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Understanding the Market Correction – 2023

You probably saw the news: On October 27, the S&P 500 officially slid into a market correction.

A correction is when the markets decline 10% or more from a recent peak.  In the S&P’s case, the “recent peak” was on July 31, when the index topped out at 4,588.1  On Friday, the index closed at 4,117 – a drop of 10.2%.1 

Market corrections are never fun, and there’s no way to know for sure how long one will last.  Historically, the average correction lasts for around four months, with the S&P 500 dipping around 13% before recovering.2 Of course, this is just the average.  Some corrections worsen and turn into bear markets.  Others last barely longer than the time it took for us to write this message.  (On Monday, October 30, for example, the S&P actually rose 1.2% and exited correction territory.3) Either way, corrections are not something to fear, but to understand – so that we can come through it stronger and healthier than before. 

To do that, we must understand why the markets have been sliding since July 31.  We use the word “slide” because that’s exactly what this correction has been.  Not a sharp, sudden drop, but a gradual slide, like the bumpy ones you see on a playground that rise and fall on the way to the ground.   While the S&P 500 dropped “at least 2% in a day on more than 20 occasions” in 2022, that’s only happened once in 2023, all the way back in February.4    

At first glance, it may seem a little puzzling that the markets have been sliding at all.  Do you remember how the markets surged during the first seven months of the year?  When 2023 kicked off, we were still coming to terms with stubborn inflation and rising interest rates.  Many economists predicted higher rates would lead to a recession.  But that didn’t happen.  The economy continued to grow.  The labor market added jobs.  Inflation cooled off.  As a result, many investors got excited, thinking maybe the Federal Reserve would stop hiking rates…or even start bringing rates down. 

Fast forward to today.  The economy continues to be healthy, having grown an impressive 4.9% in the third quarter.5  Inflation is significantly lower than where it was a year ago.  (In October of 2022, the inflation rate was 7.7%; as of this writing, that number is 3.7%.6)  And the unemployment rate is holding steady at 3.8%.7  But the markets move based either on excitement for the future, or fear of it – and these cheery numbers no longer generate the level of excitement they did earlier in the year. 

The reason is there are simply too many storm clouds obscuring the sunshine.  While inflation is much lower than last year, prices have ticked up slightly in recent months.  (We mentioned the inflation rate was 3.7% in September; it was 3.0% in June.6)  As a result, investors are now expecting the Federal Reserve to keep interest rates higher for longer.  Seeking to take advantage of this, many investors have moved over to U.S. Treasury bonds, driving the yield on 10-year bonds to its highest level in 16 years.  Since bonds are often seen as less volatile than stocks, when investors feel they can get a decent return with less volatility, they tend to move money out of the stock market and into the bond market.

As impressive as Q3 was for the economy, there are cloudy skies here, too.  This growth was largely driven by consumer spending – but how long consumers can continue to spend is an open question.  Some economists have noted that Americans’ after-tax income decreased by 1% over the summer, and the savings rate fell from 5.2% to 3.8%, too.5  Mortgage rates are near 8%, a 23-year high.8  Meanwhile, home sales are at a 13-year low.9  All this suggests that the Fed’s rate hikes, while cooling off inflation, have been cooling parts of the economy, too.

Couple all this with violence in the Middle East, political turmoil in Congress, and a potential government shutdown later in November, and you can see the problem.  Despite the strong economy, investors just aren’t seeing a good reason to put more money into the stock market…but lots of reasons to think that taking money out might be the prudent thing to do.  It’s not a market panic; it’s a market malaise.    

So, what does this all mean for us? 

We mentioned how the markets operate based on excitement for the future, or fear of it.  But that’s not how we operate.  We know that, while corrections are common and often temporary, they can worsen into bear markets.  Furthermore, any decline can have a significant impact on your portfolio, and by extension, your financial goals.  So, while our team doesn’t believe in panicking whenever a correction hits, neither do we believe in simply standing still.  Instead, we’ll continue to analyze how both the overall market – and the various sectors within the market – are trending.  We have put in place a series of rules that determine at what point in a trend we decide to buy, and when we decide to sell.  This enables us to switch between offense and defense at any time.  This, we feel, is the best way to keep you moving forward to your financial goals when the roads are good…and the best way to prevent you from backsliding when they’re bad. 

