This week’s chart shows the cumulative S&P 500 return and 10-year Treasury yields through January 21st. The S&P 500 is up over 3% year-to-date despite impeachment proceedings and geopolitical tensions with Iran. We investigate why equity markets have remained strong through a seemingly difficult start to an election year.

Impeachment proceedings allege that Trump interfered in the coming 2020 election by holding back millions of dollars of military aid to Ukraine in exchange for them launching an investigation into Joe Biden. The market seems relatively unphased, however, as Republicans control a majority in the Senate of 53 to 47. A two-thirds majority (67 senators) is required to convict Trump and remove him from office. This seems unlikely as evidence remains thin and he retains backing from the Republican party.

Iran has been another point of conflict early this year as the U.S. killed Qassem Soleimani as a result of his alleged targeting of U.S. embassies. Iran then responded by firing missiles at U.S. targets in Iraq. It is widely viewed that Iran is looking to avoid a head-on conflict with the U.S. as economic sanctions are harming the Iranian economy. As the direct conflict seems to have abated and Iran’s economy is struggling, the market seems to view this as a non-event.

Rates have remained low and the economy is growing. Though there seems to have been a few bumps in the road, the S&P 500 continues to march higher. Uncertainties remain, however, as a surprise verdict from the impeachment trials or newly discovered coronavirus could upset the markets moving forward. Going forward, investors will look for positive earnings and economic growth — both domestically and abroad — to support further equity market gains in 2020.

Print PDF > Despite Political Tensions, 2020 off to a Great Start

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Domestic equity returns have surprised investors to the upside this year. The S&P 500 is up ~24% and the S&P has posted 26 new highs in 2019. Over the past 10 years, the S&P has recorded 233 new highs and a 481% cumulative return. The chart shows that many of the market highs were backloaded into the second half of the current recovery as economic growth and investor confidence increased. The S&P 500 did not reach its post-recession peak until 2013: four years after the financial crisis. During those four years, market volatility was elevated, but steadily decreasing.

2019’s market environment has been very different from 2009. The first contrast is valuations. In March 2009, the S&P 500 traded at 11.2 times forward earnings and today it trades at 19.2 times forward earnings, higher than its 10-year average of 16 times. Second, while market volatility on average has decreased by 50% since 2009, volatility (measured by the VIX index) ­— as shown by the orange diamond — remains elevated since 2017’s lows. Lastly, geopolitical risk has predominantly shifted from Europe and its sovereign debt crisis to the U.S.-China trade war, the latter of which is still not resolved. Luckily, U.S. businesses and especially U.S. consumers have proved resilient through these stressors. If the status quo continues into 2020, we can only hope for more of the same: positive equity returns albeit with higher market volatility and geopolitical risks.

Print PDF > Will the Good News Continue for U.S. Equities?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Prior to each presidential election, there is inevitable talk about market reactions to candidates and how policy changes could impact investors. As shown in the table, election years tend to exhibit more muted returns (as measured by the S&P 500 index) and greater volatility compared to the years leading into the presidential election. Year-to-date, 2019 has continued the Year 3 trend of strong performance, but if history is any indication, the 2020 outlook is less optimistic.

When it comes to Republicans vs. Democrats, political pundits often try to show one is better than the other for equity market returns. The reality, however, is that there isn’t enough of a sample size to draw any meaningful conclusions about parties, given the number of combinations of who controls the Presidency, Senate, and House of Representatives. Even in the case of 2016 with Trump’s unexpected win, markets initially sold off but quickly rebounded to their previous levels. No matter the candidate or the policy, markets care most about clarity and dislike uncertainty. As a result, we are expecting greater volatility over the next 12 months as we head into the 2020 presidential election. While the election will certainly not be the sole driver of market volatility, it will undoubtedly contribute to further uncertainty over the coming months.

Print PDF > What Does an Election Year Mean for Equity Investors?

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.