Q4 Markets Outlook Webinar

Don, I I know we’ve got a lot to go over, and, as people are still joining us here, I I think that we’ll we’ll go ahead and jump in here. So, thank you all for joining us for our, quarterly market and economic update, here at Mercer Advisors.

I’m Cara Duckworth, the managing director of client experience, and I’m pleased to be joined once again by Don Calcagney, our chief investment officer.

Hello, everybody. Thank you for giving us a few moments of your time today.

We’re very much looking forward to it. So as we get started here, I I know we’ve got a lot to cover, and we’ve got a lot of insights and information to share with you all. But we just wanna remind you that this information is for informational purposes only for your education, and it should not be construed as financial advice specific to your personal situation.

As always, questions related specifically to you, your portfolios, your financial plan should be directed to your wealth adviser.

So given that, Don, I was reflecting on this week, and I counted so many points of information. In fact, I had to write them down. There were so many of them. So we got GDP information today. We’ve got inflation tomorrow. We got jobs data on Monday, a different kind of jobs data on Friday.

We have earnings this week. Five of the seven, magnificent seven, were reporting. So that’s twenty five percent of the S and P reporting in just one week along with a hundred and eighty one other companies, and we have an election in less than a week.

Quite a bit.

Quite a bit. A lot of information to digest on the on the economy, on the markets, on politics. And so I I know that you’ve kind of thought about collected all the questions that we’ve been getting from our clients. And so I wanted to turn it over to you. Like, what are the things that are top of mind? How are you going through and just sorting through so many data points and making them relevant to our clients to their portfolios?

It’s certainly a lot. Right? I mean, it’s, you know, it’s you know, when when you consider the election and all the news and all the economic news, I mean, people could be forgiven for, having information fatigue. Right?

Information overload. And so, you know, with so much coming at us as as humans. Right? We can only process so much information.

Right? Which is why we tend to just self select out of certain types of information and focus on what we want to to see.

But, when you have so much information, I find it helps to just try to try to focus on some key themes. Right? Some key high level data points. Certainly, you know, Kyra, we can get into the weeds here on a lot of data, but it’s tough.

You gotta filter it. You gotta filter it. So, so let’s do that. And and before I jump in here, you know, I just wanna acknowledge I know it’s an election season.

I know it’s a close election. I know that, you know, the partisan divide in the United States is pretty pretty pretty tough at the moment.

We at Mercer Advisors always do our absolute best. It doesn’t mean we always succeed but we always do our absolute best to try to give our clients, a a a very balanced fair, assessment of the data. Alright? Our job here is not to make political points. Our job here is to advise our clients and help them achieve economic freedom. And the best way that we know how to do that, Cara, is to just focus on the data.

And so so let’s do that. Let’s jump into some data. We certainly received a significant number of questions from all of you, our listeners, our our our our treasured clients.

Some of those were a little political and so we’ll we’re happy to touch on some of those and we’ll do our we’ll do our best.

So, Don, before we jump in there talking about questions, we got quite a number of questions from folks in advance, which was terrific, and we appreciate them very much. But if you have additional questions as we’re going along here, please do feel free to put them into the q and a box on the bottom of your screen, and we will do our very best to get as many to as many of them as we can.

Absolutely.

Absolutely.

So the particular slide that you see on your screen at the moment, this is just really a a synopsis. You know, these are the key themes. No surprises here. Inflation, markets, recession, politics, taxes, things like that.

So naturally, we’ll touch on all of these key themes as we look at some of the data. If there’s one high level takeaway from the economic data at the moment, it’s this. Things are mostly better than we think. I know it’s an election season.

Both sides would have us believe that, you know, the economy is perhaps not doing very well.

Let’s actually look at the data. And when we actually look at our economic report card, there’s a couple of things that that stand out. Cara already highlighted that this morning. We received a, third quarter GDP, report.

The US economy grew at a two point eight percent real, which by which we mean after inflation. A two point eight percent real net of inflation growth rate in the third quarter. Now that’s an annualized growth rate. That’s pretty good. By any objective measure, the US economy is doing very well in terms of economic growth. Additionally, inflation has also come down quite dramatically. And I’m gonna we’re gonna do a little bit of a deeper dive here in with respect to where we are with inflation.

In September, just last month, the Federal Reserve cut interest rates, fifty basis points. That’s one half of one percentage point.

For for all of for everybody you know who’s trying to buy a home or wants to refinance their mortgage, that is that is great news. And we have some more data here, where we will show you what we think the future projected path of interest rates will be over the next couple of years.

The Federal Reserve continues to reduce its balance sheet. In English, what it means is they’re soaking up money. They’re sucking excess cash out of the U. S. Economy.

Just to just to remind our listeners the Federal Reserve expanded its balance sheet. They basically printed lots of digital dollars to combat the global financial crisis from two thousand eight to two thousand nine. They printed a lot of digital dollars up until about twenty fifteen. They did this again to combat the deflationary spiral that hit in March of twenty twenty when COVID hit, hit the planet.

Moving on, the US stock market is virtually at all time highs. Right? The S and P is up it’s up forty four percent over the past twelve months.

Right? It’s up about twenty four percent year to date. Global stock markets have done amazingly well. So we’re doing very well with respect to the economy, with respect to, the stock market, and again we’ll do a little bit of a deeper dive into some of these other into some of these other statistics.

Interest rates certainly are higher than we would like. At the end of the day, they’re still pretty much on average, right? We don’t have super high interest rates, we don’t have super low interest rates.