In the meantime, our advice is to enjoy the holiday season!  Our team will continue to focus on investments, so our clients can focus on why they invest: To create happy memories and live life to the fullest with their loved ones.  Happy Holidays! 

  

SOURCES:

1 “S&P 500,” St. Louis Fed, https://fred.stlouisfed.org/series/SP500

2 “Correction,” Investopedia, https://www.investopedia.com/terms/c/correction.asp

3 “Stocks rebound to start week,” CNBC, https://www.cnbc.com/2023/10/29/stock-market-today-live-updates.html

4 “S&P falls into correction,” Financial Times, https://www.ft.com/content/839d42e1-53ce-4f24-8b22-342ab761c0e4

5 “U.S. Economy Grew a Strong 4.9%,” The Wall Street Journal, https://www.wsj.com/economy/us-gdp-economy-third-quarter-f247fa45

6 “United States Inflation Rate,” Trading Economics, https://tradingeconomics.com/united-states/inflation-cpi

7 “The Employment Situation – September 2023,” U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf

8 “30-Year Fixed Rate Mortgage Average,” St. Louis Fed, https://fred.stlouisfed.org/series/MORTGAGE30US

9 “America’s frozen housing market,” CNN Business, https://www.cnn.com/2023/10/19/homes/existing-home-sales-september/index.html

   

Investing Like Water

Lately we’ve been thinking about water.  There are water problems everywhere – too much in the southeast and not enough out west.  Our thoughts are with you.

We know thinking about water might seem like an odd thing for financial professionals to think about. Especially during times like these, with interest rates on the rise, inflation remaining stubbornly high, and volatility dominating the markets. 

But, as investors, this is exactly the time to think about water.

To illustrate what we mean, consider this quote, usually attributed to the great Chinese philosopher, Lao Tzu:

“Consider that nothing is softer or more flexible than water, yet nothing can resist it.” 

Even in the best of times, many investors are rigid and inflexible in their approach.  It’s in the hardest of times that this rigidity comes back to bite them.  For instance, many investors take the approach that they must stay invested all the time.  Since the whole point of investing is to grow your money, they are constantly in growth mode. Though, investors like this simply fear missing out on future growth.  As a result, they are constantly climbing towards the top of the mountain, even when the cliff becomes straight and sheer, without a single ledge or toehold to cling to. 

As of this writing (9/30/2022), the S&P 500 is down 24.8% for the year and the NASDAQ is down 32.4%. For the first time since 2009, the first three quarters of 2022 have all been negative. It’s been a very challenging year!

Perhaps that slide will continue, perhaps it won’t.  We don’t know; no one does.  What we do know is that, when the cliff gets sheer, it can be a long drop down to the bottom. 

Other investors, perhaps burned by this approach, become inflexible in another way.  They sit out the markets permanently, or invest only in bonds, or some other approach that makes them feel “safe”.  Better to risk gaining nothing than to risk losing anything.  As a result, these investors never move at all.  They simply stay where they are…even if where they are isn’t where they want to be. 

Despite the volatility we’ve seen this year, the S&P 500 is up nearly 60% since March of 2020.1 Perhaps that number will go up, perhaps it won’t.  We don’t know; no one does.  What we do know is that we’d hate to miss out on that kind of journey. 

Now consider water.

Have you ever seen a major river from above?  If so, you’ll have seen how it always takes the easiest course.  Sometimes it flows straight; sometimes it bends and curves back on itself.  Sometimes it flows fast and strong; sometimes, it barely moves at all.  It cannot fight against gravity, so it never tries to go uphill.  But it always keeps moving, from source to destination. 

When you think about it, our entire investment philosophy here at Minich MacGregor Wealth Management is based on emulating water.  As you know, we use a combination of technical and fundamental analysis to help us find and follow market trends.  Sometimes, the markets trend up.  Sometimes, the markets trend down. Sometimes, the trend is short; other times, it’s long.  Sometimes, different sectors of the markets will trend in different directions.  (This is why we don’t try to invest in everything, but choose our investments based on their relative strength compared to other, similar investments.) 

