How to Position Your Investment Portfolio Ahead of the 2024 Elections – Morningstar

Susan Dziubinski: Hello, my name is Susan Dziubinski from Morningstar. Here in the United States, we will go to the polls in November to elect our next president. And for now, it looks like we’ll have to choose between current President Joe Biden and former President Donald Trump. Dan Lefkovitz is with me to discuss what investors could learn from how the market has behaved during previous administrations. Dan is a strategist at Morningstar Indexes and co-host of The long term vision podcast.

Hi Dan. Thank you for being here today.

Dan Lefkovitz: It’s always nice to be with you, Susan.

Dziubinski: All right. So, you’ve done a real in-depth analysis of the performance of various asset classes over the last four administrations, and viewers can access your research in a link below this video. Talk very generally about how stocks and bonds have performed over these different administrations.

Lefkovitz: We looked at the annualized returns of the Morningstar US Market Index, which is our broad gauge of stocks, as well as the Morningstar US Core Bond Index over the past four administrations. We found that stocks had their best performance under Trump. They also performed very well under Obama, strong results under Biden, and their worst performance under the George W. Bush administration. Bonds performed better under Bush and worse under Biden. Now, this goes without saying, but I’m going to say it anyway: there was a lot going on, a lot of different variables, and context is really key to understanding.

Dziubinski: Got it. Now, given that this year’s presidential candidates have both served in office before, quite recently, let’s take a little more look at market performance before and during the Trump and Biden administrations, in particular. Today, as elections approach and during election years, we often hear: “Oh, expect more market volatility.” Have we seen more volatility than usual, for example in 2016 and 2020, which were our last two election years?

Lefkovitz: We had assumed that there would be more volatility in election years, but that did not necessarily happen. So 2016 was actually less volatile than 2015. There was some volatility in the run-up to the November 2016 election, but the biggest market move of 2016 was in June, in response to Brexit. This decline occurred when the United Kingdom voted to leave the European Union. This surprised and disrupted the markets, and even the US market experienced a decline. But even that decision wasn’t as big as the flash crash of August 2015, which I’m sure you remember, Susan. Actually, I didn’t. But it’s amazing how these events, which seemed so important at the time, are somehow lost. But 2020 was a very volatile year, but that was more because of the pandemic than the election. We saw the great pandemic panic in March 2020 when lockdowns began, and there were also pandemic-related market events in September, October and November 2020.

Dziubinski: Now let’s talk a little about market dynamics under the Trump and Biden administrations, starting with the Trump administration and its surprise victory in 2016. How did the U.S. stock and bond markets initially react after his victory?

Lefkovitz: There was a large rally in November 2016. It was called the “Trump Bump” at the time. And when we looked at it, it was really the small-cap value section of the U.S. stock market that led the charge after the election. Economically, interest rate-sensitive, and domestically oriented companies were the biggest perceived beneficiaries of the Trump agenda, which consisted of accelerated economic growth, tax cuts, regulatory rollbacks, and government spending. ‘infrastructure. When it came to Big Tech, Trump was not seen as a friend of Big Tech, and tech stocks were actually lagging the market in November 2016, as was the bond market. The bond market collapsed due to expectations that there would be lots of stimulus, inflation and rate hikes.

Dziubinski: And what about international markets? How did international markets initially react?

Lefkovitz: Russia up, Mexico down. So, at a time when the Russian stock market was investment-friendly, Russian stocks performed well after the elections. Trump was seen as a friend of Russia. And in Mexico, if you remember, the big campaign slogan was “Build the wall,” the Mexican stock market and the Mexican peso really collapsed after Trump was elected.

Dziubinski: Now let’s look at the entire term, the entire Trump administration. What happened in the market during this period and at the end of the mandate? Have these initial market expectations or behaviors been maintained?

Lefkovitz: No, they didn’t persist. In fact, in 2017, small-cap value companies, which were the biggest beneficiaries of Trump’s election, were the worst performers in the style category measured by our indexes. Large-cap growth dominated in 2017. What happened was that many of the key elements of the campaign platform, like infrastructure spending, did not progress and expectations were actually revised upwards. So what we saw during the rest of the Trump presidency was that technology was the best performing stock sector, which was certainly not what anyone expected after the election. If you remember, we were talking about FANG stocks back then. This acronym was invented in 2013: Facebook and Amazon, Netflix and Google. They were the market leaders before the election, and this acronym has only evolved and grown throughout the Trump presidency.

Dziubinski: Let’s move forward a bit and talk about Joe Biden’s victory in 2020. And again, same questions here. How did markets initially react, here and abroad, to this victory?

Lefkovitz: Interestingly, small-cap stocks also saw an uptick following Biden’s victory in November 2020. But it is very difficult to separate election results from the effects of Covid vaccine announcements. Thus, the Covid vaccines were released in November 2020, just after the elections. And stocks that, again, were sensitive to the economy and had suffered during the pandemic and as a result of the lockdowns, recovered. In 2020 we were talking about BEACH values: booking and entertainment and airlines and cruises and hotels. These countries were the biggest losers of the pandemic, and they rebounded strongly after vaccine announcements in November 2020. Small-cap stocks therefore recovered after Trump and Biden.

Dziubinski: Dan, now that we are further into Joe Biden’s term, how have these initial expectations come to fruition? Are they somehow stuck?

Lefkovitz: The story is a bit complicated. So small-cap value stocks have performed very well in 2021. This is the best-performing part of the market. 2021 has really been a good year across the board, both in terms of growth and value. In 2022 we had the big crash. However, energy held up very well in 2022. Technology dragged the market down. And then we had the enthusiasm for artificial intelligence that started in late 2022 and continued through 2023. And so far this year we’ve been talking about the “Magnificent Seven,” the technology leadership of growth of large caps. But energy has actually been the best-performing sector in the U.S. stock market under Biden, which is surprising given the focus on renewable energy, and the energy sector in the stock market is more traditional than that of oil and gas. But technology also worked very well under Biden.

Dziubinski: Dan, given what we’ve seen in the past, is there a candidate that would be better or worse for the markets?

Lefkovitz: My honest answer, Susan, is “Who knows?” It’s really hard to know how politics will affect the markets. And I would say that politics and elections present many behavioral pitfalls for investors. There are a lot of emotions involved. It is also very difficult to predict the results of an election, the type of policies that will be adopted and the market reaction. So I do not know.

Dziubinski: After reviewing all of this data from four administrations, what do you think are the key takeaways for investors in this 2024 election year?

Lefkovitz: First, I would say that elections do not take place in a vacuum. Elections are just one of many variables that constantly interact to influence markets. Second, I would say that the initial reaction does not always persist. In the long term, markets will be driven by corporate profits and cash flows, not so much by the effects of policy and administration. And third, I would say that in 2024 we can’t just assume that the market will react the same way if Trump wins like in 2016 or the same way if Biden wins like in 2020, because markets learn and adapt always. . And this is why the past is not always predictive.

Dziubinski: And that’s why I guess no matter what season or year we’re in, a diversified portfolio is probably the best solution for most people.

Lefkovitz: That’s right. I think there’s this old expression: don’t predict, prepare. I think there’s a lot of wisdom in that.

Dziubinski: Good advice, Dan. Thank you for being here today.

Lefkovitz: Thank you, Suzanne.

Dziubinski: My name is Susan Dziubinski from Morningstar. Thank you for listening.