Should high interest rates and election cycles alter your investment strategy?

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Should high interest rates and election cycles alter your investment strategy?

When looking at the stock market headlines, there appears to be some disconnect between how consumers are feeling about the economy. After dropping 25% between June and October 2022 when inflation was running hot and the Federal Reserve was rapidly increasing interest rates to bring price pressures down, the S & P 500 Index has continued to climb to new highs. While many economic fundamentals have remained strong despite the Fed’s efforts to cool the economy – job growth has remained strong and unemployment low with more workers coming back into the labor force, consumers are having a challenging time adjusting to higher prices, keeping consumer sentiment well below average.

Some of the disconnect between stock market returns and perceptions about the economy may be due to the fact that the S & P Index’s rise has been driven by a handful of technology stocks, namely Apple, Amazon, Google, Meta (Facebook), Microsoft, Nvidia, and Tesla. After leading the interest-rate driven market downturn in 2022, these companies quickly regained the favor of investors accounting for more than 60% of the index’s return in 2023 and for the first half of 2024. Consequently, investors holding stock portfolios diversified beyond large US companies or more heavily weighted in dividend paying stocks are likely experiencing fear of missing out since the returns of their stock holdings have not kept pace with the “Magnificent Seven.” This emotional response can trigger a couple of investing mistakes that can hurt long-term returns. First, investors can be enticed to chase returns, loading up on stocks that have the best performance and holding them too long. Others may see the headline index numbers reaching new highs and fear that stocks are overvalued leading them to keep savings in cash rather than stomaching the potential volatility of stock prices.

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