Don’t Be Deceived By Mutual Funds

by | Nov 6, 2018 | Learning, Most Popular

Don't Be Deceived By Mutual Funds

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Best Mutual Funds?
Since the bull market run started 10 years ago, how many mutual funds would you guess outperformed the stock market?

If you are thinking 500, 200 or even 20, you are very wrong.  In fact, not one single mutual fund has beaten the market since 2009.  After pondering that fact, does that make you want to change what you invest in?   Remember all those expensive, slickly produced TV and magazine ads boasting market beating ratings and top quartiles?  You know, the ones that show an incredibly good looking, but aging couple walking hand in hand into the sunset on a deserted beach?  They all are just so much bunk. The funds mentioned rarely quote performance beyond one or two short years.

Not too long ago, the New York Times studied the performance of 2,862 actively managed domestic stock mutual funds since 2009. It carried out a simple quantitative analysis, looking at how many managers stayed in the top performance quartile every year.

ZERO was their final conclusion.   It gets worse…. It is very rare for a mutual fund manager to stay in the top quartile for more than one year. All too often, last year’s hero is this year’s goat, usually because they made some extreme one-sided bet that turned out to be a flash in the pan.  The harsh lesson here is that investing with your foot on the gas pedal going 100 miles per hour and your eyes on the rearview mirror is certain to get you into a fatal crash.

 

“It is possible that any one of these mutual funds will beat the market over the long term,” … “Some of them will do that. But the problem is that we don’t know which of them will do that in advance.” And that, in a nutshell, is the kernel of the argument for buying index funds.
  -New York Times

In their investigation, The NY Times did come across two mutual funds which did beat the S&P500 for five years.  These small cap energy funds more than average amounts of risk to achieve these numbers and have since lost most of their money.
The underlying causes for the pitiful underperformance are many and they highlight the reasons ETFs are coming on strong.  Mutual fund management fees are high and more buried costs are hidden in the fine print of the prospectus. The managemnt fees that are quoted are just the tip of the iceberg.

Any proven,  real talent soon flees the mutual fund industry, with all the real brains leaving to start their own hedge funds and investment advisory services. The inside joke among hedge fund managers is that employment at a mutual fund is proof positive that you are a lousy manager.

Let’s revisit those high dollar mutual fund TV ads. They cost tons of money to make.  All the production costs of the commercials are rolled up into those 12B-1 hidden fees you never really see unless you hunt through the prospectus.  These commercials and print ads are made at the expense of the fund investors thus yielding you a lower return on investment on your money. And those sexy performance numbers? They benefit from a huge survivor bias. If a mutual funds performance is substandard, it is at risk of being closed. As there is a impending desire to protect the other funds in the family. Trying to find mutual funds with standout records spanning 2 decades is near impossible. Like finding the proverbial needle in a haystack.

But since we are on a roll, its hard to imagine that the mutual fund industry as a a whole woefully underperforms the basic S&P500 averages. How could this be? Random picks from the stock pages of your local paper would probably create a better investment return than the majority of the mutual fund industry.

Two years ago, when he signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, President Barack Obama bragged that he’d dealt a crushing blow to the extravagant financial corruption that had caused the global economic crash in 2008. “These reforms represent the strongest consumer financial protections in history,” the president told an adoring crowd in downtown D.C. on July 21st, 2010. “In history.”

Financial Advisor, Financial Advisor Maryland, Investment Advisor, Retirement Planner, Retirement Planning, TSP Transfer, TSP Rollover, 401K Rollover, Best, Adviser, Advisor

This was supposed to be the big one. At 2,300 pages, the new law ostensibly rewrote the rules for Wall Street. It was going to put an end to predatory lending in the mortgage markets, crack down on hidden fees and penalties in credit contracts, and create a powerful new Consumer Financial Protection Bureau to safeguard ordinary consumers. Big banks would be banned from gambling with taxpayer money, and a new set of rules would limit speculators from making the kind of crazy-ass bets that cause wild spikes in the price of food and energy. There would be no more AIGs, and the world would never again face a financial apocalypse when a bank like Lehman Brothers went bankrupt.

