Getting to 'the other side' of election uncertainty 🌤️
Plus a charted review of the macro crosscurrents 🔀
📉The stock market declined last week, with the S&P 500 shedding 1.4% to end at 5,728.80. The index is now up 20.1% year to date and up 60.2% from its October 12, 2022 closing low of 3,577.03. For more on the stock market moves, read: Keep your stock market seat belts fastened 🎢
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History shows that the stock market usually performed well regardless of the U.S. president’s political party.
This suggests that there isn’t a political party that’s necessarily bad for the stock market. Maybe some presidents are better for the market than others, especially at the industry level. But there isn’t clear evidence showing that a particular president alone can have enough of a material, long-term impact that the fundamentals driving the market higher will turn unfavorably.
“Over time, the stock market’s strongest threads have been the economy and earnings, not who’s in the Oval Office,” Ritholtz Wealth Management’s Callie Cox said.
At the margin, however, the results of a presidential election can certainly cause market volatility to rise in the short-term. After all, each candidate comes with very different ideas for policies like the corporate tax rate. Over time, companies will adapt and adjust to new policies as they work to preserve earnings growth. But they need some clarity as to what those new policies could be before proceeding with changes.
As such, companies will often take a wait-and-see approach ahead of an uncertain election. That’s a headwind for economic activity in the short-term. And with polling data showing the presidential candidates neck and neck ahead of this year’s election, companies are once again saying that they’ll wait for election results to move forward with any changed business strategies.
“It was unsurprising that the U.S. election came up quite a bit in last week’s earnings calls,” RBC’s Lori Calvasina said on Monday. “As has been the case in recent quarters, there were numerous references to the uncertainty that the event has created and the adverse impact that uncertainty has had on business activity. Several companies noted the need to simply get to the other side.”
Declining uncertainty could be bullish regardless of the election outcome 👍
Uncertainty doesn’t only keep business executives on the sidelines. It keeps traders and investors on the sidelines too.
History shows that during election years, the stock market tends to deliver below-average returns ahead of Election Day. However, the rally tends to pick up once we “get to the other side” and the uncertainty wanes.
“[R]egardless of the election outcome, declining uncertainty typically lifts equity valuations and prices following Election Day by more than the typical seasonality would suggest,” Goldman Sachs’ Ben Snider wrote in a February note to clients.
The fact that the S&P 500 fell 1% in October is very much consistent with history.
“October is the worst month of the year in an election year,” Carson Group’s Ryan Detrick said. “So maybe down some last month shouldn't be a huge surprise?”
“What also shouldn't be a surprise is strength in November, as this is the best month of an election year,” Detrick added.
Though, this election year has arguably been unusual in that year-to-date returns have been well above average. Through Friday, the S&P 500 is up a little over 20%.
“[These gains] would join 2021 (+22.61%), 2019 (+21.17%), and 2013 (+23.16%) as the only years in the 2000s with gains of over 20% up through this point of the year,” Bespoke Investment Group observed on Thursday. “Only looking at election years, however, this year's gain is the largest YTD rally in the S&P 500 since 1936!”
“With equities having already posted huge returns this year, it raises the question of how performance looks for the rest of the year,” Bespoke added. “With only two prior examples of the S&P 500 rallying 20% YTD headed into a presidential election, it isn't a big sample size so not too much weight should be put on it, but returns in November and from October through year's end have been mixed. Both times saw gains in November while the index was higher for the rest of the year in 1928 and slightly lower in 1936. The only other election year when the S&P 500 was even up 15% YTD through the end of October (1980), November experienced a gain of 10.24% but the rest of the year's gain was just 6.5%.”
Perhaps the market has gotten a little ahead of itself. Perhaps not. We’ll only know what the rest of the year looks like until it’s behind us.
Will we know who won the election next week?
Election Day is Tuesday. But experts warn we might not get final results by the end of the day.
“With polls indicating another very tight race in 2024, many of the same factors that led to a delayed call in 2020 could be at play again,” Goldman Sachs’ Michael Cahill said on Tuesday.
