10/28/2024 Market Strategy
Eight Days a Week
With the US Elections Eight Days Away, Investors Have Plenty of Economic Data and Earnings Results to Parse in the Meantime
Key Takeaways
- With 183 or nearly 37% of the firms in the S&P 500 index having reported, earnings thus far are off to a good start. Profits in Q3 overall were up 3.6% from a year earlier on 3.9% revenue growth.
- Eight of the 11 sectors have positive earnings growth, with two at double-digit rates. Three sectors are showing declining earnings, with two falling at double-digit rates.
- We discuss past rallies following elections and find that “honeymoon” rallies can occur, but often results are interrupted by the changes in monetary policy settings.
- This week brings the first data on economic conditions in October with the ISM survey of manufacturers and the non-farm payrolls report. In addition, another 170 companies in the S&P 500 are due to report results.
Data scheduled for release this week should shed further light on a cross section of key economic topics including numbers on inflation, jobs, inventories, home prices, consumer confidence, and construction activity leading up to Friday when the non-farm payroll change, unemployment and wage growth rate for October are released.
With 183 of the S&P 500 companies having already reported results this week finds 170 companies due to provide results across a number of key sectors including widely followed names in auto manufacturing, semiconductors, integrated oil, financials, search engines, fast food, pharmaceuticals, biotechnology, beverages, ecommerce, streaming, prepared foods, construction equipment and health insurance.
Investors should expect some excitement and drama midst the potential for surprises and disappointments as this week’s Q3 earnings results are posted.
Election Jitters?
With polls and pollsters calling for a dead heat race to the finish in this year’s Presidential election and just eight days to election day (November 5) a level of uncertainty is being felt in the market’s day to day activity which appears quite normal to us especially as some investors take actions to position for the outcome they feel is most likely.
In our view the results of the election (once they are known) are likely near term to produce an effect similar to a sigh of relief.
Once election outcome uncertainty is determined then the markets may well take opportunity to rally before they begin to ponder what policies are likely to surface sooner than later depending on which side of the aisle controls which of “the three houses” (White House, The Senate, House of Representatives).
If the elections of 2016 and 2020 provide clues to how the market may weigh in on the results of the election we might expect an initial postelection “phew glad that’s over” relief rally to be followed by a post-inauguration “honeymoon” rally in 2025.
It’s the year after the election results rally and the year after the inauguration rally that in our view have proven challenging for both the administrations of Donald Trump and Joe Biden.
The markets ran into turbulence in the fourth quarter of 2018 as a result of Fed monetary policy that had tightened from December 2015 into late December 2018 as the economy picked up speed.
In March of 2022 the emergence of forty-year high inflation caused the market to turn volatile in Q4 of that year.
Into the Great Election Unknown
With the election just a week away, we are often asked in meetings with private and institutional investors what we expect could happen depending on which party proves victorious in the current election.
In our view:
- As the political polls and pundits are saying this year’s contest is a dead heat to the finish we’d expect market reaction to an official outcome to be first and foremost a sigh of relief rally once the election results are known.
- Very important to both sides, beyond who will be President of course, will be which party controls either or both houses of Congress.
- As a result, some near term volatility could be expected post-election results as some investors ponder the immediate outcome and tweak and re-position portfolios.
- The year after the Presidential inauguration (2026) is when any material change in political and fiscal policy will likely begin to be felt and have real effect on the markets and Main Street.
- We recall the Trump inauguration year saw the S&P 500 rise 19.4% in 2017 as the markets pondered potential for less regulation and lower taxes. The maximum draw down for the S&P 500 in that year was 2.6%.
- In 2018 the S&P 500 shed 6.2% for the full year after the market had become concerned with a Fed tightening cycle that had begun in December 2015 and ran until late December 2018 when the Fed pivoted policy. Worth noting the maximum drawdown that year was 19.8% experienced in the fourth quarter.
- Similarly in 2021 the Biden Presidential inauguration year was positive for equities with the S&P 500 gaining 26.9% on a substantial boost in fiscal policy that raised prospects for economic growth. Worth noting the maximum drawdown that year was 5.21%.
- In 2022 markets became concerned with inflation that reached 40-year highs and that suggested the Fed was “behind the curve”. The S&P 500 fell 19.4% in 2022 on recession risk as the Fed began to raise its benchmark rates. The maximum drawdown that year was 25.43%
Longer term statistics suggest that market performance during Republican and Democratic administrations is subject to a host of factors that have little to do with election year promises and more to do with the effects of what occurs and how those occurrences are responded to on many levels some of which have very little to do with fiscal policy or other political drivers. Ultimately markets are driven by revenue growth, earnings growth and innovation.
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