What happens on 'the other side' of election uncertainty
A version of this story first appeared on TKer.co
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.”
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.
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.
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.”
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.
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%.
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.
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.
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.
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.
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.
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.
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.”
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.”
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.“
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.”
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.
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.“
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.
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.
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.
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.