With one month of 2024 already behind us, things are off to a reasonable start. Markets are slightly higher, inflation pressures continue to abate, the Fed has stated they are no longer looking to raise rates, and mortgage rates continue to decline. However, a sense of unease persists among many, suggesting something significant looms in the distance. What could it be? Ah, yes, it’s the 2024 presidential election. And with it, all the political histrionics that it entails.
For starters, every four years, we hear about how this year’s election is the most important ever. Along the way, people make a whole host of sweeping statements about how picking their party will lead to all these great things, but picking the other party will lead to certain doom. Now, being rational, objective professionals (or just stopping to think about this for a moment), we know it can’t really have that much of an impact.
Nevertheless, investors often worry about what presidential election outcomes might mean for their portfolios. In discussing this matter with clients, we know it is a genuine concern for many. We’ve often heard from clients that if “fill in the blank” gets elected, they express nervousness about what it means for their portfolio. But is that feeling warranted?
The most straightforward answer to the question is no; it is not merited. Why? First and foremost, historical average stock returns are nicely positive under both Democratic and Republican presidents. And this makes sense, as even though the U.S. president is the most powerful person in the world, they actually have limited power over the economy. Moreover, due to other political gridlock, they usually cannot get as much done as people hope or fear.
In addition, the U.S. economy is massive. Digging one step below the surface, it is clear the private sector holds the primary firepower and productive capacity. In fact, the private sector accounts for almost 90% of total GDP. This means that nearly all of the economy is outside the direct control of the government. And while the President and Congress can create and influence policy decisions, these tend to be moderate changes.
Finally, let’s look at a few numbers. From 1926 to 2022, there have been 47 years of Republican presidents and 50 years of Democratic presidents. Over this period, average returns during Republican presidencies were about +9%, while during Democratic presidencies, they were about +15%. With that type of spread, we should all be rooting for four more years of President Biden. If only it were that simple. We know outliers can influence averages, and this case is no exception.
Two of the worst market return environments were overseen by Republican presidents. The first, Herbert Hoover, presided over the country during the onset of the Depression, when markets declined by about -75%. The second, George W. Bush, came into office as the 2000s tech bubble was bursting and left office near the depths of the Great Financial Crisis, seeing a return of -40% during his tenure. It’s safe to say that events of this magnitude would have impacted either party. So even though the market dropped, there likely wasn’t much causation. And if we’re willing to say a large part of these declines was out of the president’s control, how many other smaller economic events are also unavoidable?
All of this is a long way of saying no matter your political beliefs or party affiliation, do yourself a favor this year and don’t let it impact your investment decisions (or your sanity).
Economy
- Markets were mixed this week after the Fed meeting and hot jobs numbers, with the S&P 500 up 1.4%, the Nasdaq up 1.1%, and the small-cap Russell 2000 down -0.8%.
- U.S. job openings surged by 101K from the previous month to 9.03 million in December, the highest in three months and above the market consensus of 8.75 million.
- ADP Employment change showed private businesses in the U.S. hired 107K workers in January, below a downwardly revised 158K in December and forecasts of 145K.
- The Federal Reserve kept the Fed funds rate unchanged at a 23-year high of 5.25%-5.5% for a fourth consecutive meeting in January, in line with expectations.
- The U.S. economy added 353K jobs in January, compared to an upwardly revised 333K in December, and way above market forecasts of 180K.
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Communication Services were the top performers, while Energy and Real Estate lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield decreased 13 basis points to 4.03% during the week.
- Global bond markets were in positive territory this week.
- Corporate bonds led for the week, followed by government bonds and high-yield bonds.
