Topic: Market Movement

The clock started ticking last week on the drama surrounding the debt ceiling. The United States hit the $31.4 trillion debt ceiling on Jan. 19, triggering the Treasury Department to start taking extraordinary measures to prevent a default. Although the crisis probably is five to six months away, concern about whether a deeply divided Congress can find a path to raise the debt ceiling will be a critical issue this summer.

What is the debt ceiling?

Established by Congress, the debt ceiling is the maximum amount of money the federal government can borrow to finance obligations that lawmakers and presidents have already approved. It was originally created more than 100 years ago, and it has been modified more than 100 times since World War II alone. Though its original purpose was to make it easier for the federal government to borrow money, the debt ceiling has become a political battleground as a way for Congress to restrict the growth of borrowing. Increasing the debt ceiling does not authorize new spending commitments; it allows the government to meet its existing obligations. 

What would happen if the United States were to default on its debt?

If the government were no longer able to borrow, it would not have enough money to pay its bills, including interest on the national debt. It would probably have to delay payments or default on some of its commitments, potentially affecting Social Security payments and federal workers’ salaries. Thankfully, this has never happened, so no one knows exactly how the Treasury would handle the situation. In a letter to Congress, Treasury Secretary Janet Yellin wrote that the department would begin employing “extraordinary measures” to help delay the point at which the nation might default on its debt.

What are “extraordinary measures”? 

The Treasury has employed measures more than a dozen times in past debt-ceiling battles to prevent a default by allowing lawmakers more time to increase or suspend the limit. These measures include suspending new investments in various retirement accounts for government employees. These funds count against the debt limit and would therefore reduce the amount of outstanding debt subject to the limit, providing the agency with additional capacity to continue funding the government’s operations. No retirees would be affected ultimately, though, as the funds would be made whole once the debt ceiling was agreed upon.

Will Congress raise the debt ceiling?

The closest the United States ever came to default was the summer of 2011, when Standard & Poor’s downgraded the U.S. credit rating for the first time ever and the S&P 500 fell by more than 16%. Congress eventually reached a compromise in early August, raising the debt limit just days before the country would have defaulted. Those conditions are similar politically to what we have today with a Democrat in the White House, Democrats holding a slight majority in the Senate and Republicans holding a slight majority in the House. The drama will play out over the next several months, but ultimately the two parties will have to negotiate a solution. Currently, neither party is in a rush to begin working on a deal. 

What is the potential impact on the markets?

The stock market historically has not reacted until the default deadline is much closer. In 2011, the market downturn started about a month before the deadline and accelerated as the deadline approached. Market volatility increased as the deadline drew closer. At this point, we are five to six months away from a potential crisis point, so the market reaction is expected to remain calm for now. While the path to resolution is uncertain, a default would be an unprecedented event that would have dramatic repercussions in the global financial markets. But this has never happened before; Congress has always managed to reach an agreement, and we think that this time will be no different.

All of these factors will have a much larger effect on investor sentiment over the next few months than the looming debt-ceiling drama.

As we get closer to the default deadline, we will determine if any changes need to be made to the portfolios. We would like to reiterate that a default has never happened, and we will continue to monitor the issue diligently.

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: Brookings Institute, CNBC, Schwab

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.

The story for investors last year was all about inflation. The 2023 narrative is shifting toward how quickly inflation can cool — and how much cooling will be sufficient to get the Fed to pause its campaign of hiking interest rates.

Last week, the December Consumer Price Index (CPI) report marked the fourth consecutive decline in headline CPI on a year-over-year basis. The Fed will want to see further evidence that inflation is cooling, especially in the service sector (see chart below) before it will be comfortable pausing rate hikes. Housing costs are generally the biggest-ticket item on most households’ spending budgets, and shelter costs (rent and mortgage payments) make up roughly one-third of the CPI index. 

Services Ex-Shelter to Keep the Fed Hiking but at a Slower Pace

Year-over-year percentage change, seasonally adjusted

Unfortunately, many retail investors tend to sell low and buy high when investing in the stock market. As a result of the difficult last year in the stock market, investors have pulled more money out of U.S. equities than at any time since 2005. Most of this comes down to behavioral finance: Investors worry more about losing money than they do about making money. 