Whichever way the trend goes, though, we don’t fight it.  Like water and gravity, we know that you can’t fight it.  Instead, we adapt to it.  When the trend is down, we may move into cash to protect against undue risk.  When the trend is up, we do the opposite.  Sometimes, this shift may occur month to month or even week to week.  But we are always on the lookout for opportunities to invest your money where it will do the most good.  Like water, we try to follow the path of least resistance, adapting our approach to the lay of the land.  Sometimes we will be in growth mode; other times we will be defensive.  Just as water will speed up or slow down, flow straight or curve backward, sometimes we will, too. 

Experience has convinced us that this approach – being flexible and adaptable – is the surest way to your destination.  By not trying to constantly scale the cliff, we do not risk the fall.  And by not being afraid to move, we do not risk forever staying in one place.  By being like water, we stay soft, flexible…and irresistible. 

The reason we’re telling you all this, is because investors have so much noise to contend with right now.  On Tuesday, September 13 alone, the news came out that the inflation rate for August was at 8.3%, higher than many experts hoped for.2 This means it’s even more likely that the Fed will continue to raise interest rates, which is hardly welcome news for most companies.  The result?  The Dow fell over 1100 points.2  For rigid, inflexible investors, numbers like this represent a major obstacle.  Some will crash into it in their attempts to plow through.  Others won’t even bother trying.  For us, however, it’s merely another data point. 

Over the coming weeks, it’s possible we’ll have more days like September 13. We don’t know how long this volatility will continue; no one does.  Either way, our strategy will help us get around it.  So, while the headlines might seem scary, we hope you take comfort in the fact that we’ll continue adapting to changing market trends with great flexibility, all based on your needs and goals.

We’ll be like water. 

1 “S&P 500 Historical Data,” Investing.com, https://www.investing.com/indices/us-spx-500-historical-data

2 “Stocks Fall on Hotter-Than-Expected Inflation Data,” The Wall Street Journal, https://www.wsj.com/articles/global-stocks-markets-dow-update-09-13-2022-11663065625

Questions You Were Afraid to Ask #2

We recently started a new series of posts called “Questions You Were Afraid to Ask.”  Each month, we will look at a common question that many investors have but feel uncomfortable asking.  Because, after all, when it comes to your finances, there’s no such thing as a bad question!

In our first post, we looked at the difference between the Dow, S&P 500, and NASDAQ indices.  This month, let’s discuss a related question:

Questions You Were Afraid to Ask #2:
Why is the price of the Dow so much higher than the S&P 500?

Before we get started, do me a favor.  Pick up your phone or go to your computer.  Open your internet browser and search for “S&P 500.”  The first result will show the current price of the index.  Make a note of the number. 

Next, search for “Dow Jones.” 

Notice how much higher it is?  As in, tens of thousands of dollars higher. 

As you know from our last post, the Dow tracks the performance of 30 of the most prominent companies listed on stock exchanges in America.  (Think Apple, Coca Cola, and Walmart, among others.)  The S&P 500, meanwhile, measures 500 of the largest companies listed on American stock exchanges. 

This is why many investors often wonder why the Dow’s total price is so much higher than the S&P, even though the latter contains hundreds more companies.  The answer has to do with how these two indices are calculated. (Brace yourself, because we’re about to do some math.)

The Dow, for example, is calculated by taking the 30 stocks in the average, adding up their prices, and then dividing the total by the “Dow Divisor.”  Early in the Dow’s history, this divisor was simply the number of companies within the average.  Today, the divisor is adjusted regularly to factor in changes to the list of companies, stock splits, and other events that could have an impact on the overall average. 

As of this writing, the Dow Divisor is 0.15172752595384.1  In effect, calculating the Dow’s value essentially means multiplying the sum of each company’s price by roughly 6.5.  (Because the divisor is less than one means it technically functions as a multiplier.)  Every $1 change in price to a particular stock within the Dow equates to a movement of 6.59 points on the Dow.  (1 divided by 0.15172752595384.)  We know that probably seems counterintuitive, but hey, that’s math! 

This multiplication effect is partly why the Dow’s value is so much higher than the S&P 500’s.  You see, even though the S&P contains hundreds more companies, its overall price is lower because of how it’s weighted.  Now, take another deep breath before we plunge into the wild world of weighted vs. unweighted indices…and yes, do a little more math.    

