Political Influence – S&P 500 Performance During Election Years

The stock market is off to a volatile start in 2022, and history suggests it could remain volatile ahead of this year’s midterms. Midterm elections won’t officially take place until November, but the next nine months of campaigning and political speeches will give investors plenty to think about. January’s Chart of the Month aims to separate the emotion of politics from investing by looking at the S&P 500’s historical performance during election years.

History shows the S&P 500’s returns are typically lower during election years. Figure 1 graphs the S&P 500’s average price return during presidential and midterm election years against non‐election years. Since 1950, the S&P 500’s average price return during presidential and midterm election years is +7.2% and +5.9%, respectively. For comparison, the S&P 500’s average price return during non‐election years is +12.5%, while the average price return for all years since 1950 is +9.5%.

Figure 2 looks at historical S&P 500 returns from another political viewpoint ― the 4‐ year presidential election cycle. From a timing perspective, 2022 represents year 2 of Joe Biden’s presidency. Since 1950, the S&P 500’s average price return during year 2 of the presidential election cycle is +5.9%, which is the lowest average return across the election cycle. Taking the analysis a step further, history shows year 2 returns are generally weak regardless of which political party occupies the White House.

What is the takeaway? The S&P 500’s return is historically lower during midterm election years. It should be noted the analysis does not mean 2022 is destined to follow historical precedent, because it may not. Instead, it highlights how elections introduce uncertainty, which investors don’t like. If recent history is a guide, 2022 will likely be another politically charged election year. Above all, it is important to remember to separate your political beliefs from your investment decisions.

Important Notices & Disclaimer
The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.
The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.
The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.
No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.
READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.
PFG Private Wealth Management, LLC is a registered investment advisor.
 

Drilling Into Soaring Energy Prices

If you gassed up your vehicle or paid your energy bill recently, you probably noticed energy prices are soaring. AAA reported the national average for a gallon of regular gasoline was $3.41 on November 14th, up 60% from $2.13 one-year ago. Natural gas cost $4.79 per million British thermal units on November 12th, up 70% from $2.82 one-year ago. Soaring energy prices are starting to impact the economy. U.S. consumer prices rose +6.2% year-over-year during October, the fastest pace since late 1990. In turn, rising inflation pushed consumer confidence to a decade low.

Why are energy prices soaring? Current prices are not the result of a single demand or supply shock but rather the result of a combination of supply and demand factors converging. On the supply side, oil and natural gas investments declined after energy prices collapsed during 2014 and 2015. Since then, investors have pushed oil drillers to return capital to shareholders rather than reinvest in new energy production. Reduced oil and gas drilling capacity has left supply vulnerable to demand shocks like we are seeing today as demand recovers quicker than expected after the pandemic.

Where do energy prices trade from here? Forecasting energy prices is a difficult task, which is why we looked back at prior periods of soaring energy prices to understand what may happen next. Using weekly prices since 1990, gasoline prices fell by an average of -3% over the next 12 months after rising more than 60% year-over-year. Likewise, natural gas prices fell by an average of -24% over the next 12 months after rising more than 70% year-over-year. This does not mean energy prices cannot go higher, because they certainly can. However, it does suggest the worst may be behind us if energy supply and demand can move back toward equilibrium.

The information contained in this document is intended to provide general information for educational purposes. While all information contained in this document is believed to be accurate, PFG makes no guarantees regarding the accuracy of the information provided. No information provided in this document should be interpreted as a recommendation of securities. Investment advice will only be given after a client engages our services by executing the appropriate investment services agreement and shall be subject to the terms and conditions therein.

Household Net Worth Soars During Pandemic

One of the more interesting statistics to come out of the Covid pandemic relates to household net worth. Federal Reserve data shows household net worth recovered quicker during the Covid pandemic compared to the 2008 financial crisis. Looking at the statistics, net worth fell ~$11 trillion, or ‐16%, from 3Q 2007 through 1Q 2009. In contrast, net worth increased ~$31 trillion, or +28%, from 1Q 2020 through 2Q 2021.

Why did net worth rise during the pandemic? Two categories ― home values and stock market prices. The National Association of Realtors reported the average home sale price rose from $316,100 during March 2020 to $376,000 during August 2021, a +18.9% increase. In the financial markets, the S&P 500 index of large cap stocks produced a +98% price return from its pandemic trough on 3/23/2020 through 10/13/2021. Both contributed to increased net worth.

The question is whether the net worth increase, which is likely paper gains in retirement accounts and tied up in homes, will be tapped to fund additional consumption. Historical GDP data shows consumer spending traditionally accounts for ~70% of U.S. economic activity. If the net worth increase is tapped to fund additional consumption, the economy may benefit from stronger economic growth.

From a big picture perspective, household net worth data highlights the importance of remaining invested during periods of economic uncertainty and market selloffs. Stock market volatility is an unfortunate side effect of investing. However, maintaining a steady approach to investing and keeping an eye toward the long‐term can help get you through uncertain times.

The information contained in this document is intended to provide general information for educational purposes. While all information contained in this document is believed to be accurate, PFG makes no guarantees regarding the accuracy of the information provided. No information provided in this document should be interpreted as a recommendation of securities. Investment advice will only be given after a client engages our services by executing the appropriate investment services agreement and shall be subject to the terms and conditions therein.

Required Minimum Distributions – Not Required This Year But Should You Take It?

We recently saw a humorous quote stating that they “missed precedented times.” 😊 That is so true as we come near the end of 2020. There will be plenty of reflection that occurs for years to come. Hopefully, many good things can be remembered. 

November is an excellent time to think about pre-planning. It’s a great time to look at strategies for reducing taxes before December 31st. Every year at this time we start talking with clients about their required minimum distributions (RMD). By definition, this is the amount of money that must be withdrawn from a traditional, SEP, or Simple IRA account and qualified plan participants of retirement age. The original starting age was 70 ½ and has now been changed to age 72. Earlier this year, Congress waived the required minimum distributions. 

Even though participants do not have to take it, here are a few reasons some may consider it: 
• Low income and low tax bracket – If your income for 2020 is in a low tax bracket, it may be wise to consult with your accountant and see how much money can be withdrawn from your tax deferred account with little or no taxes at all. If the funds are not needed for spending, then they can be transferred into a brokerage account and managed. If every year for your tax return you pay no taxes at all, then this might be something to investigate. 
• Converting funds to a Roth – There are times where taking funds from the IRA and converting them to a Roth is extremely beneficial and this year may be the best time. When funds get converted, they show as income but stay in a retirement account and grow tax free. In traditional years, a Roth conversion is not allowed for RMD. In addition, those funds can then be withdrawn tax free if the Roth has been opened for 5 years or more. 
• A known increase in taxes next year – If there is a known increase in income such as a sale of a business, an expected pay increase, or the potential of rental income from a property for 2021 and it will influence the tax bracket, then taking the RMD this year may be best.
• A higher RMD next year – If it is expected that the RMD is going to be much higher next year because none was taken this year, this is another reason.  As a reminder, the RMD for each year is based off the December 31st value from the previous year and then it is calculated.  

These are only a few reasons why taking the RMD could be considered.  As always, we encourage you to consult with your accountant and your advisor to collaborate and come up with your best tax option for 2020. 

At PFG Private Wealth Management, we thank you for your trust in us and encourage you to be safe. 

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.  Insurance products and services are offered and sold through individually licensed and appointed insurance agents.