Inflation as I said we’re gonna do a deeper dive into this it’s come down quite a bit. Unemployment still close to historic lows. We’ve seen it tick up here a little bit. And to be fair there’s a lot of ways to measure unemployment that’s usually usually the biggest criticism that’s leveled at economists when we talk about unemployment.

I totally agree there’s a lot of ways to to track it, a lot of ways to measure it, and there’s a lot of debate around how best to do that. But regardless of how we measure it, unemployment is pretty low in the United States at the moment. GDP growth, like I said, coming in pretty rock solid.

The U. S. Economy, it’s growing, it’s doing pretty well. Now does that mean it’s growing equally well everywhere?

Absolutely not. If you are in part of the country that is suffering, economically, I just want to acknowledge that, right? There are parts of the United States where the economy is on fire and then there’s parts where the U. S.

Economy is is is not doing so well. So I just want to acknowledge that.

Consumer settlement, this is probably the the most negative data point that we have as economists at the moment. We just, as Americans, we feel horrible about the economy and I think part of this is probably related to the election cycle that we’re in. But this is ironic because when we look at the GDP number that we just got this morning, it was fueled by all of us going to Amazon and clicking away or going to the local shopping mall, right, and buying stuff. It was fueled by consumer spending. So despite the fact that when we survey our citizens about how we feel about the economy, our spending patterns tell us that we actually feel quite good about the economy at the moment.

In terms of the market, I already highlighted the market has done very well this year. I will highlight that markets are volatile throughout the year. Right? And so, it’s it’s not uncommon for the market to hit a high and then retract, you know, eight ten percent from that high. Stock markets are volatile. So, I’m not saying that the market has gone up in a straight line. It’s been a bumpy road over the past twelve months, but certainly the market continues to do well and is and is close to all time highs.

Let’s do a deeper dive into interest rates, inflation, energy, and gold. A lot of your questions, thank you again for submitting those. Lots of questions around gold, around oil, around US energy independence, and things like that. So let’s take a closer look at that.

Just a little bit of history.

About twenty four months ago, inflation took off like a rocket. Highest inflation since nineteen eighty, and it peaked at about nine point one percent. Now, we can debate why did all of that happen. Was it government spending? Was it pent up demand from COVID? It was a lot of different things. One thing I will tell you is that whatever you hear in a political sound bite, it’s probably wrong.

Okay? It’s inflation is a more complex phenomenon than what either political party would have you believe. But it did take off. It peaked at about nine point one percent.

It was during this time that the Federal Reserve began rapidly increasing interest rates to combat inflation and to pull it down. It has since come down quite a bit to somewhere in the mid two percent range and that’s pretty darn close to where the Federal Reserve would like it to be. Right? Which is why the Fed is starting to, bring interest rates down.

We saw that in September. Starting to bring rates down. Now, I want to be clear about something. Just because inflation the rate of inflation has come down, does not mean that prices have declined.

Inflation measures the change in prices.

Right? So this is actually what we call disinflation right here. Meaning that the rate of, increases in prices has come down. Alright?

Prices on average are still rising. Right? And we’ve seen that for over a hundred years in this country. Right?

That every year prices typically would creep up.

Below the line here, this is what we call deflation. Deflation is when prices actually decline.

Alright? And we’re seeing deflation over the past twelve to eighteen months, predominantly in energy, but we’re also starting to see it in what we call core goods.

Alright?

But energy is highly volatile. Right? Just look at the prices at the gas pump. Look at the prices of oil. Look at the prices of, heating oil for our for our homes.

Very volatile.

So I thought it would be interesting to take a look at where the United States is in terms of its production of oil. Right? There’s a lot of debate around is the US energy independent?

Have we stopped drilling in this country?

And I think when we look at the data what we see is no that’s not the case.

Oil production in the United States since twenty nineteen has actually increased a little over eighteen percent. In fact it has grown in the United States whereas on average the rest of the world it has actually declined a bit. Right? We see that in Russia for example, oil production has gone down about nine percent over this particular period of time.

And when we actually look at the data a little bit more closely, we see that energy, oil production actually declined in twenty twenty. No surprise. Price of oil actually went slightly negative, if you could believe that, in April of twenty twenty. So naturally a lot of drillers stopped drilling because the price of oil had fallen so dramatically.

But since then, US oil production has increased every single year. So much so that today, the United States is the world’s largest producer of oil, nearly two times that of Saudi Arabia. Alright? So the U.

S. Certainly we are drilling in this country, certainly we do produce a significant significant amount of of oil. We can debate whether that’s a good thing, bad thing. Naturally, the climate change debate is part of is part of that context.

But again, objectively, when we look at the data, the United States is is doing quite a good job in terms of producing oil. Additionally, the United States also produces more than it consumes, Meaning that we are effectively today a net exporter of oil to the world. That doesn’t mean we don’t import a lot of lot of energy markets, a lot of oil markets are local markets. There are different grades of oil that we will perhaps import, we will export other different grades of oil, but that doesn’t change the fact that when we look at the data, again, the United States actually produces more than it consumes.

Now let’s pivot and talk Before we get off of inflation, and I think that we probably already answered this question here from Steve, but he’s asking about if inflation is cooling, then why are we not seeing, that at the grocery store, the gasp up insurance?

I think you addressed that a bit with this the disconnect between the prices and the inflation. But any specific thoughts on that question?