In an unweighted index, every company has the same impact on the overall index, no matter its price or how many shares are available.  The price of the index is determined by simply adding up every company’s stock price, then dividing by the total number of companies in the index.  For example, imagine an unweighted index containing only three companies.  If Company A went up 15%, Company B went up 10%, and Company C went up 5%, the index itself would be up 10%.  (15+10+5=30, and 30 divided by 3 equals 10.) 

With us so far?

Most indices don’t work like this, however.  That’s because not all companies are equal.  Some are worth much more than others or have a much higher volume of shares available to buy or sell.  For that reason, a simple mean average is a pretty unnuanced way of looking at the overall index.  For this reason, most indices are weighted.  This means the average is calculated by putting more importance – or weight – on some numbers than others.  It’s a more accurate way of looking at data. 

The S&P is a capitalization-weighted index.  (The Dow, by contrast, is a much simpler price-weighted index.)  That means each company is weighted according to its market capitalization – the company’s share price multiplied by the number of shares available to buy or sell.  As you know, some companies are simply bigger than others.  Typically, this means they have more outstanding shares, which means a higher market capitalization and more weight within the S&P 500.  The result?  The price movement of these companies has a much bigger impact on the S&P than that of smaller companies. 

For these reasons, the divisor that the S&P 500 uses is much higher than for the Dow.  In fact, it’s currently higher than 8,000.2 And the equation the S&P uses is much more complex.  (I’ll spare you the algebra.)  This is all done to keep the value of the index down to a more manageable level, and to prevent the price movement of a few companies from having an even bigger impact on the overall index than they already do.  Hence, as of this writing, the Dow is currently over 35,000, while the S&P is around 4,675. 

Whew!  That was a lot of information to cover in one post, wasn’t it?  This has also been a much more technical post than we usually try to write.  But we hope it gave you a glimpse into the numbers you see reported every day in the news.  That way, when the media says, “The Dow finished at X today,” or, “The S&P 500 opened at Y”, you’ll have a better understanding of what that actually means.  Because, after all, that’s a big part of what life is all about, isn’t it?  Increasing our understanding of how the world works – and why. 

Next month, we’ll cover a simpler – but broader – topic: The difference between stocks, bonds, funds, and other types of investments.  Have a great month!      

2022 Crystal Ball

Welcome to 2022!

May it bring us peace, prosperity, and a whole lotta love.

And some greater certainty about what lies ahead.

This post includes precious little certainty, but it does have kittens. (All the way down in the P.S.)

You’re probably seeing an endless parade of emails, listicles, and thought pieces loaded with predictions for 2022.

Will these predictions be right?

In some ways.

Will they be wrong?

Almost certainly.

Predictions are usually judged by how right or wrong they turn out to be.

Is that the right approach?

Is there innate value in the exercise of looking at the current state of things and thinking about where the winds will take us, to mix metaphors?

Beyond the success or failure of our prognostications?

We think so.

We also think revisiting predictions to see where and why we got it wrong is a great exercise in how complex our world really is.

Rather than issue predictions about 2022 that are certain to be wrong, here are some musings about trends we think will play a role this year.

There’s hope for COVID-19 in 2022.

As omicron numbers skyrocket, it’s clear the pandemic is still with us in this third year.

But, we’re hopeful that increasing vaccination rates, medical advances like Pfizer’s at-home anti-viral pill, and decreasing virulence could help reduce the impact of COVID on our lives.1

We also want to acknowledge that our outlook as Americans is not reflected in every country around the world. Getting to the other side of this pandemic will require the whole world’s efforts.

We deeply hope this is our year.

The economy looks poised for more growth.

Despite plenty of hurdles, the U.S. economy looks to have entered 2022 in shape for more growth.

Current estimates suggest the economy will continue to grow this year, faster than typical historical trends.2

But all that depends on a lot of assumptions about variants, spending, hiring, inflation, and more. We’ll see just how rosy those assumptions are as the year progresses.

Politics will dominate headlines.

Mid-term elections mean politics will play a big role (in the media at least).

Election years always mean uncertainty, and that often rattles markets. However, historical analysis shows that markets typically bounce back after election uncertainty is over.3

While the past doesn’t predict the future, it’s a good reminder of why we don’t let elections drive strategy. They’re just one more factor in a very complex system.

Folks are ready for some kind of normal.

We think it’s safe to say that we’re all tired of the pandemic and longing for normalcy.

What does normal look like in 2022?

