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How a U.S. Election Could Impact Your Long-Term Investment Goals

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U.S. election retirement goals

U.S. election performance

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How a U.S. Election Could Impact Your Investment Goals

When constructing a financial plan, it can seem like there are a million things to consider. Your life expectancy, the return needed to reach your goals, and your risk tolerance all play a role. In addition, short-term events like the U.S. election can influence the volatility in your portfolio.

In today’s infographic from New York Life Investments, we outline the factors threatening individuals’ retirement savings, and how a U.S. election has historically impacted investments.

A Precarious Future

In recent years, a variety of factors have increased longevity risk—the possibility that individuals will outlive their retirement savings.

Little Savings, Low Yields
A quarter of working Americans have no retirement savings, and 44% feel their savings are not on track.

What’s more, investors now face a low yield environment, affecting their ability to save. From its peak of over 15% in the early 1980s, the U.S. 10 Year Treasury Yield now sits below 2%.

Longer Lives, and More Retirees
With a higher life expectancy today than in previous generations, Americans need to save for a longer retirement. What’s more, the aging U.S. population will peak within the next few years—creating even more urgency.

At the other end of the working life scale, millennials will make up 75% of the global workforce by 2025. To avoid the same issues as baby boomers, they will need to set a strong retirement savings foundation from the start.

Layered Uncertainty
In 2020, the uncertainty of the U.S. election further complicates these longevity issues. With the political divide growing, heated opinions have dominated headlines—and many experts are predicting market volatility.

U.S. Elections and Market Performance

However, volatility doesn’t necessarily mean poor performance. In fact, it has generally translated to positive returns in election years. In the 23 election years since 1928, only four years have seen negative returns.

S&P 500 Stock Market Returns During Election Years

YearReturn
192843.6%
1932-8.2%
193633.9%
1940-9.8%
194419.7%
19485.5%
195218.4%
19566.6%
19600.5%
196416.5%
196811.1%
197219.0%
197623.8%
198032.4%
19846.3%
198816.8%
19927.6%
199623.0%
2000-9.1%
200410.9%
2008-37.0%
201216.0%
201611.9%
The average return during these years was 11.3%.

Sector Performance

An incoming administration’s policies have the potential to sway market segments and sector returns. For instance, sector dispersion increased substantially around the 2016 election.

Which sectors have done well historically?

From the beginning of the 2008 election year to the end of the Obama administration, the S&P 500 Health Care Index increased by 103%, compared to the 55% increase in the S&P 500 Index over the same period. It is possible that Obama’s pro-health policies contributed to the sector’s growth.

From January 2016 to January 2020, the S&P 500 Aerospace and Defense Select Industry Index increased by 143% compared to the 72% increase in the S&P 500 over the same period. The Trump administration has increased defense budgets and deals, which may have contributed to the sector’s strong returns.

What About Bonds?

Historically, bond returns tend to be lower than stocks—and election years are no different.

Bond and Stock Returns During Election Years

YearU.S. Aggregate Bond*S&P 500Difference
19802.71%32.50%-29.79%
198415.15%6.27%8.88%
19887.89%16.61%-8.72%
19927.40%7.62%-0.22%
19963.64%22.96%-19.32%
200011.63%-9.11%20.74%
20044.34%10.88%-6.54%
20085.24%-37.00%42.24%
20124.22%16.00%-11.78%
20162.65%12.00%-9.35%

*U.S. Aggregate Bonds represented by the Bloomberg Barclays U.S. Aggregate Bond Index.

During these years, the median average annual return for bonds was 4.79% compared to 11.44% for stocks. Bonds have provided important diversification and risk management during market downturns. However, upside returns are generally more limited.

Reaching Investment Goals

While historical performance helps us understand the big picture, returns during the 2020 election could vary widely.

Instead of trying to time the market, Americans can keep a long-term focus and, if suitable, consider investing more heavily in equities—a powerful option in the current low rate environment. This may help investors manage longevity risk, and potentially build a sufficient nest egg for retirement.

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Infographics

How Carbon Offsetting Works, and What Investors Should Know

Eliminating all harmful GHG emissions is not yet possible, but carbon offsetting offers a route for businesses and funds to become more sustainable.

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Carbon Offsetting: What Investors Should Know

In 2016, an international treaty known as the Paris Agreement was negotiated by member nations of the UN Framework Convention on Climate Change.

The long-term goal of this agreement is to limit the increase in global temperature to below 3.6°F (2°C) over the next century. Achieving this target will require the world to develop cleaner solutions across all areas of the economy, from energy to transportation.

