Bears, Bulls, Donkeys, Elephants, and Volatility

Answer: Election years are known to have their share of volatility, but this year has provided more than its share with a flurry of news and loads of noise. Staying up to date is a full-time job. In writing this column there’s another layer to address which is the delay between when it’s written, and when it appears in the newspaper. My compliance department must review my writing, then I submit to the production team at the newspaper for publication, making staying ahead of twists and turns a challenge. Fortunately, it matters less than you think who is in the White House or Congress. 

Be cautious of statistics manipulated to fit different agendas. Since its inception in 1957, the S&P 500 has provided a median compound annual growth rate of 9.3% during Democratic Presidencies and 10.2% under Republican Presidencies. Dire predictions, misperceptions, bad information, and personal biases often prove to be wrong. Politics is only one factor in portfolio design. 

Politics

Policies and politics impact markets, but don’t overlook business’ profitability when maintaining your portfolio. Energy performed well under Biden, and the Affordable Care Act, although expected to harm the healthcare sector, actually created a new set of winners for astute investors. 

With Biden stepping aside, the expectation is for Vice President Harris’s policies to be a continuation of Biden’s policies. Stay mindful of her 2020 platform where she favored raising the corporate tax rate to over 30% (it’s currently 21%) and other significant changes. For Trump, the impact of higher tariffs he suggests remains unclear. The point is, as polls tighten uncertainty increases, and we know the market doesn’t like uncertainty. 

The good news is, once the election uncertainty lifts, the market has historically recovered the year after the election, gaining over 9%, on average, with positive returns over 71% of the time. Researchers at Apple found that tech giant was more of a force in the market than the White House. Apple’s iOS app economy supports more than 2.4 million jobs in the US and facilitated $1.1 million in commerce worldwide in 2022.

Economics

The Fed’s efforts to cool the economy are working with inflation slowing, labor markets cooling off, and job hiring and quit rates back to normal, while unemployment inches up. Housing and auto sectors are under pressure from higher rates. Consumers are slowing their spending. Case in point: car manufacturers and dealers have slashed prices and increased incentives to offset soft demand. This should be good news, but there is concern that the economy may be cooling too quickly which could influence earnings.      

But wait, isn’t a slowing economy with rate cuts good for markets? Investors were happy to see inflation easing believing it would push the Federal Reserve (Fed) to cut interest rates. This, plus Artificial Intelligence tailwinds, helped push markets higher this year. But recent sentiment has brought those numbers down slightly.

As Mom always said, all things in moderation. 

Earnings 

So far, the 2Q24 earnings season is off to a good start expected to climb ~10% year-over-year. However, softer economic activity has increased uncertainty about future earnings strength. For example, consumer-facing companies, such as Visa, Nike, and Chipotle, noted that not only is consumer spending slowing, but consumers are becoming more discerning. As a result, businesses focus on volume growth while pricing power diminishes. With valuations stretched and much of the good news already priced in, earnings will be the key driver of the market. As earnings uncertainty starts to creep back into the market, volatility is bound to follow. Markets typically experience three to four pullbacks of 5% in any given year. This year has only seen one such drawdown. 

You’ve likely heard that it’s time in the market that matters, not attempting to time the market. Remember that macro-economic factors are the main driver of the equity market. These include inflation, employment levels, gross domestic production (GDP), fiscal and monetary policy, earnings growth, international trade, and economic growth. Much can change between now and November 5th meaning we should look beyond politics and not make politically or emotionally driven portfolio changes. Stay focused and plan accordingly.