Q2 2024 Commentary: Pessimism Abounds (But Stay Calm & Stay Invested)
Pine Haven Investment Counsel, Inc.
Casey Fitchett & Paige Johnson Roth, CFA®
Like moths heading to the flame, we as humans can’t seem to resist the pull of bad news. Our social media feeds, newscasts, and newspapers know this and consistently focus on what is wrong with our economy, our government, and our society, as bad news sells. Crime rates! Inflation! Job Losses! Crumbling Cities! Bad Traffic! Traffic Accidents! And always the weather! Politicians add to this with their negative campaign ads and smear tactics. It’s hard to stay positive, especially regarding the upcoming election.
There are multiple lenses through which we can look at the looming November event: citizen versus investor. As a responsible citizen and voter, I will make sure I am well informed, especially on local issues and local candidates, and I will vote (early and often! - LOL). However, as an investor, it is better to not get caught up in the predictions and focus on the long term, as difficult as that can be.
We experience election cycles and the uncertainty around them every four years. In reality, the political party holding the presidential office has not mattered too much for the economy and the stock markets. The American economy has been strong under all types of administrations, and often years of poor market performance have more to do with external events – wars, pandemics, housing market collapses, oil crises - than the person at the top of our democracy.
[1]
This chart illustrates that equity markets have done well under both political parties, and by staying invested, you/the investor benefited from the marvelous effects of compound returns with reinvested dividends in a long-term rising market.
This next chart shows what happens when investors are out of the market for a period of time – the period of time being based on what political party held the presidency. In general, the Republican tout themselves as the party of fiscal responsibility and more pro-business. However, the stock market has had better returns recently under Democratic presidents.
[2]
During the months leading up to the election, the pundits will be focusing on what a second Biden or second Trump term will do for the economy. However, after the election, the markets will refocus on interest rates and corporate profits, which are the primary long-term drivers of stock prices. The other issue of course is control of Congress (and current predictions have it looking as if we will stay with a divided Congress). One scenario that appears to not be factored into the current stock market strength is a landslide victory by one side. A landslide by the Republicans would likely be the most unsettling to the financial markets as they have stated the desire to impose high tariffs, deport large segments of our workforce, dismantle regulations, and decrease taxes (among other things). Of course there are no guarantees, and there is no crystal ball to predict with certainty what the markets will do under specific conditions.
Although the market is somewhat agnostic to the winner of the next presidential race, we may still see a selloff in the near future. In the last 24 years, the average inter-year stock market correction has been 14%, so being aware of this possibility helps me remain calm when the inevitable ‘downdraft’ occurs.[3] A dash of short-term pessimism paired with long-term optimism has long served investors well.
1 Page 4, How Do Presidential Elections Impact The Market?, YCharts
2 Page 5, How Do Presidential Elections Impact The Market?, YCharts
3 Page 16, JP Morgan Guide to the Markets 3Q 2024, June 30th, 2024