- The S&P 500 broke above its two year trading range in July
- Stocks posted positive gains, led by non-U.S. stocks
- Elections typically don’t have long-term effects on markets however they do bring short-term uncertainty
- We don’t invest in Presidents. We invest in companies. The fundamentals of those companies matter the most in the long run
Risk assets performed well in the 3rd quarter, led by emerging markets and U.S. small cap stocks. U.S. large cap stocks, as measured by the S&P 500, broke out of their broad trading range to reach new all-time highs. Bond returns were close to flat during the quarter as yields stayed relatively flat during the quarter.
In this quarterly recap we will briefly look at the last quarter and we will then spend the remaining time addressing the election’s impact on the markets and your investments.
|US Large Stocks
(S&P 500 TR)
|US Small Stocks
(Russell 2000 TR)
(Barclays US Agg Bond TR)
|3rd Quarter 2016||3.85%||9.05%||6.43%||9.03%||.46%|
Through September 30, 2016. All returns are in U.S. dollars. Source: Morningstar
S&P 500 Breaks Out of Broad Trading Range
After the first quarter we wrote that “we have yet to break through the neutral trading range of the last year”. We then saw the S&P 500 briefly break above its trading range during the second quarter before promptly falling back inside the range. And then in July, the S&P 500 broker above its trading range again and finished the quarter above that range. The S&P 500 is now decidedly above that. Below is a chart of the S&P 500 since 2015. The yellow line shows the top end of the range and the red and black line show the price movements of the S&P 500.
U.S. stocks vs Non-U.S. stocks
Non-U.S. exposure has hurt a diversified portfolio over the last five to ten years. However, we may be seeing a shift as non-U.S. equities have gained momentum year to date. In fact, this was the first time since Q1 of 2015 where both Emerging Market and International Developed equities outperformed U.S. equities. We wrote last quarter that “Not only do non-U.S. stock provide diversification but their valuations are relatively better than U.S. stocks at this point in the cycle.” We continue to believe this to be the case.
How do Presidential Elections affect my portfolio?
The answer – based on decades of historical data – is that presidential elections typically don’t have a long-term effect on market performance. However, elections can have a short-term effect on markets mainly because markets don’t like uncertainty. Stock market volatility tends to spike in a presidential election year but then dissipates shortly afterwards, returning to more normal levels once the uncertainty is gone. So far this year, volatility hasn’t exceeded normal levels for a presidential election year.
Many readers may want to credit or blame the president for stock market performance, but the truth is that their policies have little impact on stock market returns. Ultimately fundamentals – not elections – are the more important drivers of asset prices. Valuations, the health of corporate balance sheets, the level of interest rates, technology, demographics and the economy are some of the more important influences on market behavior.
Warren Buffet on Elections
In this year’s letter to Berkshire Hathaway shareholders Warren Buffet had some wise words to say on elections. He wrote the following:
“It’s an election year, and candidates can’t stop speaking about our country’s problems (which of course, only they can solve). As a result of the negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is a staggering six times the amount in 1930, the year I was born. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.
Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.
The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, “search” is invaluable to me. (I’m not ready for Tinder, however.) For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did”.
If you are worried about a particularly party winning, it important to remember that we don’t invest in presidents or governments, but corporations. Our system of divided government helps ensure that no one leader consolidates all power. Regardless of who wins, short-term developments are less important to your investment success than the big picture trends that will shape markets in the years ahead. So while we will be paying attention to the news, we will also continue to make sure that your portfolio is well diversified, that your investment costs are kept low and that you are on your best path forward.
Leonard Rickey Investment Advisors, PLLC (“LRIA”), is an SEC registered investment adviser located in the State of Washington. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of LRIA, please contact LRIA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov).
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The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. It cannot be invested into directly.
The MSCI EM Index is a float-adjusted market capitalization index that consists of indices of approximately 800 stocks and is designed to measure equity market performance in 23 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, and Turkey.
The MSCI EAFE (Europe, Australasia, Far East) Index is a free float-adjusted market capitalization index of approximately 900 stocks and is designed to measure equity market performance in 21 developed market countries outside of North America
 Created by LRIA using StockCharts.com
 Morningstar data
 Vanguard, based on data from Thomson Reuters, 2016.