Will it look like what we had before the pandemic? Will it be completely different?

What do you think?

Do you have any predictions for 2022 to share?


P.S. These are the kittens you’re looking for. Here’s a live kitten cam from a rescue.

P.P.S. Need some inspiration for the new year? Here’s a curated list of Ted talks to get you going. We think the talks on happiness and stress are particularly fascinating.

1- https://www.reuters.com/business/healthcare-pharmaceuticals/pfizer-oral-covid-19-pill-gets-us-authorization-at-home-use-2021-12-22/

2- https://www.newyorker.com/news/our-columnists/the-2022-economy-looks-strong-but-beware-the-known-unknowns

3- https://us.etrade.com/knowledge/library/perspectives/daily-insights/midterm-elections-stocks

Wrestling with the Unknown

Let’s talk about omicron.

(If you’d rather not, scroll right down to the P.S. for something beautiful.)

Since the first known cases of COVID-19 were detected in China, we’ve seen a number of notable mutations as the virus moved across the world. Some, like beta and gamma, didn’t end up being a huge deal.1

Others, like delta, spread rapidly and caused new waves of infection.

Now we have another variant on our hands: omicron. And it could be a serious one.

Unsurprisingly, markets reacted badly to the news last Friday and gave us our worst market day for the year.2

Why? The short trading day and lack of overall volume over the holiday break gave the selling pressure greater impact on the market than it might have had under normal conditions.

We’ve seen that pattern before and it’s worth keeping in your back pocket: bad news over a holiday often leads to outsized market reactions.

Is omicron dangerous?

Well, we don’t know yet. And we won’t know for several weeks until scientists can determine how the variant will respond to current vaccines and treatments.

If it’s more virulent, it could have delta-level impacts on travel, hospitality, and other parts of the economy.

It could also turn out to be a tiny bump in the road.

We just don’t know yet.

The market is laser-focused on omicron news so we can expect rocky times until the uncertainty clears (or something else takes over the chatter).

So, what can we do?

Rather than try to predict the unknowable or speculate wildly without enough information, let’s do something else instead.

Let’s take a deep breath, step back, and focus on some ground truths:

Everyone is tired of this pandemic and ready to move on. But the pandemic’s not done yet.

We will continue to see COVID-19 variants. Most will fade into the background. Some will be more serious.

New vaccines and treatments are continually being developed and released.

We have been adapting to the virus for nearly two years and we’ll continue to get better at it.

Life is a gift and every day is extraordinary in some way. Let’s cherish that.

Hopefully, we’ll look back in a few months and forget omicron ever hit the headlines.

Until then, we wait, we watch, and we count our blessings.

P.S. Can we share something uplifting with you? A retired dad (who already fostered 30 kids) adopted five young siblings so they could grow up together.3 How beautiful is that?

P.P.S. Want to learn more about happiness and how to get off the hedonic treadmill? Check out one of the very first TED talks on the science of happiness. Thoughts? Hit “reply” and let us know.

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8342008/

https://www.cnbc.com/2021/11/26/stock-futures-open-to-close-market-news.html

https://www.cbsnews.com/news/foster-dad-lamont-thomas-adopts-five-siblings

Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

Is the Sky Falling (again)?

There’s a lot going on in the world right now.

We thought this message was going to be about the $3.5 trillion budget deal or what to do with any child tax credits that may be heading your way.

But then global markets jolted on fears of new viral variants.

Is the sky actually falling?

Could a big correction happen?

After hitting record highs in previous days, markets tumbled Monday, sending the Dow 700+ points lower.1

Why?

Mostly fears of a COVID-19 resurgence caused by the delta variant that could derail the economic recovery.

Case numbers are rising globally, even in countries with high vaccination rates, and the surge could lead to a return to travel restrictions and business closures.2

Could these market jitters cause a 10%+ correction?

Absolutely.

Should we panic and freak out?

Definitely not.

Here are a couple of reasons why:

Summer months can bring higher volatility, perhaps because of lower trading volume, making bad news shake the market harder.3

We’ve had a pretty long winning streak, and corrections are part and parcel of a healthy market, especially when we’re near all-time highs.

New variants and higher case counts are a threat. However, vaccination rates are continuing to rise, and experts don’t think that we’ll see the devastating health outcomes we saw last year.4

Could the delta variant cause the economy to slow down?

