President’s First Year and S&P 500 Return
December 15, 2024 | Sage Capone
Key Points for Hawaii Investors
President’s First Year in Office
S&P 500 Historical Return
President’s First Year
According to the Sam Stovall with CFRA Investment Research, the president’s first year has experienced declines of more than 5% in 90% of all the first years of their terms since 1949.
These annual significant drawdowns are normal and a part of the investing process which history shows the stock market may end higher as well in the first year of the president’s term.
Source: CFRA, S&P Global
As many clients have expressed concern with the inflationary tariffs being discussed by the incoming Trump administration it is still undetermined how much is rhetoric and a negotiation tactic.
If the tariffs are damaging, we will see a harsh market reaction much like what we saw in the first term of the Trump administration and a trade war de-escalation take place.
This past week, the National Federation of Independent Business (NFIB), Optimism Index was released, and it showed the highest reading since June of 2021.
Source: NFIB
The NFIB index tracks how the soft components performed against the hard components. In the near-term business expect to see economic growth and higher sales.
Due to the presidential election and the shift in economic policy, firms are anticipating tax and regulation policies that favor economic growth.
Regardless of the optimism, the downside risks of economic policies proposed by the Trump administration should not be ignored.
President Donald Trump has some aggressive changes to trade policy and business regulation that could pose harmful with tariffs and tighter immigration.
These proposals can pose as serious headwinds to business that could dampen demand and increase inflation for consumers.
S&P 500 Return is Far from Average
Since 1950, the Standard & Poor’s 500 (S&P 500) stock market index that tracks the performance of the 500 largest companies has returned an average of 8-10%.
However, the actual return you see each year is not 8-10%. If an investment account is invested 100% in the S&P 500 the investor would generate the full exposure of positive and negative returns, and that return is far from average.
The return could easily fluctuate between -7.8% and 31.2% which is entirely consistent with the historical returns.
When looking at the chart by Carson Investment Research, you will see the return from the S&P 500 which as they say is quite rare to generate that average on your annual account statement.
Source: Carson Investment Research, FactSet 10/18/2023
As of December 13th, the S&P 500 has a year-to-date return of 27.58%. Yet this index can sometimes be thought of as the boring index when you have single companies having returns far greater with eye popping returns.
The returns of these single businesses can bring in new investors that want to get started quickly without an investment plan and these investors tend to go all in on a few stocks with little to no diversification.
The fear of missing out (FOMO) mentality and listening to their friends that persuade them to place high positions in a few great performing companies.
However, this may not be in your best interest with your financial plan. I have helped many investors that have held positions at a timeframe that was a lot shorter than anticipated.
When an investor buys and sells a stock within less than a year, the investor is not getting the benefit of capital gains tax but instead paying the ordinary income tax rate.
The difference can end up being very hard for some individuals as they manage their annual taxes and neglect to save the right amount necessary to pay them.
Another important reminder, a small concentration to individual companies increases your volatility risk and your individual investment choices may sometimes not always be in your favor.
Over the years, I have met with prospects that hold underperforming companies, but they choose to hold on to them with the optimism of a bounce to the upside over the long term.
Without debating the choice of holding an investment for your beneficiary to inherit. It’s important to remember that the S&P 500 experiences a change of its constituents about a third every 10 years.
Source: Compustat, Goldman Sachs Global Investment Research
Based on Exhibit 45 below, Goldman Sachs Global Research, found that since 1980 the S&P 500 has an average of a 36% turnover.
What that means is the index replaces less successful companies with new firms that may potentially have better growth with another larger company.
It’s important to remember that your investment plan, income plan and tax plan should determine your asset allocation for your investment accounts. Create your financial plan before investing.
As always, stay focused on a tax efficient financial plan to provide you with peach of mind in achieving your short term and long-term goals while paying the least amount of taxes.
Please do not hesitate to contact Sage Financial Investments for a Free Strategy Review or Second Opinion to discuss your portfolio or re-visit your risk profile. The best investment strategy is one tailored to your financial plan that achieves your goals.
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