Two years later, Dodd-Frank is groaning on its deathbed. From the moment it was signed into law, lobbyists and lawyers have fought regulators over every line in the rulemaking process. Congressmen and presidents may be able to get a law passed once in a while – but they can no longer make sure it stays passed.

With millions of dollars being spent on high paid Washington lobbyists, the mutual fund industry continues to complain about overregulation. Plus, don’t forget, that the costs of the lobbyists also come out of your fund performance as well.

This is why the overwhelming bulk of investors are better off investing in the lower cost ETFs that have become so popular with investors, diversifying holdings among a small number of major asset classes, and then rebalancing as needed to keep the winners in play.

Research Financial Strategies does not charge you with any of our overhead. I am not jacking up what you pay me based on what I spend. I don’t even sell your email address to another online marketer. Being an independent operation of a dozen or so people, I’ll tell you what I don’t have. I lack an investment banking department telling me I have to recommend a stock so we can get the management of their next stock and we don’t have any in-house mutual funds from which we profit more and are required to push.
You just need to pay me a low, flat fee. I don’t need any more.

 

For over 25 years, Research Financial Strategies has been serving families and businesses as their investment advisor. Let us put our money management expertise to work for you. Set up a consultation by either filing out our contact form or by calling us at 301-294-7500. We are here for you!

 

We Are Here For You

 

Source: NYTimes.com

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Market Commentary – November 5, 2018

by | Nov 5, 2018 | Weekly Stock Market Commentary

Stocks recovered some ground last week and then stumbled over unemployment.
Major U.S. stock indices faltered Friday after the Bureau of Labor Statistics (BLS) reported on a popular ‘lagging’ economic indicator – unemployment. (Remember, lagging indicators describe what has happened in the past.) The BLS reported:1, 2, 3

“The unemployment rate remained at 3.7 percent in October, and the number of unemployed persons was little changed at 6.1 million. Over the year, the unemployment rate and the number of unemployed persons declined by 0.4 percentage point and 449,000, respectively.”

Reuters reported the number of Americans receiving unemployment benefits was at the lowest level in 45 years. That’s good news, but it’s old news. Again, unemployment is a lagging indicator and the report reflected what happened in October.4

The stock market, on the other hand, is a ‘leading’ economic indicator. It moves in response to investors’ expectations for the future – and recent gyrations suggest investors aren’t certain what to think. Barron’s Daren Fonda wrote, “The market’s 6.9 percent slide in October and the stock averages’ wild swings are testing everyone’s mettle.”2, 5

Economists are uncertain about what’s to come, too. Kevin L. Kliesen, in an Economic Synopses on the St. Louis Federal Reserve website, wrote, “Historically, a trough in the unemployment rate also tends to be a reliable predictor of a business recession…an economic analyst is nonetheless never sure that a trough has occurred. Indeed, the unemployment rate can move up and down over the expansion.”6

There is one thing many analysts think is likely. They expect the Federal Reserve to increase the Fed funds rate so the U.S. economy does not overheat. Paul Kiernan at The Wall Street Journal reported, “Robust hiring and wage gains last month leave the Federal Reserve all but certain to raise interest rates in December and on course to continue gradually lifting them next year.”7

Higher interest rates are expected to keep inflation in check by slowing economic growth.8
Despite Friday’s stumble, major U.S. stock indices finished the week higher.1

Here’s an unexpected retirement saving trick. If you’re concerned your adult children are not saving enough for retirement, send them a photo of themselves that’s altered so they appear to be older, perhaps age 60 or 70. (You can do this for yourself, too.)9

One reason Americans don’t begin saving early enough, or save as much as they should for retirement, is ‘present bias.’ When asked to choose between two possible rewards, research shows that people tend to choose the one that will be received sooner.10

For instance, imagine you have chocolate and fruit salad. Which will you choose to eat today and which will you choose to eat next week? Researchers found that 83 percent of people chose chocolate today and fruit salad next week.11

