Election Looms: More Volatility Ahead?
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On Wednesday, Wall Street investors were selling stocks ahead of key mega-cap tech earnings and the highly anticipated U.S. presidential election on November 5th. The tech-heavy Nasdaq 100 ETF (QQQ) was hit the hardest of the major indices. QQQ flushed more than 2% Thursday, erasing its early-week gains. Despite the worst down day in weeks, QQQ has been higher for seven straight weeks.
How do Stocks Act Around Presidential Elections?
Markets tend to dislike uncertainty. Unsurprisingly, equities tend to be jittery around U.S. presidential elections, especially one as contentious as the 2024 election. In most instances, this volatility tends to subside once the market uncertainty is alleviated and the results are finalized. As I have mentioned in previous commentaries, U.S. presidents can have a significant impact on certain industry groups (for example, clean energy might do better under a Harris admin) but less of an impact on the general market. For instance, Trump and Obama both scored ~16% annualized returns during their respective administrations.
Technical View
Today’s correction was due, even beyond the election uncertainty and the tight presidential race. QQQ has been drifting higher for seven straight weeks, so some profit-taking is normal. Nevertheless, QQQ is retreating to its 10-week moving average for the first time since breaking out. The 10-week moving average is an intermediate dip buying zone in bull markets, like the one we are in now.
Image Source: TradingView
Meanwhile, the S&P 500 Volatility Index (VIX), a market fear gauge, is running into a supply zone that has acted as resistance since early September.
Image Source: TradingView
Seasonality
Historical seasonality favors the bulls in the short term and into year-end. According to Jeffrey Hirsh of “The Stock Trader’s Almanac”, the Nasdaq is up 9 of the last 12 first trading days of November. Meanwhile, the month of November is the strongest month of the year over the past decade and is the best election year month since 1950.
Earnings are Robust
Sheraz Mian, Director of Research at Zacks Investment Research, points out that “Total Q3 earnings for the 258 S&P 500 members that have reported results through Wednesday, October 30th are up 8.9% on 5.0% higher revenues, with 74.4% beating EPS estimates and 59.3% beating revenue estimates.”
Alphabet (GOOGL) and Tesla (TSLA) each reported results that beat Zacks Consensus Estimates by more than 15%. Tesla, whose earnings surprise history is below, beat consensus estimates for the first time in several quarters.