Terry Gerton You and I don’t normally talk politics, but I thought we might a little bit today because we have obviously big midterm elections coming up. And when we’re thinking about markets and TSP, some people may think that there’s a relationship there. Do people normally connect some market performance changes to midterm election? Is there a pattern?
Arthur Stein There are some historical patterns, but I question how useful they are. I mean, historically, on average, past performance is no guarantee of future performance. Typically, returns for years where there are midterm elections, returns from January through the November election date, are lower than average. But returns for the 12 months after the election tend to be higher than average. So we’ve already gone through most of the before the election period. And actually this year’s returns do not fit the average at all. You know, as I said, typically returns before the midterm, calendar year returns, from January through the end of October, are typically lower than average But this year’s stock market returns have been great so far. And just looking at the TSP fund, the C fund, for instance, which is the S&P 500 index fund, is up 14% this year. And the S funds up 13% and the I fund, which are stocks of foreign companies, is up 18%. So the data I don’t have is, how do the midterms affect election results in years where the returns are much higher before the election? I mean, we don’t really know. And I would say this, Terry, you know, especially during presidential election years, there’s a lot of interest in this. Like, how will it affect the market if this party wins or that party wins? And I’ve been looking at these every four years for a long time. And it’s just, there is some indication maybe Democrats might be slightly better for the market, but I don’t consider the results to be statistically significant in any way. I mean, basically, the market tends to go up about every two out of three calendar years, and that increase is based upon not who’s in the White House or who controls Congress, but on current earnings, expected earnings. Things like that. Now, the control of Congress and the White House does affect a lot of things that affect businesses. You know what I mean? Like taxes and regulation. But there’s not much of a direct connection.
Terry Gerton Let’s stick on this moment for a minute because in the political environment there are a lot of ‘vibes’ I’ll say with my air quotes here about how bad things are or how bad consumers are feeling and yet the market continues to climb even in the midst of a war, rising gas prices, interest rates going up. How should investors reconcile the vibes versus the performance? Where, where is the disconnect?
Arthur Stein Well, vibes are very unreliable because they’re vibes. And who knows what investors are really feeling. And of course, a lot of investors are like people in the TSP. Federal employees are just making regular investments every month, and they continue to make regular investments. I think you just have to look at the historical averages and hope that they continue because they strongly favor stock returns, you know, outperforming bonds, which is a key question. And, you know, if you’re a long-term investor, well, everyone has some money they should be invested for the long term. If you’re retired and you need to take money out of your TSP and other investment accounts, you want to make sure that, say, the next five years of expenditures are invested in something that you don’t have to worry about, which could be the G fund, would be the G fund in the TSP, because it doesn’t fluctuate in value. But the return is low, so low that you also are pretty much guaranteed that the money you have in the G fund and the F fund, which is the other bond fund, that the returns for in those two TSP funds are going to lose purchasing power because of the effects of taxes and inflation. So people have to balance out their need for current income, short-term income, you know, one to five years, with their need for sufficiently high long-term growth that the purchasing power of their investment portfolio or their TSP account increases.
Terry Gerton Arthur Stein is a partner with Allworth Financial. As you just articulated, you are a long-term advocate for dollar cost averaging, buy and hold, take a long term view. It still feels like many of the issues that are driving the market right now are going to be subject to change potentially with results of the election. So just, you know, come back to that for a minute. What’s more likely to move the markets over the next six months? Is it the election results itself? Is it inflation? Is it international affairs? What should people who really are dollar cost averages and long-term investors still be watching for?
Arthur Stein Well, I think that the vibe I hear, Terry, is that we should watch out for artificial intelligence to kill us all. Very bad for the market, right? Personally, I’m more worried about the environment as an immediate threat. I’m sorry, I don’t see a way to look at various issues, and I’m not saying they’re incredibly important, and then use that as a basis for investment decisions. The future often looks grim, and it’s a very scary period now, and I don’t blame people for being scared, but it’s been very scary all year long, and you know, there’s a lot of dysfunction in government that we did not previously see. Market does well, because the market is not the economy, and the economy is not the market. The market’s based upon, returns are based upon earnings and expected earnings, profits, taxes, things like that. And if American corporations continue to do well and foreign corporations continue to do well, then the C and the S and the I funds will continue to do well and what may be like reducing regulation, many people are against, say, reducing the regulation of emissions from coal and other forms of, you know, and oil-fueled plants and things like that. I am too, but that adds to the profits of those companies. And you know it’s disturbing in many respects, but it’s just an example of how, you know, government regulations, you know, they have an effect, but not usually for the overall market.
Terry Gerton Such an important point that you made, the market is not the economy, the economy is not the market. So for folks who are watching their TSP accounts right now and committed to that long-term investment strategy, what would you say might most tempt them to make a mistake in the next few months? Is there a headline that people would say, oh my gosh, I really need to move my money when in fact that steady investment strategy is actually the right approach?
Arthur Stein I think that people are most likely to make an investment mistake when the market crashes, especially because the market crashes we’ve seen for the last, I’d say, 20 plus years have been very short term. You know, even 2008, that was basically like a year and a half or two years. So it was, you know, easier to ignore that. What I’m worried about is we get into a market. Like we had in 2000, 2001, and 2002, where we had three straight years of stock market declines and each year’s decline was worse than the year before. A very scary period. It’s very hard for investors to rationalize that. The best kind of stock markets decline, and just speaking about the stock market, You know, it was like 2020. When the market crashed 35% a very short period of time and then was back up about three or four months later. I mean, people didn’t even get their year-end returns before the market came back. And 2020 was a great year. The S&P 500, the C Fund was at 18% when the whole world economy had just gone into the tank. Stock market is considered a leading indicator. Like, when the market’s doing well, it indicates that the economy’s gonna do well in the future. And when it crashes, it indicates that the economies gonna do poorly in the future and, you know, we’ll have a recession. But even that’s not always perfect. I would say to people, don’t let politics dictate your investment decisions. And the second thing is, if you’re worried about current affairs, and I think we all are, you need to have more money in your emergency fund so that you can easily last if the paychecks start coming in or the annuity payments stop or whatever it is, you lose your job. That’s the way to deal with these kinds of worries.
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