Equity markets started 2024 in the same manner that they ended 2023: Higher. The US Market (as measured by the S&P 500) was up 10.5% through March 31st – earning close to its annual average return in just three months – creating a total return of almost 30% for the 12-month period ending March 31, 2024. More impressive is when this occurred: during a Fed tightening cycle with the backdrop of stubbornly high inflation. If ever looking for evidence that timing markets is pointless, this would be exhibit one.
The current month, however, has not seen a continuation of extraordinary returns, with the S&P 500 down ~3% (Through April 23rd).
While predicting markets is a futile effort (as mentioned above), it is worthwhile to discuss the a few factors that will surely impact investors for the remainder of 2024: Economic Growth, Inflation, and Elections.
Zooming out, stock market performance is nothing more than the cumulative growth of an economy and the expectations for growth moving forward. How has economic growth looked? Not bad at all, with 3.4% growth in the fourth quarter of 2023 and 1.6% growth to start 2024. While this tells us very little about the future (which is inherently hard to predict) it does provide some validation for the recent market returns.
The catch-22 of this growth is that it makes inflation very sticky, as demand for goods and services remains high, which in turn drives higher wages, which are then passed on to consumers via higher prices. While this doesn’t directly explain all price increases (which I guarantee all of you reading have noticed when your auto and property insurance renews), it does provide a backdrop for why inflation is so hard to tame without causing a recession… and why The Fed seems to be getting more flexible with their long-term inflation target of 2%.
While The Fed’s job is thankless, I do think maintaining higher rates is the right move, along with flexibility around their 2% inflation target. Can they cut and continue to maintain high rates? Of course, given the current level of rates, but it’s quite hard to suggest rate cuts are imminent, especially when anything they do between now and November 5th will surely be viewed through a political lens.
Thinking back to the 2016 and 2020 elections, the only thing anyone wanted to talk about was the election and the imperfect candidates we had to pick from. Flash forward to today, and it seems we are all choosing blissful ignorance when it comes to an election that is less than 7 months away. Maybe this is due to the “encore” we get in 2024, or maybe just election fatigue. Regardless of why, this is an important topic to bring up, as it will surely become THE topic of conversation as we approach election day.
While you may have heard this before, it bears repeating: Markets don’t share our biases towards candidates, their policies, or political parties. Markets don’t care at all. Markets care solely about growth and expected growth moving forward. Markets are also very aware of the limited impact a presidential candidate has on overall economic activity. As much as you may hate Biden or Trump – you probably didn’t change your spending habits the day after the election in 2020, 2016, 2012, etc.
To further validate that point, the chart below illustrates the return investors experienced under various presidents for the past 100 years.
Only two presidents had negative returns during the entirety of their time served: Herbert Hoover – Who happened to be the president during the great depression, and George W. Bush – who was inaugurated towards the top of the US Tech bubble in 2001 and left office amid the housing crisis. Neither of these events - nor their corresponding stock market declines - can be blamed on them.
Does this mean elections don’t matter? To be curt, that’s exactly what it means, from the myopic perspective of your investment portfolio. You shouldn’t make any changes leading up to nor following an election cycle, as regardless of the occupant of the oval office, you are still going to eat food, go on vacations, and generally participate in the economy.
From a more holistic perspective, elections do matter, and the best thing you can do is participate in this messy process we call democracy. I can assure you I will be casting a ballot come November, and I hope all my readers will as well –regardless of who you vote for.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.
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