May 10, 2024 Letter to Clients

The first quarter of 2024 showcased remarkable resilience amidst various challenges. The US economy has demonstrated stronger performance than expected, despite facing dual challenges of escalating interest rates and persistently high inflation. We are seeing the impact of high rates put pressure on areas such as real estate (the only sector to have negative returns in the first quarter of this year) and credit cards, with delinquencies ticking higher. In 2023, as inflation showed signs of easing, it was anticipated that the Federal Reserve (Fed) would initiate prompt reductions to its benchmark interest rate throughout this year. However, developments this past quarter dampened this expectation and the stock market rally lost steam in April as it became clear the Fed still has much work to do in the battle against inflation.  

The economy’s resilience, coupled with expectations of cautious interest rate cuts by the Fed (albeit more cautiously than had hoped), along with optimism surrounding advancements in artificial intelligence, propelled stocks to new peaks to kick off the year. The S&P 500 surged by over 10%, marking its most robust performance at the start of the year since 2019, with all but one sector (real estate) seeing positive returns, a sign of healthier levels of market breadth than last year.  

While the first quarter saw a surge in stock performance, the returns from bonds were comparatively modest, apart from high yield bonds (bonds rated below investment grade which carry a higher risk of default) which experienced a notable increase. Looking ahead should the Fed opt for rate cuts, it’s likely that shorter-term yields will decrease, potentially impacting future returns for investors heavily invested in cash equivalents. Additionally, the recent uptick in the issuance of Treasuries might introduce volatility in longer-term bonds. We continue to see opportunity in the bond markets; however, there will be caveats. The potential for rate cuts remains wait and see with the prediction for the first cut having shifted from March to June, then to September and now Wall Street and investors are left wondering if a cut is coming this year at all.  

 Election Year Investing 

Given the upcoming election, we understand the apprehension people may be feeling surrounding investments and the economy. While we do plan on delving deeper into this topic in future letters, for now, we’d like to offer some preliminary insights and debunk a few myths.  

History has shown that elections have a minimal effect on the stock market in the long run, however there are implications for investors. In November, the election outcome remains uncertain, but one thing is for sure: the presidential election season is in full swing, generating significant chatter as it always does. The news buzz can be distracting when focusing on investment decisions, so we find it is important to reiterate that markets primarily consider economic environment rather than election results. That said, not all election news is mere noise, and, in this letter, we are highlighting election-related issues that are worth noting as they may impact investment decisions and those that are myths.  

Democratic and Republican administrations would differ in ways that could impact the markets.  Here are three topics currently on our radar: 

  • Tariffs. Under a potential second term for former President Trump, higher tariffs could be anticipated, impacting the profit margins of importers, especially those dealing with Chinese goods. These tariffs might include a universal baseline of 10% on all US imports, with a significant increase to 60% on imports from China. However, such measures would very likely face stiff opposition.  


Furthermore, tariffs can influence currency dynamics by strengthening the currency of the country imposing them. For instance, under a Republican presidency, such as in 2016, the US dollar could appreciate against other major currencies. However, this initial reaction tends to diminish over time. Conversely, in a second term under President Biden, the reaction in foreign markets might be less pronounced, given reduced expectations for additional tariffs.  


  • Tax cuts. Another area of contrast between the candidates lies in their approach to the Tax Cuts and Jobs Act, which reduced taxes for many Americans. With the roughly $3.5 trillion of the 2017 personal income tax cuts scheduled to expire at the end of 2025, federal taxes would increase for most households unless its provisions are prolonged. President Biden proposes extending many provisions for taxpayers earning less than $400,000, whereas former President Trump advocates for a permanent extension of all provisions.  


Against a backdrop of escalating deficits both candidates may encounter challenges in offsetting the lost tax revenue. This could potentially lead to higher bond yields as concerns about the deficit mount. A deteriorating federal debt outlook could prompt bond investors to seek higher compensation for assuming modestly higher default risk.  


  • Near-term changes in sector performance. Once election results are in, there may be short-term shifts in sector performance driven by new administration policies, although historically, these changes tend to diminish over time. Aerospace, defense, financials, and small- to mid-cap stocks typically experience gains under Republican presidents, while healthcare and green energy stocks often see increases under Democratic leadership. 

It's essential to note that the implementation of high-impact policy proposals largely depends on Congress. Adoption is more probable if the same party controls both the White House and the legislature. Currently, the balance of Congressional power post-election appears uncertain. Moreover, even with a majority in one of both houses, market-moving policies can still face challenges and bottlenecks. 


Let’s look at three common myths surrounding elections and why they should be tuned out:  

  • Myth #1: Stocks don’t do well in election years. Reality: While it’s often suggested that stocks perform poorly in election years, historical data tells a slightly different story. Looking at the S&P 500 since 1928, stock returns in presidential election years averaged a respectable 7.5%. Interestingly, returns were only marginally higher, averaging 8.0% in non-election years. This suggests that while there may be some variation, election years haven’t necessarily been associated with significant underperformance compared to non-election years.  


