A Market Change Before Election Season?
Unlike the first half of the year, last quarter’s stock gains were not concentrated in the largest US companies. In fact, the S&P 500 (basically comprised of the 500 largest US stocks) was a relative laggard with a gain of “only” 5.9%. Emerging-markets stocks went up 6.6% and developed-foreign stocks rose 8.9%.5 Domestically, both value and small stocks returned more than 9%.6 Global real estate fared best of all, with an eye-popping 16% return for the quarter.7
Q3’s market returns represent a departure from the pattern we’ve observed since the beginning of 2023. During that 18-month period, AI and other technology fueled huge returns in a few large US companies. Meanwhile, the rest of the global equity markets saw returns more consistent with their long-term averages that, unfortunately, paled in comparison to the market leaders.8
Is last quarter an anomaly or the beginning of a new pattern? As we’ve discussed before, our client equity portfolios contain a mix of large and small, growth and value, US and foreign. In our experience, market segments can go in and out of favor quickly. We don’t believe divining the future helps investors: If we guess wrong, we may compromise our long-term financial-life plan. That’s why we continue to believe in diversification. Especially when we find ourselves, as we do now, facing uncertainty.
A Close Election
Based on our client conversations, today’s investors are most uncertain about the outcome of the US presidential election next month. Indeed, for most of the year, polls have indicated a very close election.9 Moreover, each of the major candidates has promised very different policies and priorities. We are often asked (1) should we make changes based on whom we think is likely to win, (2) will one candidate or the other be better for various markets, and (3) does it make sense to sit things out until we know who wins?
We understand this election has big stakes and many people feel strongly about the potential outcomes. Making changes to our investments, however, begs the question: does it matter for our portfolios who wins? The answer is far from clear.
Does it Matter Who Wins?
We like to think whom we choose for our leader has a material impact on financial markets, but in practice that hasn’t been the case. Presidents certainly have at their disposal a variety of economic tools, including: setting spending priorities, appointing Fed governors, and trade policy. But US presidents don’t act in a vacuum. Markets are very complex with millions of participants, trillions of dollars, and a host of political and economic actors all with their own goals and priorities.
Thus, it’s not surprising that, when we look back over the last 100 years, we see positive equity returns across all manner of administrations, Republican and Democratic. In fact, the S&P 500 index has gone up during 15 of the 17 presidential administrations since 1926, as the chart below shows.
What About Congress?
Clients who are concerned about their preferred candidate losing sometimes ask about the US Congress and whether a divided federal government is likely to be better or worse for their portfolios. It’s true that Congress can stymie some or much of a president’s agenda. But we don’t have any indication that unified or divided government is likely to provide better investment results.
As the chart below shows, stocks tend to go up whether we have a governing “trifecta” (one party control of the US House, Senate, and Presidency) or divided government.
Should We Wait it Out?
In the United States, we have very long election cycles. For us, it feels like the country has been in “election mode” since the day after Election Night 2020. We have experienced so much election coverage and news that a majority of Americans say they are worn out by election coverage, experiencing what researchers call “election fatigue.”10 Given this phenomenon, it’s not surprising that many people want to unplug from news coverage, and some investors want to pull out and hide until it’s over. But indulging that feeling may not help our portfolios. History shows us that stock returns for US Presidential months look very much like stock returns in any month, depicted in the chart below:
We don’t suggest making dramatic short-term changes. It would be a shame for investors to sell out of their stocks, potentially paying taxes, and then missing out on a strong month or two in the markets. For those of us with election fatigue, we certainly counsel less media consumption and “doom scrolling”. Our portfolios, however, don’t get election fatigue. There we strongly recommend staying the course.
Conclusion: People, Not Politics
In August, we held a town-hall-style meeting about elections and markets featuring Apollo Lupescu from Dimensional Fund Advisors. You can watch a replay HERE. Apollo is a deep thinker and excellent presenter – please watch him if you have the time. At the risk of stealing a bit of his thunder, we’d like to summarize a point he made that’s stuck with us.
In the short term, political and other actors can impact the markets because they set the rules. But in the long term, its people – their creativity and ingenuity – that matter most. Regardless of any particular rule, people will find a way to adapt. Across all manner of conditions, entrepreneurs have found a way to create, innovate and, yes, profit. Regardless of who wins next month, in all likelihood years from now we’ll look back and wonder why we doubted our collective spirit and drive.
Bet on the players, not the rulebook.
[1] See, e.g., Vanguard Investment and Economic Outlook, December 2023 (“We foresee the equivalent of six to eight quarter-point cuts . . . .).
[2] Mid-Year Review, Wealth Architects, 2023.
[3] Global stocks represented by the MSCI ACWI Index (Net). All investment returns from Morningstar unless otherwise noted. Past performance is no guarantee of future results.
[4] US Bonds represented by the Bloomberg US Aggregate Bond Index.
[5] EM stocks represented by the MSCI Emerging Markets Index (net); developed-foreign stocks represented by the MSCI EAFE Index (net).
[6] Value stocks represented by the Russell 1000 Value Index. Small stocks represented by the Russell 2000 index.
[7] Global real estate represented by the S&P Global REIT Index (net).
[8] See, e.g., The Magnificent One, Wealth Architects, 2023.
[9] See, e.g., Laws, Is This the Closest Presidential Election Race in History?, Newsweek.com, September 30, 2024.
[10] Americans’ Views of 2024 Election News, Pew Research Center, October 10, 2024
Copyright © 2024 Wealth Architects, LLC
The S&P 500 Total Return Index (“S&P 500”) is an index of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Companies included in the index are comprised exclusively of large cap equities, primarily domestic issuers. The S&P 500 is a market value weighted index with each stocks’ weight in the index proportionate to its market value. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index and represents approximately 10% of the total market capitalization of that index. It includes 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer.
The Russell 2000 Index and the S&P 500 Total Return Index (together the “Indices”) include the reinvestment of dividends, but do not reflect the deduction of advisory fees, brokerage commissions and/or transaction fees, taxes or other expenses of investing. Furthermore, the Indices are unmanaged and are not available for direct investment. The Indices are presented for the sole purpose of demonstrating the effect of material market and/or economic conditions on the Fund’s portfolio during the performance periods presented. In comparison to the Indices, the Fund: represents the returns of a long/short portfolio whereas the Index is long only; may utilize other forms of leverage, such as margin, which the Index may not utilize; is substantially less diversified in terms of its holdings; has lower volatility; and will generally have lower liquidity.
The information provided in this commentary is intended to be informative and not intended to be advice relative to any investment or portfolio offered through Wealth Architects. The views expressed in this commentary reflect the opinion of the author based on data available as of the date this article [essay] was written and is subject to change without notice. This commentary is not a complete analysis of any sector, industry or security. Individual investors should consult with their financial advisor before implementing changes in their portfolio based on opinions expressed. The information provided in this commentary is not a solicitation for the investment management or other services offered by Wealth Architects. References incorporated into the report [essay] from third party sources are as of the date specified and are believed to be reliable. Wealth Architects is not responsible for errors in the third party data.
Chief Investment Officer
