Navigating Post-Election Markets: Investment Strategies for the Road Ahead
It’s often said after elections, 'It’s never as good as you expect when your candidate wins, and it’s never as bad as you fear when your candidate loses.' Despite the stock market's initial positive momentum following the recent election, we believe this sentiment also offers valuable guidance for the capital markets moving forward.
We believe that history can offer valuable insights for the future—if you know where to look. However, historical trends rarely provide a complete picture. That’s why, when making investment decisions, we focus less on projecting policy outcomes and more on monitoring risk indicators as they respond to actual policy implementation.
One of our key risk measurements is what we call our Investment Road Signs©, which includes tracking Federal Reserve (Fed) policies. The Fed’s actions can often have a more significant impact on the stock market than fiscal policy itself. For example, the Tax Cuts and Jobs Act (TCJA) passing in 2017 created an initial positive response in the stock market, however, the Fed continued its tightening of monetary policy. This continued tightening contributed to a sharp 20% drop in the S&P 500 during the fourth quarter of 2018. However, when the Fed announced on January 30th, 2019, that it was pausing its rate hikes, the stock market quickly rebounded, recovering almost all its losses by mid-March.
Today’s capital markets and economic landscape differ significantly from the environment at the start of President Trump’s first term, and we expect these differences to result in different investment outcomes. Let’s take a closer look at three major factors that have changed:
1. Valuations: In 2016, the S&P 500 was trading at a forward price-to-earnings (P/E) ratio of 16X. Today, that figure stands at 22X P/E. Forward returns in the stock market tend to be lower at higher P/E ratios. For example, a 22X P/E ratio historically has provided only half the average annual return over the next 5 years compared to returns starting at 16X P/E.
2. U.S. Dollar: Trade policy, including tariffs, is a focal point of the Trump administration. The direction of the U.S. dollar plays a critical role in the performance of international investments held in U.S. portfolios. This means a strong U.S. dollar is a headwind for international investments (owned in U.S. dollars).
3. Interest Rates: The most dramatic change between 2016 and today is the level of interest rates. For example, the median rate on a 30-year mortgage was 3.87% in November 5, 2016, while it has risen to 6.79% as of November 7, 2024. Higher rates tend to drag on the economy over time.
In summary, understanding we are in a different economic environment today compared to 2016 means we should not expect the same investment outcomes as President Trump’s first term. Our priority remains ensuring that your portfolio is aligned with both your short- and long-term goals and that you're taking on the right level of risk for today’s evolving landscape.
Have questions or want to speak with our team directly? Contact us.
Robert Amato, CFP®, CIMA®
Principal
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Compass Wealth Management is a Registered Investment Advisor. Advisory services are only offered to clients or prospective clients where Compass Wealth Management and its representatives are properly licensed or exempt from licensure. This article is solely for informational purposes and is not intended to be relied on as a forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Compass Wealth Management to be reliable, are not necessarily all-inclusive, and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investments involve risks.