“Looks like you’re a little stuck not doing anything. What are you up to?”

“Well, I’m just waiting on a friend…”

That tends to be the state of mind for many folks that are trying to make investment decisions. They are waiting for some new information (their “friend”) that they think is essential and will determine their ability to accurately predict the future which will of course, in their minds, help garner a successful outcome. From an investment standpoint, that “friend” could be new economic data, legal decisions, global socio-political dynamics, insight from a guru, or yes, even a new president.

As a financial advisor every four years I often hear the following: “I want to wait on making an investment decision until after the presidential election.” 

As an experienced listener, it’s important to peel back the onion on statements like this so you can really understand what kind of potential biases might be baked into someone’s decision making process. Some assumptions might be valid, some may not. One goal of a good financial advisor is to help investors reflect upon their assumptions to help them make better decisions and thus hopefully have better outcomes.

So let’s look at one assumption baked into the statement “I want to wait on making an investment decision until after the presidential election.”, namely, that the stock market will behave significantly different depending on what president is elected.

Is this true? Well, the best question we can ask to test it is, “Has this ever been true?”. Cutting to the chase, the answer is no. Let’s look at how we know this.

The table below shows the frequency of monthly returns (expressed in 1% increments) for a broad-market index of US stocks from January 1926–December 2023. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months in which returns were between 0% and 1%). The blue and red horizontal lines represent months during which a presidential election was held, with red meaning a Republican won the White House and blue representing the same for Democrats. This graphic illustrates that election month returns have been well dispersed throughout the range of outcomes, with no clear pattern based on which party won the presidency.

In USD. Dashes representing returns for a given month are stacked in ascending order of return within each column, with highest return within that range on top. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

So, there you have it, history tells us that there would have been no consistently predictable advantage as an investor to waiting until after a presidential election.  For those of you who understand this intuitively and have already structured your portfolio with strategically allocated long-term investments, this data hopefully gives you some validation that you are doing the right thing.

For those of you who are worried or waiting, the real question for you is whether or not you will be stubborn in your ways despite the evidence in front of you. I suppose that is a challenge for all of us in many aspects of our lives but somehow especially prevalent with investors.

It’s natural for investors to look for a connection between who wins the White House and which way stocks will go. But shareholders are investing in companies, not a political party. And companies focus on serving their customers and helping their businesses grow, regardless of who is in the White House.

Stocks have rewarded disciplined investors over the long term, through Democratic and Republican presidencies. Making investment decisions based on the outcome of elections, or how investors think they might unfold, is unlikely to result in reliable excess returns. On the contrary, it may lead to costly mistakes. Accordingly, there is a strong case for investors to rely on a consistent approach to asset allocation—making a long-term plan and sticking to it.

2024 Q3 Review

With everything else going on these days, it can certainly be said that it was a positive Q3 for investors across all indexes shown below.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.
Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]), Global Real Estate (S&P Global REIT Index [net dividends]), US Bond Market (Bloomberg US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2024, all rights reserved. Bloomberg data provided by Bloomberg.

The biggest surprise was Global Real Estate. Last quarter this index was the worst performing index for the quarter at -1.48%. This quarter it was the best performing index by a country mile at 16.04%. This is a very good example as to why it pays to be diversified across multiple global asset classes and why chasing only recently well-performing asset classes can be a significant oversight. 

It seems like it’s been awhile but the International Developed Stock Market index outperformed the U.S. Stock Market index at 7.76% vs 6.23% respectively. With all of the noise of the S&P 500 in the media, it’s sometimes hard to remember that other asset classes even exist outside of big companies in the U.S.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Value (Russell 1000 Value Index), Large Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Value (Russell 2000 Value Index), and Small Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. MSCI data © MSCI 2024, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

Specifically in the U.S., the Small Value index had more than 3X the return of the Large Growth index (10.15% vs 3.19% respectively) which is good news for the patient investor. The US stock market has been on a winning streak, so some investors may have not been jolted when the S&P 500 fell more than 6% from July 31 to August 5. The Cboe VIX Index, a measure of US stock market volatility, reached 65.7 on August 5. This was its highest level since the COVID-19 pandemic and the largest one-day increase since 1990. Investors with more diversified portfolios appropriately allocated to include smaller and value companies, as opposed to large growth, would most likely have been “jolted” like investors heavily weighted towards the S&P 500.

Interest rates decreased in the US Treasury market for the quarter as the yield curve lowered. Both the U.S. and Global Bond Indexes had a fine quarter delivering 5.2% and 3.48% respectively as noted in the first chart above.

Period Returns (%)

1. Bloomberg US Treasury and US Corporate Bond Indices. 2. Bloomberg Municipal Bond Index.
One basis point (bps) equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds and the Yield to Worst are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA Corporates, BBB-A rated. Bloomberg data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2024 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2024 ICE Data Indices, LLC. S&P data © 2024 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg data provided by Bloomberg.

Morgan H Smith Jr. is an investment advisor with WorthPointe, LLC, a registered investment adviser  in San Diego, Calif. WorthPointe  is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the commission. WorthPointeonly transacts business in states in which the firm is properly registered or is excluded or exempted from registration. A copy of WorthPointe’s current written disclosure brochure filed with the SEC, which discusses among other things, WorthPointe’s business practices, services, and fees, is available through the SEC’s website at www.adviserinfo.sec.gov.

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