Topic: Portfolio Management

We are less than 100 days from Election Day. Whenever a presidential election rolls around, it is common to hear it described as “unprecedented.” Presidential elections always add an extra element of uncertainty to investing. On top of assessing the path of the Federal Reserve, the stability of profits and the consumer, investors must grapple with a barrage of headlines about the election.

As seen in the chart below, many geopolitical events have impacted portfolios in the short term over the last 120 years. Over the long run, however, the market has trended higher.

Investors sometimes get tunnel vision when it comes to the stock market and may only see what is right in front of them: an election, war or a pandemic, for example. When you stretch out your time horizon, the odds move in your favor; roughly 75% of single years have positive returns, nearly 90% of five-year periods are positive, and 100% of 20-year periods are positive!

Even With Bad News, Stocks Tend To Go Higher

Political opinions are best expressed at the polls — not through the portfolio. It is crucial to keep your political feelings from overruling your investing strategy. Investors who allow political opinions to harm their investing discipline may have missed out on above-average returns during political administrations they may not like.

With the intensity of feelings on both sides, it is natural for investors to assume that the news of the day — the election’s eventual outcome — could have major impacts on sentiment and prices in the financial markets. 

The S&P 500 has averaged positive returns under every partisan combination, as the chart below shows. There also is evidence that a divided government has correlated with stronger market returns — probably because gridlock creates less policy uncertainty, and markets do not like uncertainty.

If you had invested $1,000 in the S&P 500 starting in 1953 and only invested under Republican presidents, you would have just under $30,000 today. If you did the same thing but for only Democrat presidents, you would have just over $60,000. However, if you stayed invested no matter which party was in office, your $1,000 investment would be worth close to $1.7 million today. 

No matter which side you sit on, this election cycle is likely to bring more surprising headlines and plenty of emotional ups and downs. It can be tempting to put your money where your convictions are — whether you are optimistic or pessimistic about the November election — but history shows that doing so is not the best economic move for your long-term financial health.

Average Annual S&P 500 Performance

(1933-2022, excluding 2001-2002)

Despite heightened political uncertainty, the economic backdrop remains positive. Market moves are more likely to be driven by market and economic fundamentals like corporate earnings, interest rates and other economic factors. GDP remains strong, the Fed is likely to reduce interest rates, and corporate earnings are expected to grow at double digits in 2024. 

Over the past 40 years, there has been only one instance when market returns were negative 12 months after an election — the tech bubble in 2000. This is not to downplay the importance of an election, but instead to remind us that the economy does not change course based on an election result. 

Through good times and bad, economic progress and the ingenuity of American companies have led to innovation, increased productivity and earnings growth — ultimately driving markets higher. Once political uncertainty is out of the way, markets tend to return to focusing on fundamentals, and right now, the fundamentals look pretty good.

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: Capital Group, Carson, JP Morgan, Strategas Research

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

As we head toward Memorial Day — the unofficial start to summer — the stock market is near all-time highs. After pulling back in early April, stocks bounced back quickly. The S&P 500 and the NASDAQ rose to all-time highs last week, and the Dow Jones Industrial Average closed above 40,000 for the first time. In just the last seven years, the Dow has climbed from 20,000 to 40,000 points.

Dow Jones Industrial Average

Milestones since 2016

This climb includes a near-bear market in the fourth quarter of 2018, the pandemic in 2020 and the soaring interest rates that ensued, the bear market of 2022, wars in Ukraine and the Middle East and inflation not seen since the 1980s!

The Dow first closed above 20,000 in early 2017, following large corporate tax cuts passed by Congress. The Dow was about to breach 30,0000 in early 2020, but then the pandemic happened, and the Dow fell 38% from the February peak all the way down to 18,213. By November 2020, the Dow had closed above 30,000 for the first time — and 872 days later, the Dow crossed 40,000 for the first time.

What Does Dow 40,000 Mean?

The Dow is still considered America’s index and still represents Main Street America. While the S&P 500 is more representative of the overall stock market, the Dow dates back to 1896 and is still quoted as one of the major stock indexes to follow. It’s also a reminder that when it comes to investing, patience is the key — and has been rewarded in the past.

According to Carson Wealth, this was the 1,414th new all-time high for the Dow since 1900. New highs often lead to more new highs, as the average return one year after a new high has been 7.8%, with gains seen 70% of the time. For some additional perspective, the average return for the Dow since 1900 has been up 7.4% with gains 65% of the time.

Don’t Fear New All-Time Highs

Dow returns after new all-time highs

Equity valuations and geopolitical risks remain at the top of our list. There is no denying that such risks are heightened as the world faces two wars and U.S.-China relations remain strained. It is important to remember that the underlying economic fundamentals in the U.S. remain strong, which is key during periods of heightened tension.

Last year, we saw price expansion in the stock market, led by the Magnificent Seven, and that has continued the first half of this year. We need to see earnings expand and keep pace to justify the current market multiple.

Analysts are projecting 11% earnings growth in 2024, along with 5.5% revenue growth. While the forward P/E for the market is over 20 (the 10-year average is 17.8) and some would consider the market overvalued, the forward P/E will come down and may justify the current stock prices if earnings continue to grow as expected.

The prospect of lower inflation data also spurred the market last week to reach all-time highs. Fed Chairman Jerome Powell recently reiterated that inflation data has yet to make Fed members confident that they can cut rates, but more positive movement is likely if data continue to show signs of price easing.

Our stance has long been that investing is not about timing the market but time in the market. That means not looking to play the market based on inflation data from month to month, who may win the presidential election or worries about war overseas. Please keep this in mind the next time you read scary headlines or hear an economist predicting gloom and doom.