Try this one.
You can watch one movie today and another movie tomorrow. Your choices include ‘Anchorman,’ ‘Clear and Present Danger,’ ‘The Piano,’ and ‘Schindler’s List.’ What movie will you watch today? Which will you watch tomorrow?
Researchers found a higher percentage of participants chose to watch lighter films on the day they were asked and more intellectually taxing films later.12

When presented with the choice to vacation today or save for retirement, it’s little surprise many people choose the former. The rewards associated with retirement are often far into the future. As a result, until a person is within a decade or so of retirement, it’s easy to rationalize spending on other things and not setting aside money for the future.12

There is a way to overcome present bias. When people ‘get to know’ their older selves by spending time looking at altered photos, they tend to save more for the future.9

Weekly Focus – Think About It
“If we now care little about ourselves in the further future, our future selves are like future generations. We can affect them for the worse, and, because they do not now exist, they cannot defend themselves. Like future generations, future selves have no vote, so their interests need to be specially protected. Reconsider a boy who starts to smoke, knowing and hardly caring that this may cause him to suffer greatly fifty years later. This boy does not identify with his future self.”
–Derek Parfit, British philosopher13

Best regards,
John F. Reutemann, Jr., CLU, CFP®

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

 

 

* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indices referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

Sources:
1 https://www.barrons.com/articles/stock-rally-fizzles-in-wake-of-strong-payrolls-report-1541201581?mod=hp_DAY_8
2 https://www.investopedia.com/ask/answers/what-are-leading-lagging-and-coincident-indicators/
3 https://www.bls.gov/news.release/empsit.nr0.htm
4 https://www.reuters.com/article/us-usa-economy-unemployment/u-s-labor-market-tightening-manufacturing-slowing-idUSKCN1N64XA
5 https://www.barrons.com/articles/stock-market-fear-1541091809?mod=hp_LEAD_3
6 https://research.stlouisfed.org/publications/economic-synopses/2018/06/01/recession-signals-the-yield-curve-vs-unemployment-rate-troughs
7 https://www.wsj.com/articles/fed-will-likely-raise-rates-after-strong-jobs-report-1541176431
8 https://www.reuters.com/article/us-usa-economy/u-s-job-growth-soars-annual-wage-gain-largest-since-2009-idUSKCN1N70AJ
9 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3949005/
10 https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/present-bias/
11 https://canvas.harvard.edu/files/2761311/download?download_frd=1 (Pages 10, 14-16; Course taught by Brigitte C. Madrian, https://scholar.harvard.edu/bmadrian/classes/api-304-behavioral-economics-and-public-policy)
12 https://pdfs.semanticscholar.org/2b03/cdc6119a5578cd284d8fe9de99e1f169a8fb.pdf  (Pages 262-263, 265)
13 https://books.google.com/books?id=ulhHdvbDRUkC&pg=PA319&lpg=PA319&dq=If+we+now+care+little+about+ourselves+in+the+further+future,+our+future+selves+are+like+future+generations.+We+can+affect+them+for+the+worse,+and,+because+they+do+not+now+exist,+they+cannot+defend+themselves.+Like+future+generations,+future+selves+have+no+vote,+so+their+interests+need+to+be+specially+protected.&source=bl&ots=lVFartNzpF&sig=LgqLWOkCgwMIpj5ixgDFIqNMJuw&hl=en&sa=X&ved=2ahUKEwil5t3plbbeAhVRmeAKHbX1AhYQ6AEwAHoECAAQAQ#v=onepage&q=319&f=false (pages 319-320) 

 

 

Halloween – By the Numbers

by | Oct 30, 2018 | Noteworthy

A number you’re probably not looking for is 1.5 billion. That’s the number of pounds of pumpkins grown every year. History.com said that’s more than twice the weight of the Empire State Building. Here are a few other interesting statistics related to Halloween:1

  • 9 billion pieces of candy corn are sold each year (about 36 million pounds).
  • 72 percent of Americans give candy to trick-or-treaters.
  • 30 percent of children sort their candy after trick-or-treat time.
  • 24 pounds of candy is the average consumed each year.
  • 38 percent of Americans wear costumes.
  • 11.5 percent of Americans dress their pets in costumes.
  • 50 percent of Americans decorate their yards for Halloween.