What what what I would, what what I what I think is important to highlight is the rate of growth in prices year over year has come down.

So while those prices were rising at an annual rate of nine percent in June of twenty twenty two, today, they continue to rise, but they’re rising at a much lower rate, somewhere in the mid two percent range. Right?

So it’s important to keep in mind when when you hear people say inflation has come down. Right? This always annoys me because I think economists need to slow down for a moment and explain what exactly are they saying. Prices have not come down.

I grocery shop for our household as well. No. They have not come down. Right? They’re still creeping up, but what is true is that that rate of growth has slowed.

Now Kara, there’s another point here which I think is an important financial planning point. Is that the numbers on your screen assume that we consume a certain fixed basket of goods and services.

All of us consume different baskets of goods and services. Some people prefer to eat fish, others prefer chicken and or red meat or pork. And so depending on what exactly it is you’re purchasing at the grocery store, your personal rate of inflation, is likely very different from whatever the national average is.

So great great question, Steve.

Great. Right. I know we’re moving on here to interest rates, and we got a bunch of questions from Warren and Robin. And so, glad to glad to tackle this.

Well, let’s let’s let’s do it. Let’s let’s, let’s walk people through the high level overview and then let’s tackle some of those those questions.

Look, big picture.

Naturally, the Fed raised interest rates dramatically to combat inflation.

It looks like they’ve been successful. They broke the back of inflation. Inflation is coming down.

Fed is now cutting interest rates. The debate today isn’t around whether the fed will go back to raising interest rates. I think most of us I think there’s a lot of consensus that okay we’re done with raising interest rates. The real question is how far should they fall and how quickly should they fall.

Alright? And so, you’ll see here that it’s kinda hard to see but there’s two different colored dotted lines on the screen. For the most part, those lines overlap. There’s a blue one and there’s a green one.

The blue one is the Federal Reserve’s own estimate, what they think the future path of interest rates look like. They projected by, sometime at maybe twenty twenty six that we will be down to somewhere slightly below three percent.

That’s a big reduction from where we are today. That’s a two percent reduction from where we are right now. Right now, we’re at about, four point eight eight percent.

Right? So that’s a that’s a pretty nice decline. The green line represents the market’s expectations. Right?

The the broader bond market and interest rate markets that trade those types of instruments. Who’s right, who’s wrong remains to be seen, but the reality is everyone agrees at the moment that the future path of interest rates is south. Right? It will be going down.

K?

Kara, why don’t we tackle some of those questions before we leave this particular slide?

Oh, you just addressed one of them. Warren was asking about kinda what the direction, is in future. So I think you’ve answered that that the expectation is that they will be reduced in the future. But another specific, and Robin’s asking this, can you talk about housing and how that relates to lower interest rates? How’s that going to affect perhaps that housing market?

So the housing market, so let and I’ll just speak more broadly about the residential real estate market, has really defied gravity over the past several years, arguably for even longer. Typically, when interest rates rise, the demand for housing would go down and so we would logically expect to see a decline in home prices as interest rates rose.

We actually didn’t see that on average across the United States and, there’s there’s been a lot of folks studying why this is the case. And I think the general consensus is that coming out of the global financial crisis, we had such a glut and oversupply of housing that was really you know, we overbuilt homes in the mid two thousands that there was so much excess supply on the marketplace that it has taken a very long time for that supply to get gobbled up.

Coming out of the global financial crisis, a lot of home builders really stepped back on how much construction they were beginning, how much construction they were doing. And so the thinking at the moment when we look at the numbers is that the reality is, you know, building building homes takes time. It’s not something you just push a button and, you know, suddenly there’s a whole bunch of new homes. I mean, it can take nine to twelve months easily for a new home for a new home build. And so that’s that’s the thinking at the moment. We have a bunch of millennials now who’ve come to market, lot of household formation, they’re beginning families, they wanna buy homes.

And so you have all of this demand combined with a lack of supply and that has really helped keep home prices higher than I think we would have expected. Now with rates coming down, the expectation would be that that’s only gonna fuel demand because now more home more more would be future home buyers, they can afford more. Right? They can borrow. And so that’s gonna make it easier for them to get into a home to, at least, I should say, afford a home. Alright? So what we really need is more more supply.

That’s great. Thanks, Don. I I’m looking at the at the questions coming here and a hot top topic here. I’ve got five. Ken, Tom, Philip, Joe, Tim on the deficit.

Oh, okay. Well, then that’s that’s the very next slide. So the timing is good. Let’s let’s tackle this one.

So what just a comment. I mean, this is probably one of my biggest disappoint disappointments with respect to politics today is that we aren’t discussing the issues that I think are personally that I think are most important. And I think the deficit is absolutely one of them.

And when we look at the numbers, today the federal government spends about seven trillion dollars a year. That’s a big number. Over here on the left hand side of the screen, you can see what we we, all of us, we we send them to to Washington to spend our money. So this is how we collectively have decided to spend our money.

Half of the federal budget goes towards entitlements, goes towards Social Security, Medicare, Medicaid, very critical programs for many Americans. Right?

So that’s a big part of the budget.

US defense spending is now almost a trillion dollars a year.

I I I think it’s obvious that we live in a dangerous world and, you know, I personally am a proponent of US defense spending. Whether it should be a trillion, whether it should be something less or more than that, I think is why we should have, these debates during during the elections.

But you can see how we’re spending the money. I will highlight that what’s really beginning to hurt the federal budget right now is the interest on all of the prior deficits that we accrued in years past. So the federal debt, Tara, is really just the sum total of all prior year deficits.

