Topic: Wealth Planning

We are less than a week away from Election Day. The presidential race and the race for control of the House and Senate remain very close. There is a good chance we won’t know the outcome on Election Day, and it may take many days to count the votes.

It’s possible that one candidate will gain a sizeable lead so that we will know the outcome sooner, but if not, below is a timeline for how the Presidential Election will play out over the next few months. There could be a lot of uncertainty in the days to come, and that may be reflected in a higher level of market volatility during that time.

What Happens Between Election Day and Inauguration Day

For long-term investors, it is important to keep in mind that the political structure in Washington hasn’t had much of an impact on market returns. From 1933 to 2023, under unified and split governments, the average annual return for the S&P 500 has been between 11% and 14%. Under a split Congress, as we have today, the market has generated an average return of 13.7%.

In more recent times, markets have posted even better results one year after Election Day. Since 1984, the average return a year later has been 17.6%, with only one year (2000) being negative. At the end of the day, financial markets appear to care more about the certainty of election outcomes than about who occupies the White House.

S&P 500 Index Total Returns One Year After Election

As the election cycle plays out, the noise and uncertainty can feel overwhelming and anxiety-provoking. In our view, long-term investors should ignore the noise and continue to focus on their financial goals and plan. Presidential elections historically have had very little impact on the stock market.

As we have continued to emphasize, stock markets are more influenced by corporate earnings, monetary policy and economic data than by the election outcome.

Consider the mythical investor who put $10,000 into the S&P 500 at the beginning of 1948 and did not care who was in the White House. If that investor kept their money in the market, that initial investment would grow to nearly $38 million! Had they invested the $10,000 with Republicans in office only, it would have grown into $310,000, and with Democrats in office only, the total would be $1.2 million.

Stay focused on the long-term goals and the bigger financial picture.

Time IN the Market Matters

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Capital Group, Carson, CNBC, Fidelity, Schwab

Stocks reached new highs again last week, the fifth week in a row that the S&P 500 has had positive returns. The S&P now has reached 46 new all-time highs this year, which ranks as the ninth-most ever — and we still have two and a half months to go.

The current bull market is 2 years old as of last Saturday, following a 25% drop in stocks in 2022 that coincided with a steep drop in bond returns as well. Since 1950, the average bull market has lasted more than 5 years and has gained more than 180%. Based on history, we know the market does not go up in a straight line, and plenty of upside remains.

The Bull Market Is Still Young

S&P 500 bull markets from 1950 to today

For now, political uncertainty appears to be doing little to dampen enthusiasm for stocks. Strong economic growth has helped the S&P 500 reach its new highs; it is up over 20% for the year and is on track for the second straight year of double-digit gains.

Still, election anxiety may be on investors’ minds. The VIX, which measures market volatility, has risen about 25% since late September. Some of the increase is attributable to the election and concern that we may not know the outcome immediately following Election Day. Markets do not like uncertainty.

Since 1926, the market has seen negative returns only three times in 17 presidential administrations. One came during the Great Depression under Herbert Hoover, and another came during the Great Recession under George W. Bush. During Richard Nixon’s time in office, the U.S. suffered through the Vietnam War and two recessions — and suffered average losses of only 1% per year.

Politics can bring out strong emotions and biases, but as we have said before, investors would be wise to tune out the noise and focus on the long-term fundamentals. Political opinions are best expressed at the polls, not through your portfolio. Historically speaking, election results have made almost no difference when it comes to long-term investment returns.

History also shows that stocks have done well regardless of which party is in control in Washington. Since 1933, there have been eight Democratic presidents and seven Republican presidents. The chart below shows how the market has performed on average under each scenario for the party in control of the White House and Congress. In that time, the worst average annual return was 11% — to the positive.

Investors who allow political opinions to harm their investing discipline have missed out on above-average returns during presidents they don’t like.

The chart below shows that if you invested $10,000 in 1961, it would have grown to more than $102,000 by 2023 if you invested only during a Republican presidency. If you invested the same $10,000 in 1961, that same investment would have grown to $500,000 if you invested only while a Democrat was in the White House. However, that $10,000 investment would be worth more than $5.1 million if you just stayed invested no matter who was in office.

Growth of $10,000 (1961-2023)

Investors should not let their political opinions or emotions dictate their decisions. The markets really don’t care about the results or the daily micro-dramas in the presidential race. Markets are much more likely to be influenced by corporate earnings, economic data and monetary policy.

As James Carville said back in 1992, “It’s the economy, stupid.”

Unemployment remains near historic lows. Inflation has dropped from a post-pandemic high of 9% to 2.4%. The stock market is at new highs, and interest rates and energy prices are on the decline. Long-term investment strategies tend to perform well regardless of who occupies the White House.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: BlackRock, Capital Group, Carson, CNBC, Dimensional Funds, Fidelity, Schwab

After another rough start to the month of September, stocks have rallied and have remained positive for the last three weeks. The S&P 500 has been up 10 out of the last 11 months, and all three major U.S. stock market indexes are near all-time highs.

The big story last month was the Fed’s decision to cut interest rates for the first time since March 2020, when Covid-19 shuttered most of the world’s economy. The Fed reduced interest rates by 50 basis points on Sept. 18. Although it was widely expected that the Fed would cut rates, questions remained about the size and timing.

Did the Fed’s decision have anything to do with the election?

The Fed made the cut in its final meeting before the election in November; its next meeting will be Nov. 7, two days after the election. The Fed has consistently and repeatedly stressed that political considerations do not factor into its decision-making, regardless of what some media reports may say.

