Today’s Uncertainties: Election Year and New All-Time Highs

We are strong advocates of maintaining a disciplined, long-term approach when it comes to investing, as the data shows that the amount of time in the market yields better results than trying to time the market (correctly and consistently timing the market is nearly impossible to do). The illustration below shows the results of staying invested in the S&P 500 over a 20-year time period and the resulting impact if one missed the best 5, 15, and 25 performing days.

As is illustrated, missing the best 5 trading days (equivalent to 0.099% of all trading days during this period; 252 trading days per year) would have caused your portfolio to lose nearly a third of its potential value. Therefore, timing the market is not a sensible investment strategy.

However, we understand that short-term events and uncertainties may cause uneasiness among investors that may tempt them to deviate from their long-term investment strategy, so we have selected a couple of these events and uncertainties that are top of mind and will provide context around each.

U.S. Presidential Elections

Election years tend to cause anxiety among investors as there is uncertainty as to the impact on the economy and financial markets that may result from the winning political party. While the implications that elected presidents and officials will have on policy are extremely important, the effects on the stock market may be overstated. A study by First Trust looked at the S&P 500 returns for election years from 1928-2016 and found the following:

• There have been 23 elections during this period.
• 19 of the 23 election years, or 83% of the time, the S&P 500 provided positive performance.
• When a Republican was elected, the average return was 15.3%.
• When a Democrat was elected, the average return was 7.6%.
• The combined average return for all election years was 11.3%.

An additional study by Fidelity looked at full election cycles since 1950 and found that while in election years the range of returns in the S&P 500 was the widest, the average return was still an attractive 9.1%.

While there will always be much at stake in presidential elections, your vote should be cast in your ballot and not in your investment portfolio.

Stock Market All-Time Highs 

With the S&P 500 near all-time highs some investors may want to wait for a “buying opportunity” to invest. While we have illustrated the highly improbable nature of timing the market, we look at the data around all-time highs and what usually comes next. The chart below shows the S&P 500 since 1950 and plots new all-time highs in green.

• Since 1950, there have been new all-time highs on 6.7% of all trading days.
• In the 1990s, there were new all-time highs on more than 12% of all trading days.
• From 2013-2019 there were new all-time highs on 14% of all trading days.
• Despite two bear markets this decade, there have been new all-time highs on 11% of all trading days in the 2020s.

Considering all-time highs are not uncommon, is buying at the top something an investor should try to avoid? The chart below from JP Morgan paints an interesting picture.

Since 1988, investing on days where the S&P 500 closed at all-time highs resulted in better performance than investing on any other day over the course of 1, 3, and 5 years.

As we know, past performance is not indicative of future results, so the possibility of negative returns is still on the table, but we remain bullish over the long-term as outcomes tend to generally be positive. Similarly, investors should remain focused on the long-term and avoid making portfolio decisions based on short-term events.

Sincerely,

Cesar Ortega

Portfolio Manager

About Wolf Group Capital Advisors

At Wolf Group Capital Advisors, a comprehensive wealth management firm and Registered Investment Advisor (RIA) based in the Washington, D.C. metropolitan area, nothing is more important than the fiduciary responsibility we have in managing your wealth. Taking the utmost care, we focus on providing advice tailored to your specific circumstances. With more than two decades advising U.S. expatriates and non-US citizens employed by international organizations, we are qualified in investment strategies addressing global issues. Empathy and curiosity—combined with our experience in life planning and investment management—enable you to explore a wider set of possibilities that can lead to a fulfilling life you’ve worked hard to attain.

Disclosure:

The views expressed represent the opinions of Wolf Group Capital Advisors as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.  

Diversification and asset allocation do not ensure a profit or guarantee against loss.

The information presented is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.