And that interest expense is getting very, very high.

If we look at how much we collect in revenue, we collect about five trillion from taxpayers, and that leaves a shortfall of about two trillion dollars a year.

This is absolutely unsustainable.

This is the problem that both candidates should be discussing, and specifically how we are going to bring that down.

So I think this is a big issue.

I wish we were talking more about it. Now in terms of looking forward, the Tax Cut and Jobs Act was a package of tax cuts. Couple of tax increases were in there to be fair. Right? Karim thinking of the inherited IRA rules, which was effectively a tax increase. Right?

But on the on the whole, that package signed by, former president Trump in I think it was twenty seventeen is when it was signed, is set to currently, under current law, most of that is going to sunset here in the very near future. And so if you look at this blue line over here, what we’re showing you is the deficit.

And the blue line is where the deficit would go assuming we allow those tax cuts to expire, meaning tax rates would go back up. Right? So we would squeeze this deficit a little bit.

The red represents an extension.

Right? So, former president Trump has promised as part of his campaign platform that he would extend those tax cuts. I’m not saying whether that’s good or bad. I’m just sharing with our audience.

The data shows, well, that’s going to push up the deficit quite a bit, and we can actually see the impact here in terms of our debt to GDP ratio. That’s how we think about it. This is sort of our debt to income ratio as a country. Right now, it’s at about a hundred percent.

It’s currently scheduled left unchanged to go to about a hundred and twenty one percent. If we extend the Tax Cuts and Jobs Act, it will go to about a hundred and thirty two percent of GDP. So, again, just looking at the data, not making a political comment here. If we extend those tax cuts our debt will continue to rise and it will actually rise at an even steeper slope than was otherwise the case.

Now my friends on the other side of the political aisle would say wait a minute time out. What if we cut spending? Well, sure. Right?

But I would I would argue that neither political party has actually shown an ability to successfully cut spending even when their parties, plural, controlled both chambers of congress.

So and, Kara, when we actually look at what we spend our money on, these are hard decisions.

Right? Let’s not make light I hear people say, oh, just cut the waste and the fraud. Folks, there ain’t that much of it. I hate to break it to you.

There ain’t that much of it. Right? I mean, sure, it’s gonna be there and you’re gonna get some anecdote that somebody’s gonna like double click on. But the reality is most of the federal budget goes towards things that are very cherished programs, Social Security, Medicare, Medicaid, and US defense spending.

These are hard decisions. But this is why we should be sending, you know, great leaders to Washington to figure these things out. So Absolutely.

It’s helpful to have all of the data, Don, be able to weigh all of those decisions and looking at looking at the numbers Yeah. So that we can do that. So let’s continue on. I I know you and I talked about, and we got so many questions about gold and precious metals.

I’ve got Daryl and Dave and Derek that are asking about that. Some more live in the in the, questions even submitted today about that. So can we talk about how it performs and kinda what your feeling is about people having precious metals? And there’s even a couple of questions about, how do you even buy physical gold.

Maybe we can talk about how it how that works as well and the the pros and cons on that.

Sure. And I think, you know, just, just to be fair to the question, you know, Dave and Daryl’s questions, you know, we have these debates, on our investment committee. Right? So I just want full transparency. Right? There’s a lot of debate around whether or not gold is a legitimate investment that should be included in a diversified portfolio. Full disclosure, today, we do not include gold in any Mercer Advisors portfolio.

Naturally, that could change. This is why we we have an investment committee with a lot of really smart people on there, and that’s why we debate debate these things.

But I think when we’re evaluating any investment, Carrie, you have to look at the data. Right? And you have to look at a lot of data. Right?

You can’t just cherry pick the last couple of years. Right? We are investing our clients’ life savings, and with that comes a very heavy burden of responsibility, and we require a very high standard of evidence before we make a decision to put our clients’ life savings into something. So what what I’ve done here is I’m just showing you the returns on gold since nineteen eighty.

Right?

And and this is running up I think through the end of September.

Alright? And so over this long period of time, gold has returned about three point seven percent per year.

Inflation, stocks, bonds, you can see the data here on the screen. Naturally, stocks have had the best performance since nineteen eighty. What I really wanna highlight, however, here is the risk, the volatility, how much the value bounces around over a twelve month period. And what you’ll see, and I think this is an important point for anyone considering an investment in gold, is that gold is actually riskier than US stocks.

And we all know, we all experienced as investors how volatile US stocks can be in, you know, in any twelve month period. We’ve all lived it. Right? Whether it’s the global financial crisis, March of twenty twenty or the the Internet, bubble bursting.

Gold is a highly volatile investment, but over the long term, has actually given you a very anemic rate of return. And so what I’ve done here on the next slide is I I wanted to drill in a little bit deeper, Cara, to show our listeners that, you know, from nineteen eighty until about two thousand and nine, gold, which is the gold line, actually underperformed inflation.

That’s the blue line. Right? So I often hear, well, gold is a hedge against inflation.

Really? Well, it actually didn’t do that for the better part of three decades.

Alright? It may be doing that now. Maybe maybe it maybe it takes four decades for gold to successfully hedge inflation, but that’s a really long period of time for for an inflation hedge to deliver on its promise.

So I I think when you look at the whole data here, gold tells two very different stories.

It peaked during the global financial crisis and and in the aftermath of that crisis, but then it actually cratered over forty percent. Kara, between September of twenty eleven and twenty fifteen, the price of gold came down forty percent.

