Strong Markets Tend to Get Stronger
It’s been another stellar year for risk assets, surprising many investors who expected a slowdown. After the S&P 500’s impressive rebound in 2023 with a total return of 26.29%, 2024 was widely anticipated to be a consolidation year. Yet, the market continues to defy expectations, propelled by resilient economic data, strong corporate earnings, and a persistent “soft landing” narrative driven by the Federal Reserve’s cautious approach to cutting interest rates.

While inflation remains a factor, it has decelerated to more manageable levels, hovering around the Fed’s target range of 2-3%. As you know, we have only seen one rate cut so far as the Fed has been slow to act despite cooling inflation, maintaining a wait-and-see approach to ensure price stability.

Regardless, this hesitation has created a favorable environment for risk assets, as many investors anticipate more accommodative monetary policy down the line. Consumer spending has also remained robust, which is crucial as the holiday season approaches, historically a key driver of Q4 returns. Additionally, the ongoing AI boom continues to fuel growth in tech, with companies like Nvidia, Microsoft, and others leading the charge. This surge has kept the S&P 500 and Nasdaq on track for another strong year, challenging the notion that markets must always cool off after significant rallies.

It’s a counterintuitive concept that bearish investors absolutely despise. It’s easier to be negative, especially when geopolitical risks, delayed interest rate cuts, and debt ceiling debates dominate the headlines. These factors certainly create volatility, but they haven’t derailed the overall upward momentum. In fact, the rapid recoveries after each dip reflect how deeply embedded the “buy the dip” mentality has become since the financial crisis bottom in March 2009.

Don’t Get Political With Your Portfolio
It’s tempting to let political headlines drive investment decisions, especially in today’s polarized environment. However, as history shows, both parties have overseen periods of strong market returns, making it risky to adjust allocations solely based on election outcomes or shifting policy agendas.

The recent rally has been fairly broad-based, despite political headwinds like ongoing debates over fiscal policy, government shutdowns, and contentious spending bills. Healthcare, energy, and defense have shown resilience, while sectors like technology, which are less directly impacted by policy changes, continue to lead the charge.

You will see that even targeting specific sectors based on administrations has been a fool’s errand.

Remember, staying invested through different administrations has yielded unbelievable returns the last 30 years.

S&P 500 ETF Total Returns
1-Year: +38%
2-Year: +62%
3-Year: +37%
5-Year: +111%
7-Year: +156%
10-Year: +274%
15-Year: +609%
20-Year: +665%
30-Year: +2,040% (+10.8% annualized)

But You Can Get Political With Your Taxes
One area where political changes can and will have a significant impact is tax policy. With the 2025 expiration of the current tax code on the horizon, there’s uncertainty around what the new code will look like. Whether it’s a modest extension of the existing framework or a significant overhaul, there will be implications for most of us. Our tax and planning software are ready to be put to use as soon as we see what is signed into law.

We should have an idea what is coming at least six months beforehand so next year will be crucial. Planning ahead, especially in light of potential shifts in capital gains rates, estate tax thresholds, and corporate taxes, can make a significant difference in long-term returns.

 

This post is an excerpt from a private client newsletter on 10/26/2024.