It’s hard to say at this point. The rosy projections about the economy have been based on a swift return to normal from the shortest recession in history.5

If surging case counts cause a resumption of business and travel limits, we could definitely see a hit, especially in recovery-dependent industries like airlines, cruises, and hotels.

Supply chain issues are still causing materials shortages, creating delivery delays of goods, and potentially triggering slowdowns in industries such as building and construction.6

However, consumer spending is still very strong and the economy is in way better shape than it was last year.7

Bottom line: we could see some economic complications due to the delta variant and we’re likely to see more market volatility ahead, especially if economic data disappoints.

We’re keeping an eagle eye on the trends and will be adjusting strategies for our clients if we feel they need to be changed.

Have questions? Please reach out. We’re always here to help.


P.S. A massive $3.5 trillion budget deal is working its way through Congress.8 It’s got a lot of moving parts that may affect taxes, Medicare, and much more. We’ll reach out when we know more about how it’s likely to shake out.

1https://www.cnbc.com/2021/07/18/stock-market-futures-open-to-close-news.html
2https://www.reuters.com/business/healthcare-pharmaceuticals/delta-covid-variant-now-dominant-worldwide-drives-surge-us-deaths-officials-2021-07-16/
3https://www.nasdaq.com/articles/volatility-gauge-suggests-tactical-trading-during-summer-doldrums-2021-07-19
4https://www.nature.com/articles/d41586-021-01696-3
5https://www.cnbc.com/2021/07/19/its-official-the-covid-recession-lasted-just-two-months-the-shortest-in-us-history.html
6https://www.washingtonpost.com/us-policy/2021/07/20/biden-delta-coronavirus-economy/
7https://www.reuters.com/business/finance/us-retail-sales-unexpectedly-rise-june-2021-07-16/
8https://www.cnbc.com/2021/07/14/democrats-3point5-trillion-budget-package-funds-family-programs-clean-energy-medicare-expansion.html

ELECTIONS & THE MARKETS

It’s that time again!  Every four years, Americans take a few minutes out of their day to choose the next President of the United States.  Under normal circumstances, voting is a simple, uncomplicated act—but the months preceding it are anything but.  After all, before we vote, we first have to endure the dreaded “campaign season.”  From endless televised debates to the plethora of signs on our neighbors’ lawns, “politics” becomes the order of the day.

If you’re like us, you probably don’t enjoy all the campaigning.  But you also know how important the political process is.  Being an informed, engaged citizen is crucial to maintaining the stability of our Republic.  That means asking some pretty tough questions, like: “Which candidate best represents my opinions and values?”  “What will each candidate do to ensure both our safety and our personal liberties?”  Getting the answers can be both frustrating and time-consuming.

Fortunately, there’s one question you don’t have to ask. 

“How will the election affect the markets?”

This is a question we get every four years.  This year, we thought we’d make life a little easier for you by answering it now.  That means you have one less question to worry about! 

So, how do elections affect the markets?  The answer is:

Not much.

Since 1957, the S&P 500 has gained an average of roughly 9.8% every presidential election year.1  Of course, there can be some massive exceptions.  For example, in 1928, the S&P rose over 37%.  In 2008, it fell over 38%.2 

But there’s a danger in using averages to try and predict what will happen.  Take the “Presidential Election Cycle Theory” for instance.  Once upon a time, many people believed that U.S. stock markets are always the weakest in the year following a presidential election.  This was the case for Franklin Roosevelt.  It also held true for Truman and Eisenhower. 

But in George H.W. Bush’s first year, the S&P 500 rose 27%.  In Bill Clinton’s first year, it rose 7%.  Barack Obama’s first year saw a 23% rise.  Donald Trump’s first year was 19%. 

It’s clear that the “Presidential Election Cycle Theory” just doesn’t hold water.  And that’s true for actual election years as well.  An average merely shows you what has happened, not what’s going to happen.  (Side note: this is why you often see the financial industry emphasize that “Past performance does not guarantee future results.”  Because it’s true.) 

“But what if the Democrats/Republicans win?  Won’t that have an effect?”

That’s the next question we get every four years.  Our answer:

Not really.

