, when the TCJA was passed, Apple repatriated a significant amount of their offshore reserves. Again, taking advantage of favorable taxation. **required case study disclosure listed below**
What’s my point on this? Companies realize they don’t get to control who’s in political power, they simple adjust to the changing economic landscape. Do you get my point here? The companies we’re investing client portfolios in are changing and figuring out this landscape, so they can return maximum shareholder value! This means we don’t have to, they are doing it for us, and historically quite efficiently! Sources: https://news.law.fordham.edu/jcfl/2021/04/12/tech-innovation-vs-legislative-reform-apples-response-to-the-tcja/ and https://techinquiry.org/DeathAndTaxes/
Let’s always remember that Presidents and their policies come and go. Historically, the companies we invest in continue to work towards maximum shareholder value by raising dividends and earnings over time. This is where I desire our focus to be.
Additional Data: Each month I get asked by clients what additional resources I’m looking at. Please hear me in stating I’m not trying to predict anything whatsoever, just some of the interesting data I’m watching.
- S&P 500 to triple in value? – I find there’s an abundance of negative news articles, because of this, I love sharing the positive articles. The referenced article about the S&P 500 is from a researcher named Tom Lee who thinks the S&P 500 could triple by 2030. Who knows if he’s right or wrong, but he doesn’t make a compelling argument as comes to a compelling conclusion.
- 14% Market Declines – Something we all need to be reminded of, and reminded frequently is how often the market declines. In this image from JP Morgan, I want to remind everyone, including myself that since 1980, the average intra-year decline for the S&P 500 is 14.2%. In 2023, the intra-year decline was 10% yet the market finished higher by 24%. Don’t be surprised when this happens, not if this happens.
Annual returns and intra-year declines: This chart shows intra-year stock market declines (red dot and number), as well as the market's return for the full year (gray bar). This chart makes it clear that the market is capable of recovering from intra-year drops and finishing the year in positive territory, which should encourage investors to stay the course when markets get choppy. Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only, past performance is not indicative of future returns. Returns shown are calendar year returns from 1980 to 2023, over which time period the average annual return was 10.3%. Guide to the Markets – U.S. Data are as of July 31, 2024.
- Trillions in Money Markets – At it’s highest level ever reported, there’s now 6.4T in money market funds. In the investing market, this is called “Dry Powder.” These are dollars enjoying higher levels of interest than in years past. But ask yourself, what do you think will happen when/if the Federal reserve starts to cut interest rates and banks start paying less in interest on these accounts? Do you really think people will just continue to hold their funds with less interest, or do you think they’ll look for other alternatives to make money? My guess is assuming interest rates come down, these people will start to move some of these funds back into the broader market. So what do you think would likely happen to market prices if this does occur?
- Breakeven Inflation Rate - 5-Year Breakeven inflation rate is now 1.89%. When you study this chart, you’ll see it goes back to 2004.
- Federal Reserve Balance sheet – The Fed continues to follow through on it’s statement made in May 2022 of reducing the balance sheet by $47.5 billion dollars per month in months June-Aug 2022, then reducing the balance sheet by $95 billion dollars per month. We’re now down to $7.1T dollars in the balance sheet, last time we saw this was November 2020 levels and declining.
**Case Study Disclosure** The case study presented is purely hypothetical and does not represent actual client results. This study is provided for educational purposes only. Similar, or even positive results, cannot be guaranteed. Each client has their own unique set of circumstances so products and strategies may not by suitable for all people. Please consult with a qualified professional before implementing any strategy discussed herein. No portion of this case study is to be interpreted as a testimonial or endorsement of the firms' investment advisory services.
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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