One take-away is people are different. Some dress their pets as fast food, others love to eat sweets, and some don’t recognize Halloween as a holiday. It’s a lot like investing. There is not a single investment portfolio that suits everyone. What’s important is choosing one that is right for you and your family. If you have any questions about your asset allocation and diversification, just give us a call!

Happy Halloween!

 

Source:

1 http://www.history.com/topics/halloween/history-of-halloween/infographics/halloween-by-the-numbers

Market Commentary – October 29, 2018

by | Oct 29, 2018 | Weekly Stock Market Commentary

Why did the stock market fall when the economy is doing well?
The answer is that one reflects the past and the other anticipates the future. Last Friday’s advance estimate from the Bureau of Economic Analysis showed the U.S. economy grew 3.5 percent during the third quarter of 2018. Harriet Torry of The Wall Street Journal reported:  “The economy powered ahead in the third quarter, driven by robust consumer and government spending, though Friday’s report included warning signs that the business sector faces turbulence that could hold back the expansion in the months ahead.”

Third quarter’s economic growth was slower than economic growth during the second quarter and stronger than economic growth during the first quarter of 2018. Economists refer to economic growth as a ‘lagging indicator.’ It is a measure that may help confirm longer-term trends, but offers little information about the future.

In contrast, the stock market is a ‘leading indicator.’ It reflects what investors think may happen over the next few weeks or months. The volatility we’ve seen during the past two weeks suggests investors are uncertain about what may be ahead. Many factors are contributing to uncertainty. For instance, investors are concerned:

  • The U.S. economy may grow more slowly. Economic growth slowed during the third quarter and investors are uncertain whether the trend will continue through the remainder of 2018 and into 2019.
  • Negative earnings guidance from companies. Corporate earnings growth was robust during the third quarter. Through Friday, almost one-half of companies in the Standard and Poor’s 500 Index had reported earnings and their blended earnings growth rate was 22.5 percent, according to FactSet. However, despite strong earnings growth, many companies’ shares lost value. One reason is a fair number of companies have issued negative guidance indicating earnings may be weaker in the future.
  • Trade tensions could slow global growth. While trade disputes with Mexico and Canada have been resolved, trade issues between the United States and China remain. Al Root of Barron’s reported:

“Now, on third-quarter calls, companies have begun to spell out tariff impacts in greater detail. Calculating the ultimate impact of tariffs isn’t easy or precise. A fair calculation would include not only costs but also changes in demand and the possibility of supply-chain disruptions. The result could be significant. The International Monetary Fund lowered its global growth expectations when it released its recent outlook because of, in part, ‘escalating trade tensions.’

  • Federal Reserve rate hikes could slow economic growth too quickly. The Fed has begun raising the Fed funds rates, encouraging interest rates higher, in an effort to keep inflation in check. Some are concerned the Fed may raise rates too quickly or too high and choke economic growth.

You have probably heard the saying, “Markets hate uncertainty.” Recent volatility seems to be the result of uncertainty and it is possible uncertainty will cause stock markets to bounce around for some time.

When stock markets are volatile and headlines describe the action with words like ‘plunge’ and ‘erase,’ it’s easy to let emotion get the better of you. Before making changes to your portfolio, please give us a call. We can discuss your concerns and any changes you would like to make to your long-term financial plan.

Is that a fact?
A recent Pew Research Center survey found younger people (ages 18 to 49) were better able to distinguish facts from opinions than older people.

Jeffrey Gottfried at Pew reported, “About a third of 18- to 49-year-olds (32 percent) correctly identified all five of the factual statements as factual, compared with two-in-ten among those ages 50 and older. A similar pattern emerges for the opinion statements. Among 18- to 49-year-olds, 44 percent correctly identified all five opinion statements as opinions, compared with 26 percent among those ages 50 and older.”