Don’t believe us?  Let’s take a little quiz.  Below are the last eight presidents of the United States, with their political party next to their name.  (We’re skipping Ford as he took office in the middle of Nixon’s second term.)  Look at each name and guess whether you think the S&P 500 went up or down during the first year of each president’s term.  Write your guess in the space provided, if you like.   

PresidentPartyMarkets Up or Down?
Richard Nixon (1st term)Republican 
Richard Nixon (2nd term)Republican 
Jimmy CarterDemocrat 
Ronald Reagan (1st term)Republican 
Ronald Reagan (2nd term)Republican 
George H.W. BushRepublican 
Bill Clinton (1st term)Democrat       
Bill Clinton (2nd term)Democrat 
George W. Bush (1st term)Republican 
George W. Bush (2nd term)Republican 
Barack Obama (1st term)Democrat 
Barack Obama (2nd term)Democrat 
Donald TrumpRepublican 

Now, maybe you’ll score 100% on this quiz.  But we’re willing to bet at least a few of the answers will surprise you.  Speaking of which, here they are.2 

PresidentPartyMarkets Up or Down?
Richard Nixon (1st term)Republican-11.36%
Richard Nixon (2nd term)Republican-17.37%
Jimmy CarterDemocrat-11.5%
Ronald Reagan (1st term)Republican-9.73%
Ronald Reagan (2nd term)Republican+26.33%
George H.W. BushRepublican+27.25%
Bill Clinton (1st term)Democrat+7.06%  
Bill Clinton (2nd term)Democrat+31.01%
George W. Bush (1st term)Republican-13.04%
George W. Bush (2nd term)Republican+3.0%
Barack Obama (1st term)Democrat+23.45%
Barack Obama (2nd term)Democrat+29.6%
Donald TrumpRepublican+19.42%

If a hypothetical investor had followed the “Presidentical Election Cycle Theory”, he or she would have missed out on some of the biggest gains in market history.  The same is true if that hypothetical investor had made decisions based on politics.  Convinced Democrats are terrible for the country?  Fine, but have fun missing out on Clinton’s second term.  Can’t stand Republicans?  Okay, but too bad you didn’t catch the train between Reagan and the first Bush.   

As worked up as we often get about our political beliefs, neither party tends to have that much impact on the markets compared to the other.  Historically, the S&P 500 has gone up 10.8% under Democratic presidents, and 5.6% under Republican presidents.3  That’s not a large difference and can be attributed to a whole range of factors besides politics.  Either way, the markets go up over time.  That’s because the markets are driven by far more than just one person or event.

Obviously, it matters a great deal who our president is … but not when it comes to the markets.  And that’s a good thing!  Here’s why:

  1. The Founding Fathers created a system of government where no branch (executive, legislative, or judicial) was supposed to dominate the other.  The fact that neither political party, nor election years in general, have that much influence on the markets shows that our system of checks and balances extends to investing, too. 
  2. Again, the markets are driven by far more than just one person or event.  They’re controlled by the ebb and tide of trade, by the law of supply and demand, by innovation and invention, by international conflict and consumer confidence.  The markets are like life.  The course our lives take isn’t determined by one gigantic decision, but by the millions of small decisions we make every day. 

We don’t know about you, but we find that comforting.

So, what’s the takeaway from all this?  The takeaway is that when it comes to investing, we control our own destinies, not politicians.  The way to reaching your financial goals is by having a sound investment strategy, making informed decisions, and taking emotion out of investing.  Not by worrying about the election.

So this year, as you watch the debates, chat amongst your friends, and decide who you want the next president to be, you can do so with the knowledge that whatever happens, the markets will go their own way … and so will you. 

On behalf of everyone here at Minich MacGregor Wealth Management, we wish you a happy (and headache free) election! 

1 “What could the S&P 500 tell us about Trump’s reelection?” Forbes, October 21, 2020.  https://www.forbes.com/sites/greatspeculations/2019/10/21/what-could-the-sp-500-tell-us-about-trumps-re-election/#3b5151ef4664

2 “S&P 500 Historical Annual Returns,” Macrotrends, https://www.macrotrends.net/2526/sp-500-historical-annual-returns

3 “Democratic presidents are better for the stock market and economy than Republicans, one study shows,” Business Insider, August 24, 2020.  https://markets.businessinsider.com/news/stocks/stock-market-election-democratic-republican-presidents-better-performance-economy-gdp-2020-8-1029528932#