While the political world will focus on the election for some time, financial markets have already shifted their attention to the next administration’s policies, Federal Reserve rate cuts, and the underlying economy.
In the remainder of the week following election day, the S&P 500 gained 3.7%, the Dow 4.2%, and the Russell 2000 index of small cap stocks surged 6.1%. Bitcoin also rose above $80,000 for the first time. Even though this sudden jump in markets is positive for portfolios, it’s always important to stay disciplined by maintaining a long-term perspective and focusing on fundamentals.
Putting politics aside, chances are that the next administration will inherit strong economic tailwinds. While it’s clear that voters struggled with inflation over the past few years, rising prices were the result of both supply chain disruptions during the pandemic and the significant government stimulus that followed. These shocks to the system have faded as inflation has fallen back toward 2%, prompting the Fed to cut rates, which supports the economy.
Valuations are above historical averages
At the same time, the bull market rally since late 2022 means that valuations across an array of asset classes are well above average, suggesting that many investments are no longer as attractive. The post-election rally in recent days has only pushed valuations higher. The price-to-earnings of the S&P 500, for instance, is nearing post-pandemic highs and is only a few points away from its historic dot-com bubble peak.
History shows that markets can move back and forth between extremes as investors overreact to positive and negative events. This occurred after the 2016 election as well. Markets rallied throughout 2017 before facing a market correction in early 2018, which ended the year negative for the first time in a decade. Markets then experienced a strong rally in 2019 until it was derailed by the pandemic in early 2020. While the past is no guarantee of the future, this goes to show that the market never moves up in a straight line, despite how positive the situation may seem at the time.
In uncertain situations, a north star that can guide investors is valuations. In the long run, there is nothing more correlated with returns than whether the market is cheap or expensive compared to measures such as corporate earnings. While valuations are not market timing tools – stocks can run well above fundamentals in the short run – they do tell us how to set expectations that reflect long-term trends.
Higher valuations correspond to lower expected returns
Today, much of the market enthusiasm is the result of the “Trump trade,” which refers to investments that benefit from the expected policies of the next administration. This includes lower individual and corporate taxes, tariffs, light regulation, and deficit spending in areas such as infrastructure. This propelled markets for a time after the 2016 election due to optimism in financial markets, the strengthening of the U.S. dollar, and higher bond yields as investors anticipated pro-growth economic policies.
As the famous investor Benjamin Graham observed, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.” This is relevant today because many of the investments with stretched valuations, including tech stocks and cryptocurrencies, are especially prone to booms and busts. When things go well, it seems foolish in hindsight to focus on valuations and earnings. However, the reason to do so is exactly because it is difficult to predict the exact winners.
As the accompanying chart shows, elevated valuations have often corresponded to lower or even negative longer run returns. This occurs if those valuations take place later in the business cycle just before a crash. The hope is that this time is different, and the economy continues to grow steadily. But even in that scenario, markets that are rallying ahead of fundamentals could mean that returns are “pulled forward.”
Many asset classes beyond U.S. stocks have performed well this year
High valuations in the U.S. don’t mean we should avoid the stock market. Instead, they simply suggest that we remain diversified across many asset classes and regions. The accompanying chart shows that while U.S. stocks have performed well this year, many other asset classes have generated positive returns too.
International stocks, for instance, continue to have much more attractive valuations than U.S. stocks. And while bonds have not performed as well recently with rates rising again, they still provide income and diversification benefits, especially in periods of market volatility.
Perhaps most importantly, long-term fundamentals suggest that the trends are still moving in the right direction. Corporate earnings have shown steady growth in recent quarters and GDP figures have been surprisingly strong. The Federal Reserve also implemented its second rate cut of the cycle after the election, lowering the fed funds rate by 25 basis points to a target range of 4.5% to 4.75%.
In its official statement, the central bank acknowledged evolving labor market dynamics, noting that conditions have generally eased while unemployment, though higher, remains at historically low levels. It highlighted that while inflation has eased substantially and the economy remains strong overall, labor market conditions have moderated compared to pre-pandemic levels.
During the post-meeting press conference, Fed Chair Powell presented a balanced view of the economic landscape, emphasizing both progress and continued vigilance. Your portfolio should be viewed in the same manner, balancing progress and vigilance.
Slower-moving economic trends are what drive financial success for long-term investors – not the short-term market movements over a few days or weeks. As 2016 to 2020 demonstrates, it’s important for investors to maintain portfolios that can take advantage of market rallies while also protecting against periods of uncertainty.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
The Trump Trade and Valuations
While the political world will focus on the election for some time, financial markets have already shifted their attention to the next administration’s policies, Federal Reserve rate cuts, and the underlying economy.