But that doesn’t mean the market won’t have a better sense of what the next four years could look like.
“While we cannot rule out the possibility of a very tight result and prolonged period of uncertainty, most likely the market will be able to gauge the likely presidential winner on election night or shortly thereafter, even if there are a few ‘head fakes’ in the first few hours and media sources take longer to make their call — just like last time,” Cahill said.
Zooming out 🔭
You don’t have to look very far back in history to see a president you didn’t vote for or wouldn’t have voted for occupy the Oval Office. And odds are, the stock market performed pretty well during his term.
To be clear, of course it matters who the president of the United States is: It has an immediate impact on sentiment, it could have short-term and long-term social implications, and it may even move the needle on the potential for economic growth.
But from a long-term investor’s perspective, the president has an arguably marginal impact on the already existing forces driving the markets.
In the near-term, we should always brace for market volatility. But getting past this election uncertainty — regardless of who wins — could prove to be a tailwind for markets.
“Big picture, the reduction in uncertainty is almost always positive for asset prices, and we’re at that moment of peak uncertainty,” Ken Griffin, the billionaire founder of Citadel, said on Tuesday. “Post election, we'll generally see a risk-on environment as people come to adopt a new regime, whether it's a Harris regime or a Trump regime. This uncertainty will be behind us.”
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Related from TKer:
On presidents, the stock market, and the big picture for investors 🖼
The truth about corporate tax reform and earnings, charted 📈
A very long-term chart of U.S. stock prices usually going up 📈
Review of the macro crosscurrents 🔀
There were a few notable data points and macroeconomic developments from last week to consider:
🛍️ Consumers are spending. According to BEA data, personal consumption expenditures increased 0.5% month over month in September to a record annual rate of $20.0 trillion.
Adjusted for inflation, real personal consumption expenditures rose by 0.4%.
For more on resilient spending, read: The state of the American consumer in a single quote 🔊 and There's more to the story than 'excess savings are gone' 🤔
🎈 Inflation trends are cool. The personal consumption expenditures (PCE) price index in September was up 2.1% from a year ago, down from August’s 2.3% rate. The core PCE price index — the Federal Reserve’s preferred measure of inflation — was up 2.7% during the month, near its lowest level since March 2021.
On a month over month basis, the core PCE price index was up 0.25%. If you annualized the rolling three-month and six-month figures, the core PCE price index was up 2.3%.
Inflation rates continue to hover near the Federal Reserve’s target rate of 2%, which has given the central bank the flexibility to cut rates as it addresses other developing issues in the economy.
For more on inflation and the outlook for monetary policy, read: The Fed closes a chapter with a rate cut ✂️ and The other side of the Fed's inflation 'mistake' 🧐
⛽️ Gas prices tick lower. From AAA: “The national average for a gallon of gas dipped by two cents since last week to $3.13. Low oil costs and tepid domestic gasoline demand are the primary reasons.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
👍 The labor market continues to add jobs. According to the BLS’s Employment Situation report released Friday, U.S. employers added just 12,000 jobs in October. The report was particularly noisy this month with Hurricanes Helene and Milton affecting survey collection rates. Also, transportation equipment jobs fell by 44,400 largely due to the strike at airplane manufacturer Boeing. Nevertheless, the jobs report reflected the 46th straight month of gains, reaffirming an economy with growing demand for labor.
Total payroll employment is at a record 159 million jobs, up 4.1 million from the prepandemic high.
The unemployment rate — that is, the number of workers who identify as unemployed as a percentage of the civilian labor force — remained at 4.1% during the month. While it continues to hover near 50-year lows, the metric is near its highest level since November 2021.
While the major metrics continue to reflect job growth and low unemployment, the labor market isn’t as hot as it used to be.
