Navigating Market Dynamics Amid Political Uncertainty
As we enter the final days ahead of the 2024 election, uncertainty about how politics will influence markets are at the top of many investors’ minds. However, historical data suggests that the party in the executive branch has had a minimal long-term impact on stock market performance. Whether the White House is Democratic or Republican, the market performance has shown little deviation over time. In fact, during the last four years of Barack Obama’s (2013- 2016) presidency and the four years of Donald Trump’s presidency (2017-2020), annual market returns were similar, despite their stark political differences.
That said, tax policy changes may be on the horizon, depending on the election outcome. If Kamala Harris takes office, we may see corporate tax rates rise, while Donald Trump’s return to the Oval Office could push them even lower than his previous cuts. For investors, this election may create both challenges and opportunities, particularly in estate planning. The federal estate tax exemption, which now sits at roughly $13 million per person, could see a significant drop if Kamala Harris wins. This potential shift emphasizes the importance of proactive estate planning, particularly for high-net-worth individuals looking to gift or transfer assets.
While both candidates’ tax policies are likely to affect corporate America, the broader political landscape may have a greater impact on market dynamics. Historically, markets have favored divided government, with control split between the Presidency and Congress, as this reduces the likelihood of significant legislative shifts and tends to support market stability.
Despite the political noise, the current market conditions remain strong. Inflation has cooled, with the Consumer Price Index (CPI) at 2.4% year-over-year as of September, and third-quarter earnings have been solid so far. Additionally, labor markets have remained resilient, further bolstering economic confidence. Even globally, there are positive signs, such as China’s recent stimulus measures which have strengthened its economy and could have a positive impact on global markets.
Another point of optimism comes from the Federal Reserve (Fed). Last month, the Fed cut interest rates by 50 basis points, a move that surprised some investors. Despite this, the yield on the 10-year Treasury bond has actually increased, signaling ongoing strength in the U.S. economy. The Fed has been looking to engineer a “soft landing”—where inflation falls and the economy weakens without triggering a recession. Now, some have started referring to the current environment as a “no landing” scenario, where inflation keeps falling and economic growth continues without a significant slowdown.
As we have mentioned before, stock market participation continues to broaden, and this is encouraging news for investors. More stocks are participating in the gains, including small-cap stocks, which recently hit a new 52-week high. Small caps have underperformed in recent years but are now showing signs of recovery, although the 3-year return of the Russell 2000 index is still negative. With interest rates potentially moving lower, these smaller companies stand to benefit and are priced more cheaply than their large-cap counterparts.
Looking ahead, infrastructure investments are emerging as a potential source of opportunity as well. Both political parties have expressed a commitment to bolstering domestic infrastructure through initiatives like the CHIPS Act and broader infrastructure legislation. This could present a long-term investment theme, and as such, we are actively researching ways to capitalize on future growth in this sector.
As we approach the end of the year, it is important to stay focused on your overarching financial goals. If you have any questions about how current market conditions or other factors may impact your investment strategy, we are always here to help.