In the remainder of the week following election day, the S&P 500 gained 3.7%, the Dow 4.2%, and the Russell 2000 index of small cap stocks surged 6.1%. Bitcoin also rose above $80,000 for the first time. Even though this sudden jump in markets is positive for portfolios, it’s always important to stay disciplined by maintaining a long-term perspective and focusing on fundamentals.
Putting politics aside, chances are that the next administration will inherit strong economic tailwinds. While it’s clear that voters struggled with inflation over the past few years, rising prices were the result of both supply chain disruptions during the pandemic and the significant government stimulus that followed. These shocks to the system have faded as inflation has fallen back toward 2%, prompting the Fed to cut rates, which supports the economy.
Valuations are above historical averages
At the same time, the bull market rally since late 2022 means that valuations across an array of asset classes are well above average, suggesting that many investments are no longer as attractive. The post-election rally in recent days has only pushed valuations higher. The price-to-earnings of the S&P 500, for instance, is nearing post-pandemic highs and is only a few points away from its historic dot-com bubble peak.
History shows that markets can move back and forth between extremes as investors overreact to positive and negative events. This occurred after the 2016 election as well. Markets rallied throughout 2017 before facing a market correction in early 2018, which ended the year negative for the first time in a decade. Markets then experienced a strong rally in 2019 until it was derailed by the pandemic in early 2020. While the past is no guarantee of the future, this goes to show that the market never moves up in a straight line, despite how positive the situation may seem at the time.
In uncertain situations, a north star that can guide investors is valuations. In the long run, there is nothing more correlated with returns than whether the market is cheap or expensive compared to measures such as corporate earnings. While valuations are not market timing tools – stocks can run well above fundamentals in the short run – they do tell us how to set expectations that reflect long-term trends.
Higher valuations correspond to lower expected returns
Today, much of the market enthusiasm is the result of the “Trump trade,” which refers to investments that benefit from the expected policies of the next administration. This includes lower individual and corporate taxes, tariffs, light regulation, and deficit spending in areas such as infrastructure. This propelled markets for a time after the 2016 election due to optimism in financial markets, the strengthening of the U.S. dollar, and higher bond yields as investors anticipated pro-growth economic policies.
As the famous investor Benjamin Graham observed, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.” This is relevant today because many of the investments with stretched valuations, including tech stocks and cryptocurrencies, are especially prone to booms and busts. When things go well, it seems foolish in hindsight to focus on valuations and earnings. However, the reason to do so is exactly because it is difficult to predict the exact winners.
As the accompanying chart shows, elevated valuations have often corresponded to lower or even negative longer run returns. This occurs if those valuations take place later in the business cycle just before a crash. The hope is that this time is different, and the economy continues to grow steadily. But even in that scenario, markets that are rallying ahead of fundamentals could mean that returns are “pulled forward.”
Many asset classes beyond U.S. stocks have performed well this year
High valuations in the U.S. don’t mean we should avoid the stock market. Instead, they simply suggest that we remain diversified across many asset classes and regions. The accompanying chart shows that while U.S. stocks have performed well this year, many other asset classes have generated positive returns too.
International stocks, for instance, continue to have much more attractive valuations than U.S. stocks. And while bonds have not performed as well recently with rates rising again, they still provide income and diversification benefits, especially in periods of market volatility.
Perhaps most importantly, long-term fundamentals suggest that the trends are still moving in the right direction. Corporate earnings have shown steady growth in recent quarters and GDP figures have been surprisingly strong. The Federal Reserve also implemented its second rate cut of the cycle after the election, lowering the fed funds rate by 25 basis points to a target range of 4.5% to 4.75%.
In its official statement, the central bank acknowledged evolving labor market dynamics, noting that conditions have generally eased while unemployment, though higher, remains at historically low levels. It highlighted that while inflation has eased substantially and the economy remains strong overall, labor market conditions have moderated compared to pre-pandemic levels.
During the post-meeting press conference, Fed Chair Powell presented a balanced view of the economic landscape, emphasizing both progress and continued vigilance. Your portfolio should be viewed in the same manner, balancing progress and vigilance.
Slower-moving economic trends are what drive financial success for long-term investors – not the short-term market movements over a few days or weeks. As 2016 to 2020 demonstrates, it’s important for investors to maintain portfolios that can take advantage of market rallies while also protecting against periods of uncertainty.
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which may contain security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website or Blog constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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