Now that doesn’t mean that perhaps you shouldn’t buy it or that it doesn’t mean that perhaps maybe today it is suddenly a more attractive investment. I’m just highlighting that gold is not a sure bet. Right? It has underperformed inflation for exceptionally long periods of time. It has also been highly volatile.

And interesting, gold declined forty percent during a time when the Federal Reserve printed about four trillion dollars in digital dollars to pump into the economy. So typically, we hear the argument, oh, it’s gonna hedge against, you know, the printing of money.

We didn’t see that, you know, between twenty eleven and twenty fifteen. That was the greatest economic experiment that you could have ever devised to test the hedging power of gold and I would argue it failed. Now since then, gold has rallied. In fact, today, gold is at an all time high.

Now we can debate why. Is it because of dedollarization, the bricks? I know we had some questions about that. Yeah. Is it because of uncertainty around the election?

We don’t know. We can’t get millions of gold investors in a room and ask them. There’s lots of reasons, lots of reasons that have been suggested for why investors have poured into gold.

At the moment, we don’t think any of them are are are good enough to convince our investment committee to say, yes. Let’s put our clients’ life savings into gold.

That’s helpful context, Don. Thank you.

K.

As I’m looking at the rest of the questions that are coming in, and you mentioned dedollarization.

We’ve got a couple of questions related to that somewhat to, to the Robert is asking about that. Let’s talk about that for a bit.

Certainly. And and and, you know, back to the gold discussion, you know, this has been part of the argument, Cara, for why perhaps gold might be an attractive investment. Right? I I’ve heard folks argue, well, the dollar has gone down in value and so here’s how we’re going to protect our purchasing power.

However, we don’t see that either when we look at the data. Right? So I’m just showing you since twenty twenty one, how has the US dollar done globally in terms of its value relative to other global currencies?

Well the US dollar is up about sixteen percent over the past four years. The perk meaning that the purchasing power of our dollars globally has increased. That’s why so many Americans have been traveling the world and going to Italy and places like that. Right?

Is, you know, even the Europeans now are saying, hey, stop coming. We have too many tourists coming from America And it’s because our dollars are going further. Right? And so Cara, when we look at the value of the dollar it has risen.

When we look at global central bank reserves, this is how we measure the the global reserve currencies that that other banks prefer to hold. About sixty percent of all global reserves are held in US dollars.

Mhmm.

So by any measure, on on, you know, other countries, they love our US greenbacks.

They prefer to hold greenbacks. They sure as heck don’t wanna hold rubles.

Right? They’re holding dollars. They’re holding yen. They’re holding holding, the euro. They’re holding the British pound.

Very, very little. Less than one percent last time I checked was actually Chinese yuan.

Yeah. I’m I mean, I can even tell you a personal story. I got back on Thursday from a two week trip to Egypt, to see the opening of the new museum there at Jordan and Qatar, and I was expecting to have to change some money when I got there to be able to, you know, use in restaurants and tips and so forth. And I was told by people immediately, oh, no.

We’d much rather have your US dollars. And I said, well, aren’t you gonna have to exchange them? And they said, the US dollar is much more stable. We’d much rather be paid in that, which was very interesting, just on a as a traveler to hear hear that as well.

You know, it’s not to say, Karen. It’s one of the things in our investment committee is is always reminding ourselves that, look, the world can change. Right? And we should always be, you know, we should always be humble and be open to the prospect that, hey.

We could be wrong. Something could change. And so for that reason for those reasons, we spend a lot of time researching these things and trying to understand, is there any evidence? Is there any good economic logic that would suggest that the US dollar is, you know, perhaps going to decline in value?

We just don’t see it. Right? The US is still remains the world’s best place to do business. We have the world’s largest economy.

You know the rule of law, I mean it’s it’s really hard to see which country’s currency, certainly not the the BRICs. Right? The BRICs is Brazil, Russia, India, China. Right? And there’s there’s a consortium of other emerging markets that have joined that. These are countries with notoriously weak governance.

The rule of law is very questionable in many of these markets. And, you know, for those reasons, it’s really hard to see how some sort of currency issued by that group of countries would replace the yen or the dollar or the or the euro.

Yep.

Well, terrific, Don. That answers, I think, those questions. The the amount of questions that are coming in about politics and elections and what could change like, I can’t even read all of names. There’s so many of them that that are coming in here.

So maybe let’s talk about if people and, again, as as divided as we are in this country, our client base is certainly divided equally. So we’ve got lots of clients that are on one’s one have one view and lots of clients that have the other. And I think in general, everyone just wants to know what’s gonna happen. What is what’s next?

How do I plan for it? There may be some context would be really helpful here.

You know, it’s, and it’s I I wanna go back to this slide before folks start reading the other slide and getting into the data. But I I think there’s an important point here, is we always think, you know, we we as citizens, we vote, we have our political beliefs, we have a certain political party perhaps that we, have have pledged allegiance to.

The reality is this. Right? We have elections in this country every two years.

The reality is we are electing a president, not a king. Right? Congress makes and passes laws.

Congress sets the budget. Presidents, naturally, they influence that. Right? But I think the we always think that something’s gonna dramatically change if the other side wins.

Folks, I’ve been doing this for I’ve been in this business for thirty years. I have never seen anything dramatically change.

Right? Even going back to like Bush v Gore when it had to go to the Supreme Court and there was all kinds of consternation around the hanging chads.