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: CityNational Rochdale, Carson, CBNC

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

There is a popular Wall Street maxim: “Sell in May and go away.” This suggests investors should sell their equity holdings this month and then reenter the equity market in November, based on the historical tendency of stocks to underperform between May and October (compared to November through April). This may be especially true for some investors after the month of April, where all three major indexes — S&P 500, Dow and NASDAQ — all were lower. 

Those who regularly read our commentary know that we would never espouse this theory, but it is good to look at these “trends” to see if they hold water. We clearly do not advocate selling based on the calendar. Dating back to 1950, the S&P 500 has averaged only 1.7% from May to November, and the market was higher less than 65% of the time in pre-election years.

However, during election years, the average has increased to 2.3% and has been higher almost 80% of the time. While this is not a huge return for a six-month period, it is still a positive return.

What About Sell in May in an Election Year?

S&P 500 performance (May-October), broken down by presidential cycle (1950-current)

Earlier this year, many economists and investors were thinking that the Federal Reserve would reduce interest rates as many as six times in 2024. As the year has progressed, the economic data reflects that while we have made progress on inflation, it remains higher than expected.

As seen in the chart below, the market now is projecting one or two rate cuts instead of a possible six by the end of 2024. Recent market volatility and trends have been dependent on economic data and how the market interprets what the Fed may do based on inflation reading, job numbers or GDP estimates, for example.

Market Expectations for Fed Rate Cuts This Year Have Declined

Below are three reasons the Fed may not reduce rates — and how it may still be a good year in the market:

1. The U.S. economy is in good shape. The economy continues to grow at a healthy pace; its resilience in the face of higher rates has been a nice surprise over the last two years. In 2022, most economists thought that we would be in a recession by now. American consumers continue to spend, the labor market remains strong with unemployment below 4%, and manufacturers continue to invest in capital expenditures — especially related to artificial intelligence.

2. Progress on inflation is stalling. Inflation has come down considerably from 2022, when we saw CPI over 9%. But the battle is not over, and inflation remains above the Fed’s 2% target. Fed officials have stated that the last mile, from 3% to 2%, will be the hardest and may take a while. If the Fed doesn’t cut rates this year, it will be because inflation isn’t falling fast enough. (The Fed doesn’t want to repeat the 1980s.) The U.S. unemployment rate remains near 50-year lows, and inflation still is headed in the right direction.

3. Financial markets are good with the status quo. The stock market hit a record high in the first quarter of 2024. Stocks have been able to overcome the fear that higher interest rates would bring the bear market to an end. Bond investors have benefited from higher yields, and investors continue to see a nice return on cash while rates remain elevated. A market rally with higher interest rates is not unusual. Stocks and bonds have done well in periods following a Fed rate-hike campaign.

Powering Through Rate Hikes

Two-year annualized returns (%) following the end of prior hiking cycles.

Over time, markets tend to adjust to the prevailing interest-rate environment. As long as rates remain stable, markets have been able to move higher, as they are strongly influenced by corporate earnings and economic growth more than monetary policy. The bond market continues to price in one or two rate cuts before the end of the year. However, if the Fed were to decide not to cut rates, that could be a factor of both sticky inflation and the economy humming along.

If that is the case, both stocks and bonds could produce nice returns without the Fed actively cutting rates.

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: Capital Group, Carson, CNN

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.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The headlines have been scary recently with escalating tension in the Middle East and higher inflation data causing near-term volatility. Stocks had their worst week of the year and have fallen for three consecutive weeks (for the first time since September).

The S&P 500 gained 27.6% from its low on Oct. 27 through its peak on March 28; this is one of the best five-month rallies in history. Some weakness after that kind of rally is normal. The 5.5% pullback is not so bad in context of a 27.6% rally.

The illustration below is a good reminder that during times of increased market volatility, reality often is different from our preconceived ideas.

This illustration also reflects the last five-plus years. The end of 2018 saw the market fall off a cliff with the market down almost 20% in the fourth quarter alone. The market then had a strong 2019, only to hit a major road bump in 2020 with the pandemic. Then the market quickly climbed out of the hole and continued higher for all of 2021. In 2022, the Fed raised rates to an unprecedented level, and both stocks and bonds sunk to the bottom. In 2023, we saw the markets rise from the bottom and recover the losses incurred during 2022.

We are now experiencing the first mild correction of the year. Who knows if we will have another pullback or an even larger correction? We do believe that market corrections are inevitable, and they are not predictable. If you plan on investing in the stock market over a long period of time, you will experience many dips, corrections and bear markets. 

On average, investors have seen the following since 1928:

• Dips of 5% or more in the market more than three times per year.
• Dips of 10% or more in the market (known as a correction) about once a year.
• Drops of 20% or more (bear markets) once every three or four years and are usually tied to a recession.

Declines in the S&P 500 Index Since 1928

Downturns and market corrections can be difficult to endure, but they also can offer opportunities for investors to purchase stocks at lower prices. Stock prices and valuations swing daily. 

The chart below shows stock returns as well as drawdowns yearly going back to 1980. The blue bar represents the S&P 500 return for the year while the dot shows the percentage decline in the S&P for that same year. Since 1980, stocks have dropped an average of 14% during the calendar year. During the same period, stocks have generally bounced back, rising in 33 of the 43 years. The average return from 1980 to 2023 has been almost 10% per year. 

Annual Returns and Drawdowns of the S&P 500 Index

Most investors spend their time worrying about the short term and spend their lives focusing on the day-to-day. As we often preach, investing is about the long term, which requires patience. Markets do not go up in a straight line. 

Most investors’ mistakes are the result of being impatient, and successes are a triumph of patience — staying invested through pullbacks, corrections and bear markets.

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: Carson, Wells Fargo 

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 regarding 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