2024 US Elections, Worthy of Worry?

Since I have been getting common questions recently, I thought I would share my thoughts on current themes. As always, my goal is to write this in plain English, remove hyperbole and share some knowledge so you can become a better investor and in turn, achieve your financial objectives. I will keep this to-the-point and if you enjoy the read, please feel free to forward this to a loved one or a colleague. Let’s start with a snapshot of markets and economics. Then we will go over some of the themes people have been talking about such as the US Elections.

Markets Summary YTD as of October 31st 10:45am

·         S&P 500 +20.93%

·         Dow Jones +10.86%

·         Nasdaq +23.27%

·         S&P/TSX +15.92%

·         Euro Stoxx 50 +6.75%

·         VEA +5.14%

·         MSCI World Index +15.33%

·         MSCI EAFE Index +4.53%

·         XBB +0.53%

United States Economic Snapshot

Canada Economic Snapshot

Petrov Commentary

2024 US Elections

The US Presidential Elections are coming up next week. As is the case with every US election every 4 years, some investors worry about how either outcome could affect markets, their portfolio and their retirement. There is a tremendous about of hyperbole in the news about what would happen if Trump wins or if Harris wins so I can understand why it can cause anxiety. Let’s turn off the news and observe some facts. Below is a chart of the S&P 500 (US market) plotted against which political party was in power and which US President was in office from 1930 to 2023.

Politicians often take credit for stock market performance, but in fact there is no observable correlation (much less causation) between political party, US President, and the US stock market. Some Presidents were more controversial than others, but markets have performed and risen during all combinations of political party control.

Elephant or donkey—or both?

Average annual S&P 500 returns since 1953 by party control

Source: RBC Wealth Management, Bloomberg, data through 12/31/23: data based on price returns (does not include dividends)

How has the stock market performed Before vs After elections?

Historically, markets were more volatile during the Presidential primary seasons and gained momentum towards the end of the year after the election was over. This makes sense since markets prefer certainty (knowing who won the election) regardless of political party. What could cause additional volatility is if there is no clear winner on Tuesday. The uncertainty from that could cause markets to swing but once there is a clear winner (regardless of whom it may be) markets will move on to focus on other factors for pricing. That said, keep in mind that markets have enjoyed an excellent recovery since 2022 and strong returns this year so far.

Gains typically came later in the year

Average path of S&P 500 during presidential election years since 1928

Focus on what matters

Regardless of who is President, America’s economy is a 28 trillion powerhouse, and the S&P companies are profitable and thriving. What matters to markets is innovation, profits, and the Fed’s policies. Leave politics out of your portfolio.

Should you get out of US equities and invest entirely in Canadian equities?

Some investors have asked: Should I divest from the US markets and invest entirely in Canadian markets ahead of this US election? In my opinion this would be a tremendous mistake for a few reasons. First, let’s look at the sheer size of the US compared to Canada in terms of market cap. The US represents nearly 72% of the world’s market cap versus Canada at 3%. Not only is Canada’s economy much smaller, it is also not as well-diversified. The US enjoys a well-diversified economy by sector which includes Technology and Health Care for example. Moreover, the Canadian and American markets are highly correlated. When the US market fluctuates in either direction, the Canadian market often does the same so there is no way to evading volatility that would stem from the US. Again, the US is the most important economy in the world so as the old saying goes, “When the US sneezes, the rest of the world catches a cold”.

Source: msci.com Fact Sheet

Here is a comparison the Risk & Return analysis of S&P/TSX (Canada) vs Canadian Banks-only in equal weights vs S&P 500 (US Market). Foregoing the US market would have resulted in more volatility and lower returns.

Source: Morningstar

Volatility comes and goes

Equity market volatility is inevitable and the only way to benefit from long-term returns is to accept the fluctuations. Retail investors often misattribute volatility to whatever they were worried about to begin with (Confirmation Bias). Volatility is caused by changes in expectations for company earnings as a result of myriad of factors other than politics. When we experience volatility as we inevitably will, beware of confirmation bias. Sometimes fluctuations coincide with elections and sometimes they don't. This depends on all other factors that could affect earnings expectations.

Conclusion

In the Petrov Wealth Management Group’s investment models, which I manage on a discretionary basis, I typically allocate more to US equities, and this is one of the many reasons we have experienced strong risk-adjusted returns. I focus on choosing the right asset mix for each individual family based on their financial plan, proper geographical and sector diversification, and strong fundamentals when I invest in companies on behalf of my clients. I operate with a mindset of cautious optimism, and I remove emotions from the equation. I manage my clients’ investment portfolios within the context of a comprehensive financial and estate plan. Also note that I have a re-balancing process in place that allows us to be opportunistic when volatility comes.Enjoy the US election for its entertainment value but when it comes to your finances, use your personal financial plan and the facts as decision-making tools.

My eyes are on the road and my hands are on the steering wheel.The Petrov Wealth Management Group accepts clients primarily by referral. If you think we can help a loved one or a colleague, please reach out and let us know.

Alexander Petrov, Senior Portfolio Manager & Wealth Advisor

Petrov Wealth Management Group