The reality remains that markets, the economy, the country, we find a way to move forward. The sun still comes up the next day. We all we all get dressed and go to work. Right? And businesses do what American businesses have been doing for two hundred and twenty some years. Right? So you know, I would encourage us to you know maybe lower the temperature a little bit and just remind ourselves that, hey there’s been elections in the past where the other side has won and the world didn’t end.

Right? Under the I just showed you some oil data. Under the Biden administration, there was lots of debate around, you know, whether a president Biden would would kill oil production in the United States. Well, it didn’t happen.

Right? We continue to produce, and we’re producing more today than we did in twenty twenty. So, so I think that that I hopefully, that sets a little bit of context. I know that’s not always what folks wanna hear.

I usually get a a nasty email from each side of the aisle saying, hey. No. You’re wrong. And, you know, I try to keep it keep take a fair and balanced approach to how we think about these things.

Well, let’s look at some data. This is a slide that I’ve shared before.

You know, when we look at the economy, let’s ask ourselves a simple question. Which political party, when they had full control of government, meaning the White House and both chambers of Congress, which party was better for the economy?

Well, it looks like, when we when we look at the data here, that Republicans, actually underperformed and Democrats actually outperformed. Right? So it looks like that Democrats historically were better for the economy. You can see the economy grew on average about four percent annually when the Democratic party controlled all levers of government. So both chambers of Congress plus the White House. The economy grew by about two point eight percent under Republican administrations, and this is going back to nineteen forty seven.

Now we can ask the same question with respect to the US stock market. Which party has been better, quote, better for the US stock market? Well, it looks like Republicans have been better for the US stock market. Now I I put all of that in quotes because I don’t believe for a moment that the Democrats are better for the economy or that the Republicans are better for the market. I think there’s a lot of noise in this data.

Right? I think what happens in markets today is largely a function of what has happened four years ago or ten years ago. Right? Think of great companies like Microsoft and Nvidia. These are companies that have made investments in technology and patents and research and development. They’ve been doing that for decades.

Right? I mean, look at Nvidia. They’ve been around a long time. They’re finally getting their day in the sun here over the past couple of years.

Right? That had nothing to do with the Biden administration. That had everything to do with decisions that, their CEO and founder, Jensen Huang, had made many years ago. Right?

So I would just caution. Be careful. Don’t over don’t get too excited about the data. What I do like about this data, Kara, is, when we go to our cocktail parties, there’s something for our Republican friends to brag about.

There’s something for our Democratic friends to to brag about.

Take away from this data what you will.

But at the end of the day, be careful not to not to read into it too much.

Yeah. I think it’s also good to we talk about administration by administration.

And then I your point, Don, to think about it isn’t just the politics of it. There’s sometimes there have been world events that influence all of these things. Obviously, a pandemic or nine eleven, all of those things also have influence as well on market returns.

You know, absolutely. Right? Think of, you know, think of the, you know, I’m looking at this data point right here, two thousand eight, when the whole global financial crisis gripped the global economy and stock markets around the world went down. Well, that was at the tail end of the Bush administration.

Now we can debate, well, wait a minute. Was it George w Bush’s administration that somehow did something that was detrimental to the market?

I don’t think so. Right? I and and and we’ve had now fifteen years to overanalyze all the data.

You can’t convince me that it was something that his administration did. Right?

In fact, I would argue the roots of that crisis were laid in the eighties and the nineties under Reagan, under the first Bush administration, and under the Clinton administration.

Right?

But, unfortunately, that shows up now under George w’s, you know, tenure.

So the other thing I would just say here, Kara, this is an important point.

When you look at Republican and Democratic party platforms over the past seventy years, the Republican party today I’ll just pick on them for a moment, and then I’ll I’ll pick on Democrats. I wanna be balanced. The Republican party today is not the Republican party of Ronald Reagan.

Very different policy prescriptions.

Right? Reagan embraced free trade. Right?

Reagan, very different from the platform of, former president Donald Trump. They they won’t even recognize each other, I would argue. Right?

If we look at the Democratic party platform, right, Democrats historically have been sort of the party, the pro union party, more protectionist, usually in favor of tariffs to protect, their union constituency.

Yet it was Bill Clinton that signed the North American Free Trade Agreement and today it’s Donald Trump who’s running on a platform of tariffs.

Right? Putting tariffs in place. So my only point in bringing this up is that these red and these blue columns represent very different party platforms, and I would argue there’s no consistency between their policies and what’s happened in the economy or the markets.

Yeah. That’s a great point. And, Don, while you’re talking about tariffs, we’ve got a couple questions, Jim, Susan, Bill asking about tariffs. So can you make some commentary on how tariffs, potentially could affect the markets and the economy?

Well, it is you know, we study we all study this in economics one zero one, if you if you if you took economics.

Tariffs are a tax. Let’s be candid. Right? When you when you charge a tax on something that’s being imported into the United States, that will push up prices.

So by definition, you could argue, well, tariffs are inflationary, and I could agree with that. Right?

Now from an economic perspective, it is also true that having lots of tariffs will hurt economic growth. It might tip us into a recession.

To be fair, other countries logically would retaliate against us. So I think that that makes a lot of sense. You don’t you know, I I think that’s a very nonpartisan comment. That’s just an economic analysis of the impact of tariffs.

