Joe Lucey

The Election’s Market Impact

With polls indicating a very tight presidential race, investor skepticism loomed as last week’s election approached, driven largely by concerns over potential delays in confirming a clear winner. Fortunately, results came sooner than expected and with a decisive outcome. In response, markets were propelled higher. The surge in stock prices has been attributable to Donald Trump’s win, as it is believed his administration will promote pro-growth domestic policies and relatively easier regulation. However, the market rally may just as well have been a sigh of relief over a clear outcome. 

While stock performance statistics vary under different presidential administrations, much of the market’s happenings are beyond the control of any one President or Congress. Any political party taking credit for market performance tends to be oversimplified.

How The Trump Presidency May Affect Your Portfolio

So, what might a Trump presidency mean for your portfolio and financial planning? It may be too early to make precise predictions, but there are a few assumptions we can make based on his campaign.

Government spending, national debt, and tax policy come to mind as significant factors. While Trump’s administration may be perceived as pro-business, his first term revealed a tendency toward increased government spending, driving up the national debt. This has played out recently with a rise in government bond yields. U.S. Treasuries no longer carry the perceived safety they used to thanks to rapidly rising debt levels, pushing bond yields higher as investors seek compensation for added risk. Given these dynamics, in our view, bonds may not provide the most favorable returns over the next several years nor the same amount of safety or diversification in investment portfolios as they have over the past several decades. We remain very optimistic in our stock market outlook. The current bull run may slow, but we do not foresee any reason for it stopping, absent an unforeseen, large-scale event.  

Great attention should also be paid to tax policy. The tax cuts initiated during Trump’s first term in office as part of the Tax Cuts and Jobs Act of 2017 are set to expire at the end of next year. With Congress likely to be in step with the President, there’s potential for these cuts to be extended or made permanent. However, this does not mean that taxes will remain lower indefinitely. Under its current trajectory, the debt will eventually become crippling, and at some point, the bill will come due. The most probable way for the federal government to bring in more revenue is to raise taxes since spending cuts seem unlikely.

Looking Ahead

With the election now in our rear-view mirror, we turn our attention to the year ahead. The stock market has delivered strong returns throughout 2024, and we fully anticipate that stocks will maintain positive momentum, continuing to rally through year-end. The Federal Reserve’s expected interest rate cuts next year would further ease monetary policy, providing a stock market tailwind. However, if inflation rebounds—a strong possibility if government spending continues or new tariffs are imposed—the Fed may be forced to reverse course.

While the market has soared in the short time since the election, it is important to stay focused on the long term. Stock market performance tends to have a very weak correlation with which political party is in office. Instead, focus on how specific actions taken by elected leaders may impact your retirement planning and broader financial strategy. As always, to look specifically at your portfolio, and for example, how taxes and bond yields may impact it, give us a call: 952-460-3290.

The Rate Cuts and The Economic Future

The Federal Reserve finally did it—they cut interest rates for the first time in four years. Before their meeting, it was widely expected that a cut was coming, but there remained some mystery as to the cut’s size. While only a quarter-point cut was anticipated, they opted for a more aggressive half-point cut in a move similar to their inflation-combatting tactics. Pre-announcement speculation suggested that a half-point drop would signal concerns about the economy weakening—a bad sign for markets. However, the stock markets reacted oppositely, rallying sharply after the cut was announced.

Looking ahead, two more quarter-point rate cuts are currently expected in 2024 as well as a series of four quarter-point cuts in 2025. In 2026, it’s expected that two further cuts will follow.  This would bring the Fed Funds rate down to around 3%. While we don’t necessarily agree with the anticipated magnitude of the expected cuts, we can assume that they are directionally accurate – short-term rates are likely to move lower in the next year or two. 

Meanwhile, inflation remains slightly above the Fed’s 2% target, with the consumer price index and personal consumption expenditures lingering around 2.5% and continuing to trend downward. It is possible the Fed could pause rate cuts or even reverse course and raise rates if inflation happens to take hold again. However, their aggressive half-point cut suggests they feel confident that the economy is softening and lower rates are warranted.

Stock Market Snapshot

Despite indications of a slowing economy, the stock market seems virtually unstoppable and continues to provide robust returns. The S&P 500 returned over 5% in Q3 and is now up more than 20% year-to-date. We remain cautious as valuations remain stretched. Certain areas of the market look more attractive than others, depending on sector and market capitalization. We expect small caps – companies requiring loans to grow – to outperform large caps in the coming months as interest rates continue to decline.

In terms of fixed income, interest rates for terms longer than three months have already adjusted, so we don’t anticipate much further downward movement. While fixed income has posted solid returns this year, future gains may be somewhat limited. With shorter-term rates dropping, investments in money markets and T-bills will earn lower interest and therefore garner fewer “real” returns when inflation and taxes are considered. Now could be a good time to explore other options for income and safety, whether that means locking in current rates or considering alternative strategies with better potential returns.

Election Effects

Many may be concerned about how next month’s election will affect the economy, but historically elections have a limited impact on the markets. This year should be no different. The election outcome may affect different sectors, but the overall market impact is likely to be muted. However, markets dislike uncertainty, so a post-election rally could occur once the results are in.

The Bottom Line

If you are concerned about the stock market and seeking returns beyond what fixed-income investments can offer, this may be an opportune time to explore strategies participating in market upside while limiting downside impacts. Many investors have become complacent after enjoying the strong returns of the stock market since the beginning of 2023. We will caution risks abound; do not put your retirement plan in jeopardy by taking on an inappropriate amount of risk – whether it be too little or too much. Call us if you would like to review your portfolio and ensure you remain on track to enjoy a worry-free, secure retirement: 952-460-3290.