Will an election year influence a portfolio? Here’s why it’s a good idea to review it

Andy Drennen
·4 min read

The price level of the S&P 500 begins 2024 close to the same level with which it began in 2022 but with a seemingly opposite set of circumstances. Instead of starting the year off with 7.5% inflation and on the precipice of higher interest rates, 2024 begins with inflation at 3.1% (November 2023) and the prospects for lower interest rates ahead.

It’s good practice to periodically review your portfolio to make sure you’re on track to meet your long-term goals. Here are some ideas to help you evaluate your portfolio given stock market volatility, high interest rates and the 2024 election:

Economic backdrop and the stock market

From March 2022 through August 2023, the Federal Reserve raised the federal funds rate 11 times. This moved the target range from 0-0.25% to 5.25-5.50%. With this colossal upward move in rates in a short period of time, many leading economists predicted a recession. By the end of 2022, the S&P 500 had declined 19% and the Barclay’s Aggregate Bond Index lost around 13% of its value.

However, the labor market remained strong during the Fed’s nearly two-year bout with inflation…so strong that the unemployment rate actually decreased. It moved from 4% in January 2022 to 3.7% in November 2023.

If the labor market remains strong and inflation continues its downward move toward the Fed’s 2% inflation target, the Fed will have successfully orchestrated a soft landing. Given the strong economic backdrop, the stock market appears to be pricing in this possibility.

After posting a 19% loss in 2022, the S&P 500 rebounded 23% through mid-December 2023. Such wild swings in the stock market make a strong case for developing an asset allocation to match your goals. This can help investors maintain the discipline to stay the course.

Interest rates and fixed income

For the first time in over a decade, interest rates on fixed income investments have the potential to outpace inflation. For example, the national average for interest rates on a 60-month certificate of deposit was just 0.75% in April 2021, according to the Federal Deposit Insurance Corporation. The U.S. Bureau of Labor Statistics reported inflation for 2021 to be 4.7%.

Fast forward to November 2023. According to the FDIC the average 60-month CD yield was 4.8% and inflation was (as previously mentioned) 3.1%. After decades of losing purchasing power, fixed-income securities are generating income that outpaces the current rate of inflation.

To put this into perspective, a $500,000, 60-month CD at 0.75% in 2021 would have generated just $3,750 in annual income. At the estimated November rate of 4.8%, that same CD would have generated $24,000 in annual income.

Fixed income instruments can help buoy your overall portfolio in times of heightened volatility and now potentially outpace the rate of inflation.

Your portfolio and politics

Some political analysts speculate that the leadership in both chambers of Congress could flip-flop which would mark the first time ever that congressional chambers change leadership during a presidential election year. Therefore, regardless of who takes the White House, there is a good chance that the U.S. will continue with a divided government. If this occurs, it will pave the way for continued gridlock.

It’s important to not let your political leanings drive your investment strategy. Instead, let’s focus on what we know. We know that we have two years (2024 and 2025) before tax rates are scheduled to increase. Barring a Republican trifecta, there is a good possibility that tax rates will go up as scheduled.

Therefore, look to maximize tax-advantaged investment accounts now and especially during market drawdowns. Purchasing more shares at discounted prices in tax-favored vehicles could serve you well moving forward. Increasing contributions to employer-sponsored retirement plans, funding traditional/Roth IRAs, as well as Roth conversions, are all great considerations ahead of the scheduled changes to the tax code.

In the new year, work with your credentialed financial professional to make sure that your portfolio is in tune with current market conditions and that your asset allocation is aligned with your long-term goals.

Andy Drennen, MPAS is a CERTIFIED FINANCIAL PLANNER professional and a member of Financial Planning Association of Greater Kansas City. He is vice president, senior portfolio manager at Simmons Bank in Springfield, Missouri. The views and opinions expressed in this article are those of the author and are not endorsed by, and do not necessarily reflect the views of, Simmons Bank. Simmons Bank does not provide tax, accounting, or legal advice.