Pew concluded younger Americans, especially millennials, were better able to distinguish fact from opinion than older Americans because young people tend to be more digitally savvy and also tend not to have a strong affiliation to either political party.

If you’re ready to test your acumen, visit the Pew Research Center website and search for ‘Quiz: How well can you tell factual from opinion statements?’

Weekly Focus – Think About It
“I never considered a difference of opinion in politics, in religion, in philosophy, as cause for withdrawing from a friend.”
–Thomas Jefferson, 3rd American President

Best regards,
John F. Reutemann, Jr., CLU, CFP®

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.

 

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

 

 

* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Stock investing involves risk including loss of principal.
* Consult your financial professional before making any investment decision.

* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

Sources:
https://www.bea.gov/data/gdp/gross-domestic-product
https://www.wsj.com/articles/u-s-economy-grew-at-3-5-rate-in-third-quarter-1540557378
https://www.investopedia.com/terms/l/laggingindicator.asp
https://www.investopedia.com/articles/economics/08/leading-economic-indicators.asp
https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_102618.pdf
https://www.barrons.com/articles/trade-war-hits-stock-market-1540493330?mod=hp_DAY_9
https://www.brookings.edu/blog/up-front/2018/10/12/wessels-economic-update-are-the-feds-interest-rate-hikes-a-mistake/
http://www.pewresearch.org/fact-tank/2018/10/23/younger-americans-are-better-than-older-americans-at-telling-factual-news-statements-from-opinions/
http://www.pewresearch.org/quiz/news-statements-quiz/
https://www.brainyquote.com/quotes/thomas_jefferson_389008

 

 

 

 

Four things you should know about the midterm elections

by | Oct 24, 2018 | Learning

I present you with two quotes:

“Democracy is the form of government in which the free are rulers.” – Aristotle
“I tell you, all politics is applesauce.” – Will Rogers

Whichever quote best describes your attitude about the upcoming election, the fact remains that on November 6, we have an opportunity to perform our civic duty as citizens of a free country. So whatever party you belong to or opinions you hold, I hope you’re able to carve out time to vote!

Eight Things to Know about the USA-China Trade Dispute

Now, onto what this letter is really about.
With the midterms right around the corner, many clients have been asking me what the elections could mean for the markets. So, without further ado, here are four things you should know about the relationship between midterms and markets.

1. Markets usually dip before a midterm election but rise afterward.
Typically, the markets have not fared well during midterm-election years. In fact, according to one study, the S&P 500 averages a 19% decline in the months before a midterm!1

That hasn’t happened this year – as of this writing, the S&P is up slightly for 20182 – but we have seen increased volatility in recent weeks.
Of course, there are many reasons why the markets rise and fall. But one possible explanation for this trend is because elections are always preceded by uncertainty. Which party will control Congress? What new policies can we expect? What old policies will be rolled back? How will it all affect our taxes, healthcare, industries, and budget? Pundits earn their living by making predictions, but the fact is, no one knows what the future will bring until the future becomes the present.

The markets, of course, are allergic to uncertainty. It’s the driving force behind many a market pullback. And with so much uncertainty before a midterm election, it’s not surprising the markets would struggle.

On the other hand, the S&P 500 usually climbs an average of 31% in the year after a midterm.1 Again, it sort of makes sense if you think about it. After an election, uncertainty begins to fade as we gain a better idea of who is in power and what their agenda will be. In fact, the markets often rally after a midterm election. (The upcoming holiday season likely also plays a role.)

2. Historically, the markets don’t really care which party is in control.
Whether you’re a passionate conservative, devoted liberal, or something in between, the fact is that the markets aren’t as partisan as people.
Talking heads can argue till the cows come home about which party is better for the markets, but I’m not going to get into that here. (It’s not like you need another political pundit in your life!) History shows that, while some years rise higher than others, the markets tend to rise after an election no matter which party is in power.