At the same time — and for the first time in many cycles —  cash/money market now offers a better yield than the dividend yield on the S&P 500. This offers a good alternative for those looking for income, but it does not replace the long-term growth that can potentially be achieved in the equity markets. While money market rates and short-term Treasury rates are very attractive for the first time in many years (see the chart below), the rates still do not keep pace with current levels of inflation. 

Many investors think that they are going to move to cash — or to the sidelines — so they can wait out the downside or potential recession, earn interest on their cash, and then get back in when the market has “settled down.” As we have written many times, market timing rarely works, and it’s very difficult for individual investors to remove emotion out of the decision making when the market is falling. This often leads to subpar long-term results, compared to what the results would have been if they had just stayed the course.

January Sees Collapse in U.S. Equity Allocation

Net % say they are overweight U.S. equities

Yield Comparison

The market ended 2022 on a down note, with the S&P finishing the last four weeks of the year down, but January has started very differently. The Santa Claus rally — which refers to the stock market’s tendency to rally in the last five trading sessions of a calendar year and the first two sessions of the next — did eke out a gain this year. On top of that, the first five trading days also were also positive. When the market finishes positive in January, it finishes the year higher 70% of the time.

The chart below shows that the last nine times that there has been a positive Santa Claus rally, positive results for the first five trading days of the year, the month of January finished higher, combined with a negative prior year, the average return for the year has been 27.1%. (Remember that past returns are no guarantee of future returns, but the negative sentiment that exists for the market may not be warranted.)

If Stocks Are Down the Previous Year, This Trifecta Is Very Bullish

Trifecta of the Santa Claus Rally, first five days of the year and January All Green (1950-present)

This is only one indicator, but it’s clearly a sign we should not ignore going forward. Santa Claus did come to town last year, marking the seventh consecutive year stocks were higher during this historically strong period. The Fed will eventually have to acknowledge that price pressures also are easing in a broad manner. The implication is that the Fed does not need to maintain as strict a policy as it has. This is what investors are currently betting will happen, at least in the bond market. We expect more turbulence ahead, but we don’t think investors should wait for the all-clear signal that everything is better before investing in the market.

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: Bank of America, Carson Investment Research, JP Morgan

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.

From a stock market perspective, we are glad to have put 2022 to bed. It’s rare to find a calendar year in which both equities and fixed income decline in tandem. The chart below shows annual returns over the past 45 years. In 1994, both stocks and bonds suffered small losses, and it nearly happened again in 2018. However, last year really takes the cake. We have never seen both simultaneously decline as they did in 2022.

The rough waters in 2022 made many investors question whether the 60/40 portfolio was dead. The numbers are ugly: Last year will go down in history as one of the worst periods for bond returns on record. Normally when stocks go down, bonds help stabilize the portfolio, which is why the 60/40 portfolio has long been a good proxy for moderate growth portfolios. From 1980 through 2022, a 60/40 portfolio delivered positive returns 35 out of 43 years.

Making significant investment decisions based on one year’s unsatisfactory performance is never a good idea. If you were to have made that change following 2008, you would have missed out on 11 years of positive performance — with only 2018 being negative (and that was by just 3%). The average annual return of the period from 1980 through 2021 was 9.8% for a 60/40 portfolio. 

Only 2008 Has Been Worse for a 60/40 Portfolio

Annual return for a 60/40 portfolio, 1976-present

Now, everyone wants to know when the next recession will start and how long it will last. No doubt each recession can be painful in its own way. The global economy appears headed in the direction of a recession. It is more than likely that Europe already is in a recession. China’s growth has decelerated essentially to zero, following strict COVID lockdowns.

The U.S. economy is stronger than most. When looking at the recessionary indicators below, the overall signal is that a recession is coming. Many factors can contribute to a recession, and the main causes often change. It is always helpful to look at many different indicators to better assess where the economy is at any point in time. These factors currently suggest that the U.S. is in a late part of the economic cycle and moving closer to a recession, even though the labor market remains resilient.

