2024 Q4 Market Commentary…
This year, more than any other election year, I’ve been fielding questions about how the outcome of elections might affect your personal investments. T. Rowe Price put out some data earlier this year that showed the average stock market return in election years underperformed returns in non-election years by just ½ of 1%. That is seen as statistically insignificant in the view of economists. Most investment advisors concur (me included) that near-term political outcomes should not alter longer-term investing discipline. Nevertheless, we sometimes do choose to reduce investment risk by holding more cash than usual heading into election day. I’m comfortable with this strategy, especially for those individuals nearing retirement age. I view it as an opportune time to take a breath and re-assess portfolio positioning.
On the economics front, we continue to follow inflation, interest rate decisions, and GDP data. These are the factors driving market performance right now, and that will continue to be the case heading into next year. You often hear the term “soft landing” on the financial networks. A soft landing is an economic scenario where the economy slows down enough to reduce inflation without causing a recession. It’s very difficult to achieve. Here are the characteristics of a “soft landing”:
Inflation: Inflation returns to target levels without a recession within two years. The current stated target level at the Federal Reserve is 2% annual inflation.
GDP Growth: Real GDP growth expands for three quarters in a row at a rate below the economy’s potential growth rate.
Interest Rates: Interest rates are raised just enough to slow growth and inflation without causing a recession or increasing unemployment.
The “hard landing” alternative outcome is when it doesn’t all go according to plan. In general, the more dependent the economy has become on government stimulus, the more difficult it becomes to avoid the hard landing. A hard landing almost guarantees recessionary economic conditions, which can equate to a lack of investor confidence and a potential pullback in the stock market.
So, as we move through the election, we’ll have to assess what political outcomes have on monetary and fiscal policy going forward and position assets accordingly.
