August Market Recap & The Upcoming Election

In August, investment performance was mixed. US small cap stocks declined, while US large cap, international, and bonds increased. So far this year, all four the indexes we track are higher – it has been a good year for investors.

Looking Forward to the Election

In August, the Democratic party held their convention in Chicago, Illinois, where Kamala Harris officially accepted the nomination for President. This November, she will run against Donald Trump, the Republican party nominee. In addition, 34 Senate seats are up for re-election as well as all 435 seats to the House of Representatives. The results of this fall’s elections will impact the economy and markets in important ways:

  • Tax Policy – In December of 2017, the Tax Cuts and Jobs Act was signed into law by President Trump. It reduced personal and corporate tax rates, added credits for small businesses, and increased the child tax credit. The individual provisions of this act are scheduled to sunset at the end of 2025. This means that the next President and Congress will be responsible for negotiating the next phases of tax policy.
  • Regulation and Trade – In the long term, corporate profitability is the fuel that drives the financial markets higher and provides returns for investors. Changes in the level of regulation, trade agreements, or tariffs can impact corporate profits and in turn, how markets perform.
  • Market Volatility – Historically, markets have experienced bouts of volatility heading into an election cycle. This is especially true for closely contested elections such as 2016 and 2020. Currently, the outcome of the 2024 Presidential election is unclear, so expecting some market turbulence over the coming months is normal.

Although important, the impact of these factors are typically short-term. Right now, investors don’t know who will win control of the Presidency or Congress, so pre-election anxiety and speculation take control. Once the results are in (even though many people will be disappointed) markets tend to respond, adapt, and then move on. The following graph from Charles Schwab shows how stocks have responded to various presidents:

Here are a few observations:

  • Overall, stocks have fared very well in the long-term, regardless of which party was in power. The Reagan, HW Bush, Clinton, and Obama years were particularly positive.
  • Party power tends to swing like a pendulum. We tend to alternate between periods of Republican and Democratic control of the White House. This suggests that neither party has been able to deliver results impressive enough to keep power consistently.

Long-term investors should usually ride out political volatility. If you would like to discuss how the election may affect you personally, let us know.

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