The good news is that recessions generally have not lasted very long in the U.S. The 11 recessions since 1950 have lasted between two months (COVID) and 18 months (the great financial crisis), with the average spanning 10 months.

Investors with a long-term horizon are better served looking at the bigger picture. Over the last 70 years, the U.S. has been in a recession less than 15% of all months. The net economic impact has been relatively small. The average expansion increased economic output by almost 25%, whereas the average recession reduced GDP by 2.5%.

The exact timing of a recession is hard to predict. Bear markets and recessions often overlap, with equities leading the economic cycle by six to seven months on the way down as well as the way up. Recessions have been relatively small blips in economic history.

Recessions Are Painful, but Expansions Have Been Powerful

Cumulative GDP growth

Remember, much of what we read and hear on the news is market predictions representing what economists and analysts think is going to happen in the year ahead. At the beginning of 2022, the top 15 Wall Street firms predicted on average that the S&P 500 would finish at 4,950 (from a high of 5,330 to a low of 4,400). The S&P 500 finished 2022 at 3,839, a far cry from the average prediction and much lower than anyone predicted to start the year. Those same analysts today predict on average that the S&P will finish 2023 at 4,100 (a high of 4,500 to a low of 3,725). At the end of the day, these are predictions. No one knows for sure how this year will play out. What we do know is that over time, markets tend to rise — and by not being invested when the market rebounds, you will miss out on the recovery.

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: Bloomberg, Capital Group, Carson, CNBC, Factset, Horizon Asset Management

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.

Just like the waves of the ocean, constant predictions about the stock market ebb and flow from the Wall Street talking heads. As we entered 2022, the average Wall Street market strategist predicted the S&P 500 would close the year at 4,500 (it’s currently at 3,999). Now, as the seas are choppier heading into 2023, three of the largest Wall Street firms predict that the S&P 500 will hit 3,000 — a 25% drop from current levels — at some point during the year. 

At the end of the day, no one knows — not even the talking heads at the largest Wall Street firms. These are predictions from traders who are focused on the seasonal tides.

As you can see in the chart below, there have been many unsettling news events over the last 80 years. Looking through a long-term lens, you may be hard-pressed to find a bear market on the chart. This is why we focus on the long term: The trend rises with positive returns over long periods of time. 

The stock market has overcome past bear markets and unsettling news.

Growth of a hypothetical $100 investment in the S&P 500 Index (with dividends reinvested)

Despite the uncertain outlook for 2023, there are many reasons for investors to be optimistic:

• Republicans gained control of the House in the midterm elections, and Wall Street has historically preferred political gridlock. The S&P 500 has generated an above-average annual return of 13.6% since 1950 during the years in which Congress is split. The last eight times the S&P 500 finished the midterm election in the red (negative returns), it finished the following year up at least 10.8%, with an average return of 24.6%.  
• Money market short-term bonds and Treasuries are providing alternatives to the market and are likely to continue rising in the early months of 2023.
• Inflation, the biggest thorn in the market side for 2022, is showing signs of slowing with the Consumer Price Index CPI and the Producer Price Index both down more than 1% from their recent highs.

In the short term, December historically also has provided reasons to be optimistic. Following is a breakdown of how major indexes tend to perform in the last month of the year:

• The Dow Jones Industrial Average is up 71% of the time, the highest winning percentage of any month.
• The average December return for the Dow is 1.4%, second only to July.
• The S&P 500 is up 73% of the time, the highest winning percentage of any month.
• The average December return for the S&P 500 is 1.4%, the third-best month of the year.
• The NASDAQ is up 61% of the time with an average return of 1.7%, also the third-best month of the year.
• The Russell 2000 (Small Cap Stocks) is up 83% of the time, also the highest winning percentage of any month.
• The average December return for the Russell 2000 is 2.8%, the best average for any month.