For more on the labor market, read: The labor market is cooling 💼 and There are 'rules' and then there are 'statistical regularities' 🧮
💸 Wage growth ticks up. Average hourly earnings rose by 0.4% month-over-month in October, up from the 0.3% pace in September. On a year-over-year basis, this metric is up 4.0%.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈
💼 Job openings fall. According to the BLS’s Job Openings and Labor Turnover Survey, employers had 7.44 million job openings in September, down from 7.86 million in August.
During the period, there were 6.83 million unemployed people — meaning there were 1.09 job openings per unemployed person. This continues to be one of the more obvious signs of excess demand for labor. However, it has returned to prepandemic levels.
For more on job openings, read: Were there really twice as many job openings as unemployed people? 🤨 and Revisiting the key chart to watch amid the Fed's war on inflation 📈
👍 Layoffs remain depressed, hiring remains firm. Employers laid off 1.83 million people in September. While challenging for all those affected, this figure represents just 1.2% of total employment. This metric ticked higher recently but remains at pre-pandemic levels.
For more on layoffs, read: Every macro layoffs discussion should start with this key metric 📊
Hiring activity continues to be much higher than layoff activity. During the month, employers hired 5.56 million people.
That said, the hiring rate — the number of hires as a percentage of the employed workforce — has been trending lower, which could be a sign of trouble to come in the labor market.
For more on why this metric matters, read: The hiring situation 🧩
🤔 People are quitting less. In September, 3.07 million workers quit their jobs. This represents 1.9% of the workforce. It continues to move below the prepandemic trend.
A low quits rate could mean a number of things: more people are satisfied with their job; workers have fewer outside job opportunities; wage growth is cooling; productivity will improve as fewer people are entering new unfamiliar roles.
For more, read: Promising signs for productivity ⚙️
📈 Job switchers still get better pay. According to ADP, which tracks private payrolls and employs a different methodology than the BLS, annual pay growth in October for people who changed jobs was up 6.2% from a year ago. For those who stayed at their job, pay growth was 4.6%.
💵 Key labor costs metric cools. The employment cost index in the Q3 2024 was up 0.8% from the prior quarter. This was the lowest rate since Q2 2021. On a year-over-year basis, it was up 3.9% in Q3.
For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈
💼 Unemployment claims tick lower. Initial claims for unemployment benefits declined to 216,000 during the week ending October 26, down from 228,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more on the labor market, read: The labor market is cooling 💼
👍 Consumer vibes improve. The Conference Board’s Consumer Confidence Index ticked higher in October. From the firm’s Dana Peterson: “Consumer confidence recorded the strongest monthly gain since March 2021, but still did not break free of the narrow range that has prevailed over the past two years. … Consumers’ assessments of current business conditions turned positive. Views on the current availability of jobs rebounded after several months of weakness, potentially reflecting better labor market data. Compared to last month, consumers were substantially more optimistic about future business conditions and remained positive about future income. Also, for the first time since July 2023, they showed some cautious optimism about future job availability.”
Relatively weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We're taking that vacation whether we like it or not 🛫
👍 Consumers feel better about the labor market. From The Conference Board’s October Consumer Confidence survey: “Consumers’ appraisals of the labor market improved in October. 35.1% of consumers said jobs were ‘plentiful,’ up from 31.3% in September. 16.8% of consumers said jobs were ‘hard to get,’ down from 18.6%.”
Many economists monitor the spread between these two percentages (a.k.a., the labor market differential), and it’s been reflecting a cooling labor market.
From Wells Fargo: “While that marks the highest differential in five months it's still below its pre- and post-pandemic high and consistent with a less-tight labor market. Consumers also grew more optimistic around the labor market outlook in October.”