Election years do typically experience heightened volatility, particularly in the lead-up to the vote. The uncertainty surrounding elections tends to exacerbate this volatility, as some investors opt to reduce risk exposure in closely contested elections, only to reinvest once policy clarity emerges. Following the announcement of election results and the subsequent reduction in uncertainty, stocks have historically rallied. Looking back at the 40 years of Election Days, stocks have been higher, on average, one year later.  


  • Myth #2: Markets will go down if so-and-so wins. Reality: The economic backdrop at election time tends to matter more than the victor. While it’s true that some election years have witnessed larger market swings than others, these fluctuations are typically driven by macroeconomic factors. For example, in 2020, the COVID-19 pandemic and associated lockdowns had a far more significant impact on markets than the differences between the candidates’ platforms. Similarly, during the 2008 election between Democrat Barack Obama and Republican John McCain, the unfolding financial crisis largely overshadowed other issues such as the Iraq War or healthcare. When markets have fallen post-election, it was almost always due to an imminent recession or because (as in 2008) the economy was already in one.   


  • Myth #3: The Federal Reserve (Fed) won’t change policy in election years. Reality: The Fed has not shied away from hiking or cutting rates during election years. Historical data reveals the Fed demonstrates caution about altering interest rates in the two months leading up to a November presidential vote. However, for the remainder of election years, policymakers have pursued their desired monetary course. The Fed’s current primary focus is on orchestrating a soft landing for the economy, aiming to sustain growth without risking a recession, something that requires very careful navigation.  

When politics is evoking strong emotions, as is normal, we urge clients to remember what we’ve shared in this letter and to not lose sight of your long-term investment goals. Indeed, ongoing friction points such as inflation and geopolitics pose risks, however as far as the stock market goes, we firmly believe the economy will continue to be the primary driver of market performance. Therefore, it is essential to maintain focus on and a commitment to sound investment principles because if the economy continues to experience growth and inflationary pressures ease, there may be abundant opportunities for diversified, multi-asset investors, regardless of the election outcome.  


Employer Retirement Plans: Don’t Leave Money on The Table  

As of last year, it is estimated that there are over 29 million forgotten or left-behind employer retirement accounts holding approximately $1.65 trillion (yes, trillion!) in assets. The consequences of this are significant with the potential loss of hundreds of thousands of dollars in retirement income or, worst case, an investor losing track completely of the funds as time passes. The former employer either merging, being bought out or closing altogether, the retirement plan transferring to a new carrier, the investor having a change of address but not updating the former plan, the investor passing away and the heirs being unaware of the account are just a few common reasons we see these retirement funds be lost or forgotten. Additionally, as time passes, the investment selections made in the plan when you newly enrolled may not be suitable many years later when you are older and have grown the account to a larger balance.   

When undergoing a job change, it is understandable that addressing the old 401(k) may not take priority, however this is the best time to plan for your account balance, while it is fresh on your mind and while you may be enrolling in your new employer’s plan. This money is a critical part of your financial plan and as a client of our firm, we will gladly review your employer plan and discuss your options.   

 Estate Planning: Keep the Conversation Coming 

The topic of estate planning in our last letter resonated with many of you, generating a tremendous response and resulted in meaningful discussions with clients to ensure beneficiaries are current on accounts managed by our firm, as well as employer retirement plans and bank accounts. We identified needs for term life insurance and advised on additional coverage where necessary. For those requiring assistance with legal documents and more extensive planning, we provided an attorney referral. We always welcome conversations on this crucial topic in financial planning and if you missed our previous letter on this subject, it's available on our website or of course feel reach to reach out to discuss your personal situation and ensure you, your loved ones, and your hard-earned assets are protected.  

As we begin to enjoy the springtime weather and then head into early summer, we recognize this is a period typically filled with much celebration and milestones.  Both Steve and Colleen together with their families will be celebrating the high school graduations of each of their own daughters and in return if your family is celebrating your own special occasion, we congratulate you. It is also “sell in May and go away” season for Wall Street, an adage that would suggest investors should sell equity holdings ahead of summer and then reenter the market the following November. That action is not a recipe for success however, as the challenges we are facing are not unique to other points in history and attempting to time the market seldom, if ever, works in an investors favor. The bottom line is solid economic growth and strong corporate earnings continue to bolster stock prices despite higher interest rates and The Fed’s indication that it may reduce interest rates this year is fueling positive investor sentiment. When, and if, the Fed announces it will cut back rates continues to be a wait and see, however, if current inflation trends persist and the economy remains stable, stocks are expected to remain essential for long-term investment goals as they assist investors in keeping pace with or beating inflation.  

As always, we will continue to monitor developments, particularly from the Fed and if they remain on course to navigate a soft landing as well as geopolitical tensions, existing and potential new ones, and any impact on our markets as a result. Again, we wish you an enjoyable start to the warmer weather and encourage you to contact our office to discuss your portfolio and your financial plan.  


Steve LePage               Colleen Bianco