By Tim Courtney, Chief Investment Officer

Investors are often concerned, rightfully, about how elections might impact their portfolios. Most of us respond to incentives and disincentives, and investors and markets will react to changes in rules, policies and leadership to some degree. However, it is also true that many of an election year’s proposed changes never become enacted or are greatly modified after the election. Taking immediate action amid this uncertainty is often counterproductive.

 Looking at historical data, we can see that market returns during presidential terms have generally remained consistent, regardless of which party is in power. For example, over the past several decades, annualized returns have ranged between 11% and 16% across different administrations, including those of Reagan, Clinton, Obama and Trump.¹ The major exception is George W. Bush, whose presidency coincided with two significant downturns—the dot-com bubble in 2000-2002 and the housing market collapse in 2008.² While policies certainly played a role in these events (especially on the mortgage meltdown as we will discuss below) we think the stronger force in causing these bear markets was market concentration – the first in internet/tech and the second in financials/mortgage leverage.

 We should focus on concrete factors that could impact portfolios during election seasons rather than trying to predict election outcomes and how policies ultimately are executed. One area we are closely monitoring is the potential expiration of the 2017 Tax Cuts and Jobs Act in 2026, which, if not extended, could lead to higher tax rates for individuals and corporations.³ We plan on making adjustments, if any, to our strategies and portfolios in 2025 under current tax rules.

 We are also watching for price movements across different market sectors, particularly those that could be directly influenced by policy changes. Healthcare, energy and technology could see significant volatility depending on which policies gain traction post-election.⁴ Ultimately, prices will guide our decisions rather than speculation on the impact of proposed policies.

 New policies can end up incentivizing or disincentivizing productive behavior, and a healthy debate about this would be helpful. It is also important to acknowledge that the law of unintended consequences is alive and well, and that even reasonable-sounding policies can create chaos. A great example of this is the Financial Accounting Standards Board policy of requiring banks to use mark-to-market accounting in 2006. This rule heavily contributed to banks’ increasing insolvency in 2008,⁵ and it was reversed in 2009 to avoid causing further damage to markets.

 Variables moving forward will be interest rate levels, money supply, economic and earnings growth, tax rates and regulation to name a few. As investors we should be disciplined and make decisions based on prices and what we can know rather than on outcomes on which we can only speculate. If you have any questions about this, please contact your Exencial advisor.

Sources: 

1. Bankrate (7/24/24) – Election 2024: How stocks perform in election years
2. Kiplinger (9/6/24) – The Best and Worst Presidents (According to the Stock Market)
3. Investopedia (8/31/24) – What Is the Tax Cuts and Jobs Act (TCJA)?
4. S&P Global (9/2/20) – Sector Effects During Elections
5. CNN Money (10/1/08) – The Accounting Rule You Should Care About

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.