Traditions Wealth Advisors
Greysen Golgert/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer
July 28, 2024​                   

This month has seen events occur in the US political sphere that have changed the election cycle from relatively predictable to wildly unpredictable in a short amount of time. In the past week we have seen an ever-changing slew of predictions, polls, and headlines that prove this race has been flipped on its head. With that being said, history has repeatedly shown that political turnover has little to no effect on the overall performance of a diversified investment portfolio. There will likely be short-term ripples in the months leading up to the race, but these occurred time and time again as Election Day approached during previous cycles. It is only natural for investors to get the jitters when either candidate proposes a policy change or espouses a desired geopolitical stance, but the long-run reality is that the impact of these ripples fades away in the wake of an election year. In fact, since 1950, stocks have averaged 9.1% returns during an election year and 8.3% returns in the year after an election. Regardless of who wins the presidency or which party controls Congress, financial markets will not be affected by the various potential outcomes. As seen below, the average annual S&P 500 returns from 1933-2022 have been positive under each partisan combination.

One of the common lines of thought when politics intersects with investment is that policy change (or continuity) will have a significant impact on individual sectors. While it is certainly true that policy can and will affect certain sectors in diverse ways, betting on the perceived effect of policy positions at this stage is extremely risky. Even if it is possible to anticipate the effect of each party’s current policy objectives, making investment decisions now based off of that is a gamble within a gamble. First, elections are not predictable, and this one recently became less predictable by a significant margin. Second, party policy on a variety of subjects can and often does shift while candidates are on the campaign trail or elected to office. Third, it can be extremely difficult for elected officials to implement policy when they take office, and thus certain policy goals take priority over others. Also, sector performance in election years has not produced much in the way of discernible patterns. Betting on sector returns relative to political outcomes can backfire in many ways, but the safe bet that produces consistent returns is to stick with the fundamentals and a consistent investment strategy.

Investors may also be concerned about the potential for newly elected officials to completely alter the fabric of the economy. Worries especially tend to arise when a single party gains control of Congress and the presidency in one fell swoop. In truth, sweeps have happened before and they are going to happen again, but the makeup of our economy has remained consistent for decades. In past years where one party dominated the legislative and executive branches of our government, the percentage of bills­ that are defined as having real-world impact on spending and policy has not risen when compared to years in which the government was divided. The quasi-public Federal Reserve and its monetary policy have a far more relevant impact than our elected officials do.

​Whatever the political situation come November, this US economy will continue chugging along. Apple, NVIDIA, Amazon, and hundreds of other American companies will continue to innovate and grow. In other news, progress on the inflation front and a higher than expected GDP growth reading for Q2 (2.8%) are positive signs for the Fed, the economy, and investors as they provide more optimism for a soft landing.

Sources:
https://www.invesco.com/us/en/insights/market-performance-2024-presidential-election.html
https://www.fountainheadam.com/wp-content/uploads/2024/06/Market-Commentary-2024.5-1.pdf
https://www.fidelity.com/learning-center/trading-investing/election-market-impact

Traditions Wealth Advisors
Greysen Golgert/Brien L. Smith CFP®
Economic Analyst Intern/Chief Investment Officer

​Financial markets are booming as long-awaited signs of a slowing economy and declining inflation have finally appeared in the recent prints of important economic indicators. The unemployment rate clocked in at 4.1% in June, its highest level since November 2021. In 2022 and 2023, an overheated labor market had the unemployment rate hovering between 3.4 and 3.8% before it began inching upward this year. Estimates hold that the natural rate of unemployment is between 4.3 and 4.4%, indicating that there is still room for the current rate to rise before it reaches that equilibrium level. The other reading of significant import is from the June CPI report, and it indicated a -0.1% change in consumer prices. For the first time since 2022, prices actually decreased on a month-to-month basis, bringing the year-to-date Consumer Price Index inflation down from 3.3% to a more modest 3.0%. With growth remaining steady and each of their dual mandate objectives coming into focus, the Fed’s balancing act appears to be working the way it should.

So, why is all of this fueling markets upward? First and foremost, the pressure is now on the Federal Reserve to begin lowering their Federal Funds Rate from the current level of 5.25-5.50%. Following the June CPI report and the unemployment data, markets began pricing in a 100% chance for a 25bps cut in September. While the Fed has proven markets wrong before on rates, Chair Jerome Powell has sounded surprisingly dovish of late. Powell is notoriously close-mouthed about Fed decision-making, but during his congressional testimonies and various speaking engagements this month he has noted, with increasing certainty, that the labor market is cooling, and inflation is moderating to a desired level. Certainty is the name of the game with market sentiment and stocks are soaring because of it. The end of a contractionary rate environment is something that companies and investors are extremely keen on, but other factors have also increased sentiment and kept these market rallies going. As noted earlier, the economy has finally shown consistent enough trends in unemployment and inflation to indicate that it’s behaving as it should. This economy will likely continue to respond as expected, barring any strong supply or demand-side economic shocks while the Fed lowers rates. Another major contributor to the state of financial markets is the rising level of certainty when it comes to November elections. Betting marketplace PredictIt.org now has odds of a Trump victory at 2:1 instead of the coin toss it was just a month ago. In the long-run, markets typically don’t care who sits in the Oval Office, but in the short-run they do prefer less political uncertainty during election season. At this point, the only plausible shakeup on that front would occur if Biden were to drop out of the race.

​Although the data is cause for optimism about the success of the Fed’s monetary policy, some experts remain skeptical. Recent reports of unchanged retail sales indicate that the economy might be chugging along steadily when it should be slowing down in this environment. It’s also worth bearing in mind that if the Fed lowers interest rates at the wrong time, it could result in a bumpier ride than expected. Transitionary periods are always a little more vulnerable than what we’re used to, but we can’t stay in this spot forever, and everybody knows it. Whether the first cut is in September or December, market confidence in Jerome Powell and the other Fed decision-makers should remain strong. Despite the few worries brought about by the retail sales report and the debate about when to cut rates, a soft landing and “immaculate disinflation” are securely in play for this economy going forward.

Sources:
https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/notes-on-the-week-ahead/is-4-1-percent-unemployment-a-recession-warning/
https://www.investopedia.com/articles/investing/100715/breaking-down-federal-reserves-dual-mandate.asp
https://www.yardeniquicktakes.com/the-trump-trade/