Now whether or not they are a good or bad thing, I think depends on your your political views and what it is you’re trying to accomplish. I I could see for geopolitical reasons, for strategic defense reasons, for example, why it makes sense to protect the US steel industry or perhaps the US semiconductor industry, like like the Biden administration has tried to do.

So I I I think that, you know, if you had tariffs and we are comfortable using tariffs as a policy tool, I would argue, let’s just be very strategic about it, and there should be a rationale behind it because we wanna keep certain industries, again, perhaps for defense reasons, homegrown.

Right? But we should not kid ourselves. The rest of the world absolutely will retaliate, and prices will rise.

You know, just walk into a Walmart, go on Amazon. A lot of those products are produced in other parts of the world, China, Southeast Asia, South Asia.

So many of the things that we consume would be subject to tariffs, assuming we put in place some sort of blanket tariff on everything.

I hope that gave a fair and balanced view of that. Yeah.

I think that’s that’s very helpful, and the the details do matter when you when you think through those. Well, since we still are are getting a a few number of questions about the different administrations and things, maybe go through the details on that, Don.

Sure. Absolutely. So what what I what I wanted to do is, is actually take this data from the prior slide and break it down by more recent administrations.

Right? Going back to nineteen forty seven, many of us have been thinking may maybe thinking, wow, I didn’t even vote in those prior elections way back when.

But what has it looked like more recently? Well, President Clinton had the best stock market returns under under his administration, followed by Eisenhower and, and Bush senior.

So certainly some really good, you you know, stock market, returns under these different administrations.

You know, president Obama, and Trump are are right here in the mix. And so I I would argue when you look at this data, it’s all pretty pretty close. Right? Biden, currently is at thirteen point five percent annualized rate of return.

Slightly less than president Trump’s, but well north of the long term average, which is about twelve percent since about nineteen twenty six. So, you know, is thirteen point five suddenly really bad compared to fifteen point four? I would prefer fifteen point four, but I will take thirteen point five any day of the week. Right? These are still phenomenal returns.

And then unfortunately, here’s our friend GW who in two thousand and eight, had to, deal with the global financial crisis at the tail end of his administration. To be fair, George w Bush also had the tragic, terror attacks of nine eleven, and then certainly the invasions of Afghanistan and Iraq that followed, and that put a lot of pressure on US markets in twenty two thousand two.

So but again, I think when you look at the returns here, I don’t see a pattern here. If you can find a pattern, you’re better at statistics than I am. I don’t see a pattern here. Not an investable pattern that makes a whole heck of a lot of sense.

That’s helpful.

Fran, we’re also getting a lot of questions about the the difference between the stock market and and maybe if people don’t hold investments and and talking about the economy in general. And so I think you’re gonna address that here.

Yeah. So, I mean, I think when we just look at the economy again, I would argue, I I I don’t think there’s a huge pattern here.

You know, the Kennedy Johnson administrations, you know, aftermath of World War two, the nineteen sixties, that was certainly a heyday of US economic growth, you know, the whole baby boom generation coming into its own.

So but but, again, when we look at the long term data, I think we’ve actually done quite well under both administrations. President Trump has had the lowest economic growth under his administration.

Reagan did very well. Kennedy Johnson was the highest, you know, followed by, president Bill Clinton.

When I look at economic growth, Kara, I think presidents have very little influence on that, especially in the first two to three years of their administrations.

It takes a long time for any policies passed by an administration to really impact a you know, what what what today is a thirty trillion dollar economy that is highly complex.

Again, I come back to, I think we’re gonna be just fine regardless of who wins next week’s election. And that is because when we look at the data, when we look at the history of American capitalism, markets have rewarded investors regardless of who controlled government. And so that would be my advice to our listeners, keep politics out of your portfolio.

I encourage everybody to go vote. I think it’s great that we we have this whole experiment in democracy. Let’s debate.

But at the end of the day, let’s still remain neighborly. We’re still we’re Americans first, and we’re Republicans and Democrats. Maybe not even second. Maybe that’s tenth. Right? So let’s let’s let’s learn let’s learn again how to disagree with one another, but still be great friends and be great neighbors.

Yeah. I think that’s great advice about keeping politics out of your out of your investing.

We’ve got and speaking of kind of different things, we’ve got questions about, different kinds of investing. So the question from Jennifer about private markets or private investments and how can we access those at Mercer? And maybe start done with, like, why why would someone consider having, private investments as part of their portfolios?

Absolutely. I mean, just in terms of definitions. Right? Private investments are investments that are not traded on a public stock or bond exchange.

Right? So for some listeners who may not be familiar with the term, private investments means they’re not publicly traded. Right? It’s a it’s a private company.

You you may have heard of private equity or private credit, private real estate. These are investments in in companies, their bonds, their stocks, or or real estate that are not publicly traded.

We do absolutely invest in private investments at Mercer Advisors. We have several billion dollars allocated to private equity, to private credit, to private real estate.

Why would investors consider or why should they consider perhaps investing in private investments?

I think first and foremost, when we look at public markets today, it is true that they’ve they’ve been shrinking over the past couple of decades. Right? The number of publicly traded companies today is about half of what it was, fifteen years ago. Right?

And that’s You know, we can debate why that is. There’s lots of academics who are trying to study that. Some argue it’s due to regulations and so on and so forth. And I think there’s probably some legitimacy to to that claim.

But it’s also harder to build high quality diversified portfolios in today’s market. I’m not saying that it’s impossible. We certainly build very diversified portfolios, But it does get harder when you have ten companies, Cara, that make up about thirty seven percent of the entire S and P five hundred just based on their market capitalization.

