11/04/2024 Market Strategy
Right Sized vs. Great Expectations
We Think It’s Wise to Wait Out the Election Results than Place Bets Before the Outcome Is Known
Key Takeaways
- With 352 or 70% of the firms in the S&P 500 index having reported earnings thus far, results are showing a robust third quarter. Profits in Q3 overall were up 8.3% from a year earlier on 5.1% revenue growth.
- Eight of the 11 sectors have positive earnings growth, with four at double-digit rates. Three sectors are showing declining earnings, with two falling at double-digit rates.
- Last week brought a mix of economic data as the nonfarm payrolls report showed a gain of just 12,000 amid strikes and storms. The GDP report however, showed growth of 2.8% annualized in Q3 with the “core” GDP deflator showing inflation falling to just 2.2%.
- This week the election on Tuesday and the Fed’s FOMC meeting on Thursday are likely to be key focuses. Also in the mix are the ISM survey of services firms and the University of Michigan’s preliminary reading of consumer sentiment for November.
Expectations for drama in the markets on Tuesday night reported in the press as Election Day bears down upon us all are more likely in our view to risk investor disappointment and wrong way portfolio positioning --once the actual outcome is known.
We suggest investors with intermediate to long term goals consider practicing discipline, right-size their expectations of how the market will react to the outcome of the Presidential election and leave the drama of the moment for the fast money players and day traders.
While the talk among much of the Wall Street crowd seemed to suggest the market was pricing in a “Trump victory” over much of last week, every other opinion in the non-financial world seemed to be calling for a “photo finish” result to the Presidential election.
We remain of the view that the market ultimately cares about checks and balances created when election results have no one party controlling both the Senate and the House. Checks and balances as a result of differences of opinion at the Congressional level (sometimes dramatically termed “gridlock”) often have served in the past to serve to protect what investors care most about—a healthy economy for consumers and for revenue and profit growth for business.
A week to ponder if there ever was one
This week offers plenty for investors to ponder with Election Day on Tuesday, the Fed’s FOMC meeting interest rate decision on Thursday and a brace of economic data throughout the week that includes factory orders, balance of trade, ISM services, non-farm productivity, initial jobless claims and continuing claims along with Q3 earnings results for 101 S&P 500 companies.
Based on the non-farm payroll number for October reported last week our expectations are for the Fed to cut its benchmark rate by 25 basis points on Wednesday. The effects of the severe storms that hit the southeastern US last month appear to us likely to influence the Fed’s decision when it meets this week.
So far in Q3 earnings season for the S&P 500 352 of 500 companies have reported results. As of last Friday’s close eight of the eleven sectors showed positive earnings results with 4 sectors posting double-digit earnings growth (communications services +23.1%, consumer discretionary +21.7%, health care +12.7% and information technology +10.3%).
Three sectors showed negative earnings growth in the period (energy -20.2%, industrials -4.6% and materials -2.13%). (See page 10 of this report for details in our Earnings Scorecard).
We remain of the view that the market is likely to register a “sigh of relief” once the outcomes of the Presidential and Congressional elections are known. Following that, we think we could see a “honeymoon” rally through much of 2025 while the new Administration formulates its policy agenda.
The great election unknown and beyond
With early voting already having taken place in a number of states and with election-day here we summarize for investors what we expect could happen regardless of which party proves victorious in the election taking place.
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 (decline from the S&P 500’s high point to a low 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 that 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 Fed policy that suggested monetary 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 on many levels some of which have very little and some times more to fiscal policy or other political drivers. Ultimately markets are driven by revenue growth, earnings growth, and innovation.
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