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How the Balance of Power Affects Wall Street

How the Balance of Power Affects Wall Street

Graphic From USA Today November 4, 2014

Now that the midterm elections are safely behind us, a lot of people are wondering how politics will impact their investment returns.  The conventional wisdom is that divided government--where one party holds the White House while the other controls the House, the Senate or both--is good for the markets.  But is that true?

The truth is, there is no magic formula.  The specific circumstances of each era, and the actions taken by each President and Congress, are much too individual and different for us to generalize.  But the statistics are interesting nonetheless.  Perhaps most interesting of all, the markets seem to like midterm elections regardless of who wins.  The S&P 500 has gained in every six-month period following the last 16 midterm elections, with a remarkable average return of 16%.  Going back a little further, from 1922 to 2006, the Dow Jones Industrial Average has jumped 8.5% in the 90 trading days following the midterms, versus just 3.6% in non-midterm-election years.

If you look at divided government vs. times when one party controlled both the White House and Congress, the results are a bit harder to interpret.  The average annual total return for the S&P 500 when Washington is a one-party town has been 9.4%, compared with 10.6% when the parties were checking and balancing each other.  However, another study going back to 1900 found that during times of total unity (67 of the 111 years analyzed), the Dow gained 7.6% a year.  When Washington is locked in partial gridlock, in other words, where one party controlled Congress and the other the White House, (32 years in all), the index gained 6.8%.  And during the 12 years of a gridlocked Congress, the S&P gained just 2% per year.

Since 1945, the pattern holds. Under total unity, stocks climbed at a 10.7% annual pace. Under partial gridlock, they gained 7.6% per year. And under total gridlock, which accounts for eight of the 65 years, they gained just 3.5% per year.

This gloomy news might be offset by another trend, however.  Since 1900, the third year of a US presidency has been easily the best year for markets, with investors enjoying median annual gains of 16.5%.

There’s one other statistic to note, which might trump them all.  It appears that the Standard & Poor's 500 Index performs two or three times better when Congress is out of session than when at least one of the two chambers is at work.  A famous quote from an 1866 New York court decision, that “No one’s life, liberty or property are safe while the legislature is in session,” would seem to have some truth for the equity markets.  

This article was written by financial expert Bob Veres, and reprinted here with his permission.




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How to Find a Financial Advisor That Puts Your Interests First

Finding a financial advisor that you not only feel comfortable with, but most importantly, that you trust to manage your investments is not always an easy task.

With so many different types of “advisors” vying for your business, it can be confusing to filter out the noise to pick the right one. Broker, Registered Representative, Investment Advisor, Fee-Only Financial Advisor –what’s the difference between them all?

This week, we hope to shed some light on this confusing topic and answer once and for all which type of financial advisor actually puts YOUR best interests above their own.

In a recent column from the Washington Post, author Barry Ritholtz explains the differences between the two standards used to govern the financial industry – the “suitability” standard versus the “fiduciary” standard.

Brokers—or registered representatives as they’re sometimes called—are only legally obligated to do what is “suitable” for the client, and mostly get paid by commission fees from transactions. This can often lead to the broker suggesting unsuitable sales or trades to the client, with their commission earned being the sole reason to do so. Moreover, the client’s best interest is not part of the equation.

In stark contrast, Registered Investment Advisors, or RIAs, are legal fiduciaries for their clients, which means they are obligated to “act at all times for the sole benefit and interest of the client.”

Here at Ivy League Financial Advisors LLC, we are and have always been, fiduciaries and RIAs for our clients.

Rithholtz sets the record straight—“The standard is simple. There is zero wiggle room. Any advice, product or service offered to a client must meet the test of ‘Is this in the client’s best interest?’ If the answer is ‘No,’ then it cannot be performed by a fiduciary. It is against the law.”

Another recently published article in the New York Times also comments on this topic by saying that brokers are “very much hunters….hunting for assets.” Ritholtz suggests that in any given year, “brokers charge from five to 10 times (or more)” what an RIA will charge per account.

Can you really afford to trust your retirement to a broker who doesn’t have your best interests at heart?

Ritholtz closes by saying, “When seeking out advice, do yourself this favor: Find an adviser who is legally obligated to put your interests first. When you are retired and living comfortably off of your investments, you will thank me.”

We hope you will click over and read this column from the Washington Post and this article at the New York Times for more information. As always, please give us a call if you have any questions or would like to set up a time for a complimentary initial consultation. 

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