The Fed has shifted its focus from the fight against inflation to the health of the job market. For much of the past few years, unemployment has been so low and inflation so high that the Fed could focus predominantly on reigning in inflation. Now, unemployment has risen above to 4.2% from a low of 3.4%, and the pace of new jobs being added each month has slowed.

Are rate cuts near all-time market highs normal?

This is not the first time that the Fed has cut rates with the market at or near all-time highs. In fact, this most recently occurred in 2019. There have been 20 times that the Fed cut rates when the market was within 2% of all-time highs, and in each instance, stocks were higher a year later. Remember the adage: Don’t fight the Fed!

Fed Cuts Near All-Time Highs

S&P 500 returns after Fed cuts within 2% of an all-time high

Does this mean that the Fed thinks the economy is in trouble?

The economy continues to surprise to the upside. While the labor market has been cooling, it is important to remember that it is coming down from unusually high levels from the global pandemic. GDP growth for the last five years was revised from 9.4% to 10.7% and grew at 3% for the last quarter. Disposable income for households also was revised higher and as a result, the savings rate was revised up from 3.3% to 5.2% in the previous quarter.

Corporate earnings are expected to grow at double digits for the year and are expected to grow 15% for 2025. Looking at the chart below, only one of the six indicators used by the National Bureau of Economic Research for recession tracking reflects a potential recession.

Recessionary Indicators

National Bureau of Economic Research recession indicators for the United States (normalized to July 2022)

What do rate cuts mean for consumers and investors?

It is important to remember that the Fed controls very short-term rates only. The Fed does not set interest rates for mortgages, CDs, or bonds. However, it can influence these rates through its actions. Consumers may feel the impact most immediately with lower interest payments on debt that is tied to the prime rate, like credit cards or auto loans.

Investors have been anxious for the Fed to begin cutting rates. There have been 13 rate-cut cycles since World War II, with an average S&P 500 return after the first rate cut of 14%. It is not just stocks that stand to benefit from lower rates. As the Fed lowers rates, cash yields will drop in tandem. Investors faced with lower rates on cash have been moving into stocks and bonds to replace the lost yield.

Historically, bonds have been at their strongest in periods of rate cuts since bond prices rise as yields fall. Average returns for the U.S. Aggregate Bond Index have outpaced cash proxies in rate-cutting periods over the last 40 years.

Falling Rates Have Supported Bond Returns

Average annualized monthly returns during rate-cutting cycles

Where do we go from here?

The market is pricing in that by this time next year, the Fed will have cut interest rates eight to 10 times, and the benchmark rate will be at 3%. That would be much lower than today’s rates but still higher than any time from 2009 to 2021. 

October typically has been the worst month during an election year, and we wouldn’t be surprised to see some volatility during the month. However, the good news is that November and December do quite well in election years as the uncertainty of the election is removed. Investors have been rewarded for staying invested amid the constant negative sentiment and worry.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing; we are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Capital Group, Carson, Fidelity, NBER

Last week, stocks had their best week of the year. The S&P 500 rose eight days in a row, the first eight-day streak since November. In the last four years that saw an eight-day win streak, the average return was over 26% for the year.

As of now, the S&P 500 is up almost 18% through mid-August.

It wasn’t that long ago that the stock market saw a pullback that led some investors to a mild freak-out in anticipation of a worst-case scenario. The headlines were dominated by fears of a recession, the Fed being behind the curve on interest rate cuts and the yen carry trade ending.

Two weeks later, stocks are back near all-time highs, led by a broad-based rally of small caps, large-cap stocks, mega-cap stocks and international stocks. A run of favorable economic data across producer price index (PPI), consumer price index (CPI), retail sales and jobless claims is driving the rally.

As the chart shows, this year saw the seventh-largest August crisis that caused extreme fear and volatility since 1990. The good news: Investors got through all of them, and we don’t expect this time — or the next time — to be any different.

Even the best years in the market have bad days and scary headlines. Does this mean that we are completely out of the woods with regards to market weakness or volatility? Not at all; the months leading up to elections often can be volatile.

There’s Something About August

S&P 500 returns in volatile Augusts (1990-present)

The last few weeks have been a good reminder of the adage that what matters is time in the market and not timing the market. The worst time to sell is in a market panic, no matter how long or brief that panic may be. If you get scared and decide to get out of the market, you probably will miss some of the best days of the year.

If you had invested $10,000 into the S&P 500 in 2004 and stayed invested over that entire time, the investment would be worth almost $64,000. If you tried to time the market or got scared and got out during one of the above August scares, and you missed the best 10 days, the return would be less than half that total. It gets worse from there.

Fear takes over, and you think that the market can only go one direction — down. Fearful investors assume that even if the market bounces, they can’t get back in as they were by buying back in at a higher level than where they sold.

If you wait to get more clarity or less uncertainty, you will probably miss the best days — and that will cost you in the long run.

Time In the Market, Not Timing the Market

Performance of $10,000 invested in the S&P 500 the past 20 years (2004-2023)

The current economy’s underlying fundamentals are sound, but a large disconnect remains between the stock market, the economy and people’s sentiments about the economy. The job market has started to cool off since the remarkable strength of the pandemic. The number of job openings continues to trend downward.

Inflation has cooled significantly, but not quite to the level that the Fed wants to see. What’s more, consumer prices are still higher than they were several years ago, and people continue to feel it in their pocketbooks. Food prices have risen more than 25% since January 2020.

It also costs more to borrow money today than it used to. We became used to low interest rates for homes and credit cards. High rates combined with higher home prices have made buying a home much harder.

Finally, most people who are invested in stocks are invested through their 401K or retirement accounts. The growth in the market is not helping those individuals with increased costs of living, which may be why most don’t feel so great about the current economy even as the market hits new highs.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Carson, Fidelity, JP Morgan, Opco

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

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