The reason for this is simple. While politics certainly play a role, the markets are affected by many things – and Washington is not at the top of the list. Corporate earnings. Supply and demand. Interest rates. Inflation. Housing prices. Employment. I could go on. And while it’s true that the government has an influence on many of those things, the government does not dictate the daily rhythm of the markets.

If you think about it, the markets are sort like our own bodies. Our health is determined by what we eat, how much we exercise and sleep, air quality, personal hygiene, vaccinations – and of course, by things we can’t control, like our own genes. In this case, politics are to the markets what brushing your teeth is to your overall health. Both very important, but not always the difference between life or death.

As I mentioned earlier, the S&P 500 usually rises after an election. That’s been true regardless of which party is in the White House or controls Congress. Where we see the biggest difference is in whether the government is united or not. The markets tend to do the best when either party controls both Congress and the White House. It’s not hard to understand why – such an occasion would result in the least uncertainty.

When the two parties divvy up the government? That’s when more uncertainty – and more gridlock – sets in.

3. Of course, past performance is no guarantee of future results.
Just because the markets tend to do well in the months after a midterm doesn’t necessarily mean they will this time. In this case, there are some possible election outcomes that could conceivably impact the markets more than others. Republicans control both chambers of Congress If this happens, it’s possible Congress will try to extend – and possibly expand – last year’s tax cuts. Decreased regulation is also likely, and they may even take another shot at striking down the Affordable Care Act (aka Obamacare).

The markets soared to never-before-seen heights after President Trump’s election, largely due to tax cuts and deregulation, so it’s possible this outcome could bump Wall Street even higher. On the other hand, both interest rates and our nation’s deficit are getting higher, too, so even a Republican dominated Congress might decide to avoid any further economic stimulus.

Democrats control both chambers
In this scenario, Democrats may well try to roll back some of President Trump’s agenda, just as any opposition party does. And since Democrats may also decide to expand the current Trump-Russia investigation, this outcome would certainly bring a lot of uncertainty. That could conceivably have at least a short-term impact on the markets. But again, history shows that the markets do well no matter which party “wins” a midterm election.

Democrats control the House, while Republicans retain the Senate
According to pollsters, this is the most likely outcome. Should it happen, it will likely mean that neither side really gets what they want. President Trump and Republicans will be hard-pressed to advance their agenda, while Democrats will be unable to change much of what has already been done. The result? Gridlock – something most Americans are familiar with at this point. Should this happen, Washington’s impact on the markets, positive or negative, may be minimal.

4. We never make investment decisions based on politics.
No matter how many political signs you put on your front lawn, no matter if you still have an Obama “Hope” sticker on your car or a Trump “Make America Great” hat on your head, you should never make financial decisions based on politics.

This is especially true when it comes to your investments. Choosing whether to buy or sell based on who you think will win an election is the opposite of having an investment strategy. It’s investment speculation. And given how passionate many of us are about politics, it can severely color our thinking. How many people missed out on one of the longest bull markets ever because they disliked President Obama? How many people missed out on the “Trump Bump” because they disliked President Trump?

It’s true that midterms can impact the markets. But that doesn’t mean we should change or abandon our strategy. Make no mistake: This is an important time of year. It’s a time when we, the people, get to decide the direction of our country, state, and local communities.
But it’s not the time for changing the direction you take toward your financial goals.
I hope you’re able to vote next month. In the meantime, if you have any questions or concerns about Washington, the markets, or your portfolio, please feel free to contact me. If there’s one thing I can guarantee, it’s that I’m easier to get in touch with than your local politician! On behalf of everyone at Research Financial Strategies, have a safe and stress-free election day!

1 Ryan Vlastelica, “How stocks perform around midterms,” Market Watch, September 11, 2018. https://www.marketwatch.com/story/heres-how-stocks-perform-around-midterms-in-one-chart-2018-09-11
2 Per https://www.bloomberg.com/quote/SPX:IND on October 22, 2018..

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