Right? In fact, it’s actually today’s today’s stock market is more concentrated than it has ever been.

Right? So that makes it harder to build diversified portfolios for folks who are building assets, building wealth for retirement, building wealth that they wanna pass on to the next generation. So by definition, investing into private markets gives you a larger opportunity set, gives you an opportunity to diversify across more companies. So I think the first argument, Cara, is better diversification.

Secondly, is higher returns. The returns on private investments, and I’ll just highlight private equity, the returns on private equity over the past twenty some years have outperformed the average annual return on the S and P five hundred index by about six percent per year. That’s a lot. Like, you start compounding that out over over a ten year period.

That is a substantial outperformance. So there’s the prospect of higher returns in private markets, and we have seen that empirically when we look at the real world data that investing in private markets offers superior return opportunities relative to to public to public markets. And there’s a lot of reasons why that’s the case. But, you know, to, you know, to her question, it it’s really better diversification and, secondly, higher returns.

That’s great. And and also along that diversification lines, I’ve got a question here from from Michael, and then I’ve got a second one here from Karen asking about global asset allocation. So can you maybe talk about are are you seeing a change from US domestic to globalization, or or why would you want a global asset allocation?

Yeah. I mean and we’ve touched on many of these themes throughout our discussion today.

Number one is better diversification. Right? If you are worried, for example, or have any concerns about the potential decline in the US dollar, well, then you wanna own what we call non dollar assets.

So owning stocks that trade in other currencies in other countries is is a very popular way to diversify that risk away. So owning non US stocks. So that’s number one. Number two would be, is non US stocks are significantly less expensive than US stocks. Like I said a little bit ago, the United States is the world’s best place to do business. We have the best rule of law, we have the best financial markets in the world, bar none, but that results in a premium. If you wanna own a US traded company, you are going to pay dearly to own that company relative to a a company, for example, that trades in Egypt or Qatar or somewhere, maybe India or somewhere like that.

Even in Western Europe, and those are very advanced, very developed nations in terms of their economic infrastructure and rules of law.

But even in those countries, their stocks typically trade at about a forty percent discount relative to US stocks. So there’s a whole investment thesis behind why that would make make sense. And then with respect to the emerging markets, if we just look at economic growth on this planet, it’s in the future, over the next twenty years, it’s gonna it’s going to be coming from places like India and Southeast Asia. You know, China’s population is declining. Population is declining in Western Europe. Our population is still growing slightly, but the reality remains that most economic growth on planet Earth is gonna come from non US markets over the next twenty years.

That’s very helpful. And and I I’m seeing a lot of questions coming in asking about, if your portfolio has global allocations, if you have private investments. So I I will encourage you to take that up with your own personal wealth advisor, review your portfolio, and keeping in mind that your particular portfolio is, guided by your financial plan and what’s appropriate for you. So, please direct those questions.

They can definitely be reviewed with your own wealth advisor.

So one last question on, maybe taxes, Don. So I’ve got a question here about, from Robert. We’re hearing a lot about taxing of unrealized gains.

Is that even possible?

So I presume that Robert’s referencing a a policy proposal that, Kamala Harris has proposed.

So first off, I would say, yes. It is possible. And I would say we actually you know, Kara, we actually have that in our tax code today. It’s it just happens to be called the estate tax.

Right? Where when you die, if your wealth is over a certain threshold, right, all of that is taxed. Right? It’s taxable.

And, that even if it’s unrealized capital gain think of a family farm that perhaps you’ve owned for many generations that has a substantial gain. Perhaps you own Apple stock or Nvidia stock with a with a with an outsized gain. When you die, that’s all taxed. Right? So we do have precedent for it, Cara, in the form of the estate tax.

Just I I don’t wanna get too political here, but what I would say is I think trying to administer that type of tax.

I mean, you know, you work with clients and Yes.

You you you also work with them, you know, with their afterlife planning with the next generation.

So you you see how complicated that process administratively would be quite a headache.

Yeah. And I don’t know that I have a ton of confidence that the IRS would get it right.

So, you know, not to get political, but, you know, governments, you know, they struggle when it comes to bureaucracy and things like this. So, so it is possible. There is precedent for it. We do it today. Whether you could do it every year, wow. I don’t know. That that feels like a heavy lift.

Yeah. Well, in closing, I’m gonna close with a comment for from Kurt who says, Don Caucagney for president. A voice of reason focused on the data.

So even though I know that your wife yes. So not in your future, but you would for sure have my vote done.

So Thank you.

Thank you. And Kurt’s too, I think.

So, we hope that this was very informative for all of you. As always, we will be posting the recording from this webinar on our website, mercer advisors dot com, and look for the insights section. So about three business days from now, you’ll see that pop up. And along the line, since we know you that many of you had so many questions about elections and topics related to what comes next. We’d also like to invite you to our, after the election webinar, which is scheduled for December fifth. You’ll be getting an invitation to it, and wanna make clear that it will not be focused on capital markets after the election, but on tax policy, tax planning, estate planning, financial planning that may be useful tips for you based on what, what may be coming on, the new administration. So keep an eye on your inbox for that.

So thank you, Dawn, for joining us. Thank you all of you for participating for all of your questions. If we didn’t get to your question today, we do keep lists of them, and we’ll get them to your wealth advisers to make sure that you get, a response to what you asked. So thank you so much.

Thank you, Kara. Thank you, everybody. Take care.