Average Monthly Performance

The bottom line: Past outcomes are not predictive of future outcomes in the stock market. We hear this all the time, and they are certainly words to live by. Short-term waves and tide movements may help contextualize short-term moves in the market, but they should not serve as basis for long-term investment decisions. 

Each economic and market cycle is different from previous ones. There are thoughtful, experienced, and respected economists who can give us all well-reasoned arguments why this bear market is different and why it is not a good time to invest in stocks. But we’d like to close with this comment from Dean Witter in May 1932, a few weeks before the end of the worst bear market in history: “Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished. In fact, does anyone think that today’s prices will prevail once full confidence has been restored?”

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: Dow Jones Market Data, Forbes, MarketWatch, Standard & Poor’s

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.

Last week, we saw the biggest one-day rally in the stock market in more than two years as Wall Street reacted to better-than-expected inflation data for the month of October. Loosening restrictions in China also contributed to market confidence that inflation may have peaked in the world’s largest economy. The market is hopeful that the Fed will react to the most recent data with smaller interest rate hikes in December. (While the inflation data that was reported in October is backward-looking, the stock market is looking ahead.) The Fed needs to see continued confirmation that inflation has cooled and will not decide on interest rates based on a single data point. Instead, it needs to see a trend of several months of data that shows inflation slowing down.

Meanwhile, cryptocurrency investors have had a year to forget, capped off with the seismic disruption from FTX, the fourth-largest crypto exchange in the world. In a week’s time, the company went from operating as one of the biggest players in the industry to filing for bankruptcy. The unraveling of FTX is sending shockwaves through the industry. We have seen this story play out before with Enron, Madoff, Stanford Financial and more recently, Theranos. Many smart investors, analysts and auditors were duped by FTX, as it seems billions of dollars was stolen from traders and investors.

What was FTX?

FTX was a centralized cryptocurrency exchange that specialized in derivatives and leveraged products, options and leveraged tokens. It also provided a spot market (immediate exchange versus a futures market that would be delivered in the future) in more than 300 cryptocurrency trading pairs. This exchange allowed traders to speculate and make bets on various forms of cryptocurrency.

FTX promoted the ability for liquidity and transacting in coins and tokens. FTX allowed users to connect their “wallets,” place trades, exchange currencies, and buy and sell NFTs. U.S. residents were not permitted to trade on its platform due to regulations. FTX represented itself as being protected from hackers and as a safe place to store cryptocurrency.

What went wrong?

In recent months, as inflation has soared and interest rates have been lifted, the easy money cash from the days of the pandemic has dried up. That is bad news for digital assets, which are considered sponges for excess money. Less money in the money supply means more risk aversion in the market. When money is easy, investors are willing to take on more risk, such as speculating in cryptocurrency. As the year progressed, investors have continued to sell speculative assets, including crypto.

Sam Bankman-Fried was the founder of FTX and the quantitative trading firm Alameda Research. FTX created its own in-house cryptocurrency, FTT, and used customer funds from FTX in a way that flew under the radar of auditors, employees and investors. FTX used customers’ funds without their knowledge and drastically underestimated the amount of currency it needed to keep on hand if investors wanted to cash out on the trading platform. 

Read: Are Cryptocurrencies as Good as Gold? What You Need to Know

Bankman-Fried’s trading firm, Alameda, was borrowing from FTX, using FTT tokens (their own cryptocurrency) to back the loans. In early November, rumors spread about liquidity concerns and allegations of misused funds, and investors began withdrawing funds rapidly. The price of FTT fell 75% in one day, making the collateral insufficient to cover the trade. Early last week, rival Binance had agreed to purchase FTX, but the deal fell through after Binance reviewed FTX’s balance sheet. FTX crashed from a $32 billion powerhouse into bankruptcy in less than one week. At the same time, there was a suspected hack of $477 million of cryptocurrency from the exchange hours after FTX declared bankruptcy.

The damage was not isolated to FTT cryptocurrency. Bitcoin, Ethereum and many other cryptocurrencies experienced sharp declines. The Bloomberg Galaxy Crypto Index fell 23% last week, and as shown below, it has fallen 79% from its all-time high a year ago.