For more on the labor market, read: The labor market is cooling 💼
💳 Card spending data is holding up. From JPMorgan: “As of 25 Oct 2024, our Chase Consumer Card spending data (unadjusted) was 1.9% above the same day last year. Based on the Chase Consumer Card data through 25 Oct 2024, our estimate of the U.S. Census October control measure of retail sales m/m is 0.66%.“
From BofA: “Total card spending per HH was up 2.6% y/y in the week ending Oct 26, according to BAC aggregated credit & debit card data. Within the sectors we report, entertainment, online electronics and airlines showed the biggest y/y rise since last week. Meanwhile, clothing and department stores showed big declines but were still positive y/y.“
For more on personal consumption, read: The state of the American consumer in a single quote 🔊
🏘️ Homeownership rate flat. From the Census Bureau: “The homeownership rate of 65.6% was not statistically different from the rate in the third quarter 2023 (66.0%) and virtually the same as the rate in the second quarter 2024 (65.6%).“ Definition: ”The homeownership rate is computed by dividing the number of owner-occupied housing units by the number of occupied housing units or households.”
There are 147 million housing units in the U.S., of which 132 million are occupied, of which 86.6 million are owner-occupied.
👍 Many homeowners are free and clear of mortgages. According to Census data analysis from ResiClub, 34.1 million homeowners were mortgage-free — meaning they own their homes outright.
🏠 Home prices rise. According to the S&P CoreLogic Case-Shiller index, home prices rose 0.3% month-over-month in August. From S&P Dow Jones Indices’ Brian Luke: “Home price growth is beginning to show signs of strain, recording the slowest annual gain since mortgage rates peaked in 2023. As students went back to school, home price shoppers appeared less willing to push the index higher than in the summer months. Prices continue to decelerate for the past six months, pushing appreciation rates below their long-run average of 4.8%. After smoothing for seasonality in the data, home prices continued to reach all-time highs, for the 15th month in a row.“
🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.72%, up from 6.54% last week. From Freddie Mac: “Increasing for the fifth consecutive week, mortgage rates reached their highest level since the beginning of August. With several potential inflection points happening over the next week, including the jobs report, the 2024 election, and the Federal Reserve interest rate decision, we can expect mortgage rates to remain volatile. Although uncertainty will remain, it does appear mortgage rates are cresting, and are not expected to reach the highs seen earlier this year.”
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy on Tuesday rose six tenths of a point last week to 61.3%. Austin had the largest increase, reaching a peak of 76.7% occupancy, more than five full points higher than last week. Chicago was also on the rise, up 1.7 points from the previous Tuesday to 69.3%. The average low across all 10 cities was on Friday at 32.9%, up a full point from the previous week.“
For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢
👎 Manufacturing surveys don’t look great. From S&P Global’s October U.S. Manufacturing PMI: “The US manufacturing downturn extended into its fourth successive month in October, marking a disappointing start to the fourth quarter for the goods-producing sector. Although the rate of decline moderated, order books continued to deteriorate at a worryingly steep pace, and a further build-up of unsold stock hints at further production cuts at factories in the coming months unless demand revives.”
Similarly, the ISM’s October Manufacturing PMI signaled contraction in the industry.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than hard data.
For more on this, read: What businesses do > what businesses say 🙊
🔨 Construction spending ticks higher. Construction spending increased 0.1% to an annual rate of $2.15 trillion in September.
🇺🇸 The U.S. economy has been growing. U.S. GDP grew at a 2.8% rate in Q3, according to the BEA.
From Joseph Politano: “Bad time to bet against the American consumer — last quarter, consumption growth had the largest contribution to US real GDP growth in more than three years.“
Because the way GDP is calculated includes a lot of quirky metrics that distort the economic picture, economists will often point to “final sales to private domestic purchasers” to get a better sense of the underlying health of the economy. This metric excludes net exports, inventory adjustments, and government spending. That metric grew at a 3.2% rate in Q3.
For more on GDP, read: The already mislabeled 'recession' of 2022 didn't happen, new data shows 🤦🏻♂️
📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.3% rate in Q4.
For more on the economy, read: The US economy is now less ‘coiled’ 📈
Putting it all together 🤔
The outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services positive as the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
Though we’re in an odd period in that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
That said, analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
High and rising interest rates don't spell doom for stocks👍
Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.
How stocks performed when the yield curve inverted ⚠️
There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
