Third Quarter Market Update 2024: Politics & Interest Rates, How Will the Year End?
Transparency is a staple of our culture here at FSG. In fact, it's the first of three of our core values we express to our clients through our communications (Transparent, Reliable, Qualified). To be completely transparent, I’m unsure what my clients want to read when I write these market updates. Do you want them longer, shorter, more data-driven, or more analogical with stories?
That being said, we love feedback, so if you have any thoughts on these market updates and what you would like to read more about, please let us know. We want to hear from you about what you like and what you don’t like!
Now that that is out of the way let's take a quick look back at the markets in Q3, and then we’ll look forward to the end of the year.
Markets continued their banner year in Q3, albeit with some bumps and major rotations. Noticeably, investors preferred small-cap, mid-cap, and emerging market stocks over the dominant force of the “big US tech” stocks.
Source: YCHARTS
As you can see, small-cap stocks led the way for Q3, with emerging markets and international showing solid numbers as well. U.S. large-cap stocks still posted positive returns and are still leading the way year to date, but there was a significant shift. This shift or rotation into small and value is even more pronounced when we look at the style box performance of the U.S. market. See below:
Source: YCHARTS
Small-cap and small-value investors, in particular, can thank the Fed’s interest rate cut for some of this recent outperformance. As you may know, the Fed cut interest rates by 50 basis points or .50% in September. This rate cut also boosted bonds, as we now see bonds showing a positive return for the year and a whopping 5.2% Q3 return.
Small-cap stocks are more likely to own a type of debt called a floating rate, which fluctuates with interest rates. When interest rates are cut, this is seen as more beneficial to small companies that may hold a lot of floating rate debt. The cut in interest rates lowers their interest payments, making the company more profitable.
We believe we are now in a long-term interest cutting cycle, which will benefit stocks overall but with a potentially large positive benefit to small-cap stocks and, of course, bonds.
Looking Forward
As we look toward the year's end, many clients have been asking about the election and how that may impact markets. I don’t want to get into a political diatribe here, as that's not my job as your financial advisor. I will, however, discuss how presidential policies can impact markets and examine how markets performed during this administration and the previous administration.
First and foremost, the president's impact on markets is relatively limited. Yes, their decisions can have an effect. However, it's usually years down the line before those decisions and policies materially impact publicly traded markets. I said usually because I can think of policies proposed and impacted by both President Trump’s and President Biden’s administrations that had nearly an immediate impact on markets. For the record, I’m referencing some of President Biden’s policies as VP Harris is a part of that administration, and most, if not all, of her policy positions are extremely similar or the same.
Starting with President Trump’s administration. We saw an emphasis on cutting taxes, regulations, and a very pro-U.S. energy policy. These are things that the market typically likes, and for the most part, markets performed well. However, we also saw trade and tariff wars that rattled markets from time to time. In particular, President Trump went after China hard for intellectual property theft and the trade deficit. I'm not here to debate whether those were good or necessary policy decisions. However, markets certainly did not like the unknown of new tariffs, and we saw increased volatility during those trade talks.
The 2017 Tax Cuts and Jobs Act (TCJA) that President Trump passed has been and continues to be decisive. I have the benefit of working with many households and businesses, and I can say, both from that experience and the data, which shows that the vast majority of Americans pay less under this tax act than they did before. The doubling of the standard deduction is the main reason for this. A Trump administration would look to make the 2017 TCJA permanent.
Below, we’ll look at market performance during each administration from when they were elected in November of that year until they lost the election (in the case of Trump and up to the most recent quarter end in the case of Biden’s administration. But first, let's look at some of the economic pros and cons of the Biden administration.
Under the Biden administration we have seen an emphasis on infrastructure spending, returning to pre-Trump trade policies, an increase in inflation, and a more green energy policy. The infrastructure spending did seem to have a positive impact on the market. Additionally, markets seemed to appreciate not having to worry about trade and tariff disputes. Inflation has been a major thorn in the side of Biden’s administration and certainly put a damper on markets in 2022 when inflation reached multi decade highs. Of course, many factors not related to presidential politics go into the rates of inflation, such as monetary policy, fiscal policy, and, of course, supply chain issues.
Energy inflation may be one area where certain market participants can point more than the usual amount of blame towards the administration. For example, from the first days in office, the administration used executive orders to limit future energy development in the U.S. Again, I’m not arguing for or against these policies; I’m merely presenting how markets and investors may interpret them.
Regarding taxes, the Harris campaign has not formally stated it would work to extend the 2017 TCJA; however, they have proposed “higher taxes for the wealthy and corporations” and tax breaks for families. Since stocks are, in fact, corporations, higher taxes on those corporations would reduce profitability and, therefore, reduce the value of those companies. This is, of course, circumstantial, but understanding that companies (aka stocks) are valued based on their profitability and taxes reduce profitability, it's not a leap to imagine this would be bad for stocks.
The performance of various markets during each administration shows that stocks have done well over both periods. Both the Trump and Biden Administrations experienced excellent growth in all stock sectors, with the Biden Administration showing stronger numbers across stocks. Regarding the bond market, the Trump Administration showed excellent bond returns, while the Biden administration showed negative bond returns.
I thought this would be an interesting academic exploration of presidential policies and market performance. I did my best to be impartial, so I hope this information offended no one. As always, please feel free to reach out to your FSG advisor with any questions or concerns.
Written by: Brice Carter
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.