What is the potential fallout?

Crypto investors are questioning if their bitcoin or Ethereum is safe. FTX and other exchanges are a type of “crypto-casino gambling websites,” said Cory Klippsten, CEO of the financial services firm Swan Bitcoin. “Any exchange is a security risk. With bitcoin, you have the option to take self-custody and take your coins off that exchange.” If investors keep their cryptocurrency off an exchange, it should mitigate the risk of hacking. 

While the financial impact is yet to be determined from the FTX collapse, the effect appears to be isolated to the world of cryptocurrency and does not appear on the larger global markets. It is more than likely that big banks will continue to be wary of letting customers trade crypto through margin or loans. We should expect a continued emphasis on regulation in the cryptocurrency world and continued volatility in the price of cryptocurrencies. 

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: CNBC, Investopedia, Schwab, Yahoo Finance

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.

October saw the best month on record for the Dow since 1976 — a nice reversal after a tough September. The market continues to focus on inflation as the Federal Reserve meets this week to announce a fourth consecutive increase of 75 basis points. 

We also have been receiving questions about what next week’s midterm elections may mean for the market — and for your portfolios. The United States is undergoing probably the greatest bout of political volatility since the Civil War. In six of the seven federal elections since the Financial Crisis of 2008, voters have removed the party in power over either the Senate, the House or the presidency.

It is difficult to predict who will win an election, but it is even more challenging to predict how the market will react. The market does not care who wins, but which policies are eventually enacted — and how they may affect the economic landscape. Changing a portfolio based on potential election outcomes is not a prudent decision. The chart below provides some perspective; no matter which party is in the White House and which party controls Congress, the markets have performed well over the long term.

Average Annual S&P Performance Based on Partisan Control

1933-2019 (excluding 2001-02, when Sen. Jeffords changed parties)

Here are a few potential implications from the upcoming midterm election:

1. Stocks have done well under every possible party configuration. Through peace and war, high taxes and low taxes, the market has persevered. Most partisan combinations saw double-digit returns, except for one, and that may have been due to bad luck.

2. The stock market is influenced by many factors, of which only a few are attributable to a president or Congress. Political actions are a small piece of the pie. For example, the 1973-1974 oil shock and the 2008 recession accompanied two of the worst markets in recent history. They both happened to occur when there was a Republican president and Democratic Congress. While certain policy decisions may have impacted these outcomes, a tremendous amount of geopolitical and financial complexity led to the ultimate result.

3. A Democratic House and Democratic Senate is the least probable outcome — but the clearest with regard to policy implications. If the Democrats were to win both the House and Senate, President Biden would be able to focus on remaining portions of the Build Back Better program, including additional spending, tax increases and opposition to fossil fuel infrastructure. The market may like this outcome the least.

4. A Republican House and Democratic Senate would probably bring gridlock after Jan. 3, along with a lame-duck session in Congress in November and December. Such a split in Congress would make it difficult for any real legislative policy changes to occur. As the chart above shows, the market has performed well with this political mix.

5. Republican control of the House and Senate would give them the most leverage. There could still be action during the lame-duck session, but it would require more compromise. The big issue between Congress and White House would be the debt ceiling that must be raised at some point in 2023. When one party controls Congress and the other party controls the White House, the market historically has seen positive results. 

Simply getting to the election has acted as a catalyst for the stock market. The chart below shows the S&P 500 performance for the six months following midterm elections going back to 1950, and in each case, we have seen positive returns. The S&P 500 has not declined in the 12 months following a midterm election since 1942. Volatility in the market tends to be higher during midterm election years, and this year has been no different — with inflation, rapidly rising interest rates and geopolitical turmoil overseas. 

Politics is an emotional game. and some of our worst biases and behavioral mistakes show up when we let our emotions influence our decision making. Investing is no different. We are here to work with you through the political noise and election-year volatility, regardless of the political winds.

Here Comes the Best 6 Months of the 4-Year Presidential Cycle

S&P 500 performance, November-April during midterm years

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:  American Funds, Baird, Carson

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.

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