In this infographic from New York Life Investments, we introduce carbon offsetting, an activity used by both businesses and investment funds that has the potential to accelerate the development of a more climate-friendly economy.

What are GHG Emissions, and Where do They Come From?

Greenhouse gases (GHGs) are a family of gases known to trap heat in the Earth’s atmosphere. The most prevalent among them is carbon dioxide (CO₂), which accounts for 80% of America’s GHG emissions. Common sources of CO₂ include fossil fuel consumption and deforestation.

Businesses are often significant emitters of CO₂, but due to the complexity of their production chains, emissions can be difficult to track. To combat this, a company’s carbon footprint is measured across three scopes:

  • Scope 1: These are direct emissions from a company’s operations. An example would be the CO₂ emitted by company-owned factories.
  • Scope 2: These are indirect emissions from a company’s operations, such as the pollution generated from purchased electricity.
  • Scope 3: These are indirect emissions from the company’s supply chains. Common sources include the extraction of raw materials and business travel.

Although we understand that GHGs are harmful to the planet, our ability to eliminate them is limited by technology and costs. Fortunately, this is where offsetting can help.

How Does Carbon Offsetting Work?

Carbon offsetting is a method of neutralizing one’s emissions by investing in GHG-reducing projects. The benefits of these projects are measured by the amount of CO₂ equivalent (CO₂e) that they avoid or absorb. Then, the company or fund that is engaging in the carbon offsetting project will then receive one carbon credit for every tonne of CO₂e negated.

Below are the three common types of GHG reduction programs.

1. Energy efficiency projects

These projects reduce energy consumption. One example is the distribution of energy-efficient cookstoves in Rwanda, a country where many people rely on firewood and charcoal. By distributing 10,800 cookstoves throughout the country, nearly 60,000 tonnes of CO₂e can be avoided each year.

2. Forestry projects

These projects nurture and protect our CO₂-absorbing forests. One notable example is the Garcia River forest protection program, which ensures the longevity of California’s redwood forests. The program oversees over 9,600 hectares which has been estimated to store almost 80,000 tonnes of CO₂e annually.

3. Renewable energy projects

These projects reduce our dependency on fossil fuels. They are especially effective in economies such as Taiwan, where 75% of electricity capacity relies on fossil fuels. Thanks to its strong coastal winds, Taiwan is able to remove 328,000 tonnes of CO₂e per year with just 62 wind turbines.

How is Offsetting Regulated?

Carbon offsetting in America is primarily a voluntary activity, but some state governments have made it mandatory for significant polluters. Here’s how both markets are regulated.

The Voluntary Market

The voluntary market is regulated by a variety of third-party organizations such as Verra, Gold Standard, and American Carbon.

They conduct audits on GHG reduction projects to ensure each one meets four broad criteria:

  • Measurability: The GHG savings of the project must be measurable
  • Verifiability: The results of the project must be verified on an annual basis
  • Sustainability: Each project should have a minimum lifespan of seven years
  • Additionality: GHG reductions of project must be considered in reference to a baseline scenario

Carbon credits are only issued after a project has passed this verification process.

The Mandatory Market

Some U.S. states have introduced carbon offsetting schemes to meet their climate goals. One of the largest is California’s Cap and Trade program which was introduced in 2013.

The program is targeted at businesses that emit over 25,000 tonnes of CO₂e annually, and works by setting a “cap” on total annual emissions. This cap is reduced each year, and overpolluting businesses must acquire carbon credits to offset their excess pollution. These can be purchased from state-administered auctions or from other firms.

Revenues generated from California’s carbon credit auctions are used to fund various GHG reduction projects, including:

  • 690,000 acres of land preserved or restored
  • 287,000 rebates issued for zero-emission and plug-in hybrid cars
  • 108,000 urban tree plantings
  • 150,000 energy efficiency projects installed in homes

By 2030, California’s emissions cap is intended to reach 200.5 million tonnes of CO₂e, marking a near 50% reduction from its 2015 level.

What Role can Investors Play?

A majority of U.S. investors consider themselves to be values-based, meaning they care about the societal and environmental impacts of their investments. This mentality is increasing the demand for ESG investing and placing pressure on corporations to become more sustainable.

For example, the percentage of S&P 500 firms that publish sustainability reports has risen from just 20% in 2011 to 90% in 2019. More importantly, a growing number of U.S. firms are cooperating with the CDP (formerly the Carbon Disclosure Project) to report their emissions and set formal reduction targets.

