Just one year ago, U.S. stock markets fell into a brief correction during the month of December.
The bottom of the market hit on Dec. 24, 2018 – what a wonderful time for that to happen.
Yet, markets rebounded very quickly in January 2019 and as we wrap up the year, markets have had strong returns across most categories. In fact, nearly all major asset classes from stocks and bonds to gold have enjoyed a solid 2019. Investor patience with the correction a year ago has been rewarded.
Focusing on 2020, there are few signs that lead to concern of recession in the U.S. economy. While there is an occasionally data point that fights the positive trend, interest rates remain low for borrowers from consumers to businesses. Unemployment is ultra-low by historical standards, which means the labor pool of workers is in demand. In-demand workers should be rewarded with corporate retention incentives like better wages or competitive fringe benefits.
Yet, as I write this article in early December, the intra-day headlines are a dueling battle between the impeachment hearings and the U.S./China trade negotiations.
This will likely continue for a while. Like stock market gyrations and as challenging as these major events can be for all of us, patience typically is a solid strategy. The exception could be if a political discussion heats up your family Christmas celebration. In that case, walking the dog would lead to cooler heads.
It is truly vital to separate the polarization of politics from your investment portfolio.
We are acutely aware that 2020 will have many of us at the voting booth in November to use our right to vote. First, please vote – we have a moral responsibility to do so, and to be an informed voter.
In the same line of thought, being an informed investor in the midst of this is important too. Here is what I can offer based on a little research.
Since 1928, stocks have risen in 19 of 23 election years for an average gain of 11 percent. That’s an 83 percent success rate, which isn’t too shabby. More importantly, no one should be investing for a one-year time frame – but rather, look at a series of years for returns – a decade or longer is typical. Even if the markets get a little choppy, and in an average year we often see several corrections (drops of 10 percent or more) simply because of markets being markets, look past the short-term noise.
A better question is assessing one’s risk tolerance. Want no risk? Look to FDIC insured investments, but that historically low interest rate on loans means investors will be lucky to keep pace with inflation with FDIC insured items like CDS. But for some, inflation risk may be superseded by principal risk.
Taking a bit more risk means the reward should be higher over time.
History also says that control of the White House doesn’t necessarily dictate how the stock market will perform during a four-year or eight-year presidential administration.
All other factors aside, here is a look at return data.
In that 1928 to present data, the worst performing president was Herbert Hoover where markets endured the results of the Great Depression. George W. Bush didn’t fare too well – his eight-year tenure saw an average loss of about 5 percent in stock markets, but he dealt with the Dot Com bubble bursting, 9/11, and then the mortgage/financial crisis in 2008. Richard Nixon fared a little better, but markets were down overall through his resignation. FDR? Markets were up an average of 12 percent coming out of the Great Depression and through World War II. Jimmy Carter? Up 7 percent. Ronald Reagan: up about 10 percent a year on average. Former Presidents Obama and Clinton enjoyed markets that averaged over 12 percent a year during their terms. President Trump so far: up about 11 percent annually.
Yes, many, many factors go into how the U.S. economy and stock markets perform. But as we head directly into 2020 and the politics that will become increasingly focused on our emotions, the best advice is to stay patient and not make dramatic changes for the wrong reasons.
One strategy we have been adjusting for our clients follows the stock market’s strong return in 2019, when a 50 percent stock to 50 percent bond portfolio might have grown to 60 percent stock to 40 percent bond. That’s a great thing, but rebalancing a portfolio back to the 50/50 is often a good idea in order to reduce risk that often is forgotten, until the next correction.
More importantly, I’d like to wish a Merry Christmas and happy holiday season to all of those who read these articles. I have a feeling 2020 will be a fantastic year.