It’s the year 2020! I don’t know if I’ll ever get used to saying that. If the title of this blog made you think I was going to give stock market predictions for the year, not quite, I didn’t get my crystal ball for Christmas, so I’m not sure what fun things will be happening this year in markets and around the globe. I do know that there’s a presidential election this year, that the Fed will meet to discuss interest rates at least eight times like they do every year, and that our clients, friends, and families will all see the same startling headlines aiming to tempt us to act on our fears.
We receive a lot of questions from clients about the upcoming election and what it means for markets and their portfolios. Each election year bring its own critics and depending on how the stock market has done we either credit or discredit the president depending on our biases. But the truth is, there are many forces that drive stock market returns, and the daily volatility from a single tweet has much less impact on long-term returns than one might think. Markets have rewarded long-term investors under a variety of presidents. The average annual return for the S&P 500 during any given election year is somewhere around 11%. It doesn’t matter which side of the aisle you sit on, I think we can all agree that 11% is a pretty good return on investment.
Returns During and After Election Years
S&P 500 Index: 1928-2017
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. Source: S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
The Federal Open Market Committee (the FOMC or less formally known as ‘the Fed’) typically meets eight times a year, or about every six weeks. Why do we care about the Fed meetings? The Fed sets the federal funds rate, which impacts short term interest rates in the US. As borrowers we care about the federal funds rate because this determines how much interest we pay on our debt. As savers, we care because this affects what we are earning on our cash deposits. As investors, we care because what the Fed does is typically a response to current economic conditions, and where they set the rate can sway the stock market, which in turn affects our investments.
The rate pause in the December meeting has many analysts saying that the Fed’s inaction, and neutral remarks signal a continued pause on changes to the federal funds rate in 2020. I don’t look too much into these predictions because after all they’re just guesses, educated maybe, but still guesses nonetheless. After several years of gradually raising rates the Fed cut rates three times in 2019, there were many articles like this one that predicted just the opposite.
What Should We Do?
As advisors, our goal is to help our clients share in some of the upside of the stock market but also to help soften the blow of a market downturn by creating and closely monitoring globally diversified portfolios, and we will continue to do that in 2020 just as we always have. As borrowers, savers, and investors we should continue to read, stay informed, and ask questions but take predictions, forecasts, and startling headlines with a grain of salt.
We spend a lot of time fearing what we can’t control, and it’s a hard thing to overcome, but once we learn to get comfortable with uncertainty of markets, we can begin to focus on the things we can control and enjoy the handsome rewards that investing in markets can bring.
Happy New Year!