YearCompanies with active emissions reduction targetsAll other companies reporting to the CDPTotal
2013322166488
2014335164499
2015365143508
2016378124502
2017385123508
2018389117506
2019419138557

Source: CDP 2020

Some of the world’s largest oil producers are also taking action—a testament to the significance of these shareholder concerns. Royal Dutch Shell announced earlier in 2020 that it intends to fully offset its Scope 1 and 2 emissions.

Does Offsetting Really Help?

Carbon offsetting programs such as the one implemented by California have the potential to generate revenues and encourage innovation. Critics, however, have suggested it has a number of design issues.

One such issue is the fact that California’s carbon credits do not expire. This could allow companies to stockpile credits and ignore future cuts to the emissions cap. Another concern is that the companies covered by California’s cap and trade will simply pass their higher costs to the consumer, although this claim didn’t seem to hold up in a 2016 study conducted by UCLA.

Other inefficiencies within the program may exist, but its benefits are hard to ignore. By the end of 2019, the revenue generated from California’s carbon credit auctions totaled $12.5 billion. Of this amount, over $5 billion has been invested in GHG reduction projects to date.

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Infographics

Tech Investing: Exploring the Sector’s Promising Potential

In the first 9 months of 2020, tech’s return was almost 5x greater than the general market’s return. Here’s what you need to know about tech investing.

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Exploring the Potential of Tech Investing

Technology stocks have had impressive momentum. In the first 9 months of 2020, the S&P 500 Information Technology sector had a total return of 28.69%—far exceeding the S&P 500’s total return of 5.57%.

What should investors know about participating in this trending sector? This graphic from New York Life Investments covers tech’s long-term performance, the broad tech universe, and what investors should consider when analyzing tech investments.

Tech’s Performance

Since most tech companies are internet-based, COVID-19 has caused minimal disruptions to their business operations. In a number of cases, tech companies even saw sales growth as they benefited from consumers going online during lockdown.

Over a longer timeframe, however, tech’s performance is quite varied.

 S&P 500 Information TechnologyS&P 500 
201010.19%15.06%
20112.41%2.11%
201214.82%16.00%
201328.43%32.39%
201420.12%13.69%
20155.92%1.38%
201613.85%11.96%
201738.83%21.83%
2018-0.29%-4.38%
201950.29%31.49%

Data based on total returns.

Tech underperformed the general market in 2010, 2012, and 2013. However, the sector has outperformed every year thereafter.

In total, investors who held tech stocks over the last decade would have been rewarded. The 10-year annualized return for the S&P 500 Information Technology index was 20.50%, compared to 13.74% for the S&P 500.

The Tech Universe

While the information technology sector is commonly used to represent tech stocks, the broader tech universe can be broken down into 4 business types:

  • Software – such as application software, fintech, and cybersecurity.
  • Hardware – such as electronic equipment, semiconductors, and self-driving cars.
  • Internet Information – such as social networks, e-commerce, and digital advertising.
  • Telecommunication – such as internet services, telephone operators, and cable companies.

In addition, there are other companies that don’t fit neatly into these categories. This includes businesses involved in biotechnology, blockchain, or even retailers with modern technology such as mobile payment systems.

What Investors Should Consider

There are many factors to consider with tech investing.

  1. Diversification
    To lower potential risk, investors can diversify across industries, geographies, and individual companies. Tech investing should also be part of a broader portfolio strategy.
  2. Risks and opportunities
    Tech stocks have unique risk factors, such as regulatory risk arising from data privacy and antitrust concerns. However, they also present specific opportunities: new applications of technology are always being discovered. For example, GPS was originally used by the U.S. Navy to track submarines, but is now used for things like ridesharing.
  3. Personal objectives
    Investors can consider whether they are seeking growth or income. Growth investors can look for newer companies with high growth potential. Income investors may seek mature companies, some of which offer dividends.
  4. Company financials
    It can be tempting to get swept up in the news hype of a particular company. Instead, investors can pay close attention to company financials and reporting to ground their interest in reality.

With all this in mind, how do the sector’s risks measure up against its returns?

Potential Risk/Reward Payoff

Tech stocks have historically been more volatile than defensive sectors, such as utilities and consumer staples. However, they have also generated higher returns relative to their risk level.

Annualized risk-adjusted returns

 3-yr5-yr10-yr
S&P 500 Information Technology1.371.491.28
S&P 500 Consumer Staples0.650.781.06
S&P 500 Utilities0.520.760.84

Risk is defined as standard deviation, calculated based on total returns using monthly values.

By understanding the landscape and what to look for, investors will be poised to take advantage of tech’s potential.

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