Election Uncertainty Is Rising – But Don’t Overthink It!
By -Edward Lance Lorilla
October 24, 20247 minute read
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As Election Day approaches, wait and observe market reactions.
October 24, 2024
Election Uncertainty Is Rising – But Don’t Overthink It!
In last Thursday’s issue, we took a look at the potential impact a Trump victory could have on the markets. Well, with Election Day now less than two weeks away, it’s time to speculate how a Harris win could impact stocks instead.
But before we dive into the knock-on effects of Democratic policies, let’s revisit our simple, but not-so-scientific, rule of thumb that offers a glimpse into who might come out on top. You can recall the table below from my last piece:
The Dow Jones Industrial Average (DJIA) has accurately projected whether or not the incumbent candidate wins the White House in 22 out of the last 24 elections – dating all the way back to 1968!
To review: When the Dow rises in the final 11 weeks leading up to Election Day, the incumbent party has triumphed 92% of the time.
Well, with only seven trading days remaining until Election Day, the Dow is on track for a gain of more than 4% over the last 11 weeks. If the historical pattern holds, this suggests a potential win for Kamala Harris, Biden’s successor, on Nov. 5.
But don’t go placing your bets yet – there’s more to it than Dow performance.
There’s a reason I point out that this indicator is not-so-scientific: This study is built from a very small sample size – just 22 presidential election years are under review here, from 1968 to 2020.
That puts this forecasting tool in the same category as the Super Bowl indicator, which claims that if an original NFL team wins the Lombardi trophy, stocks are likely to rise. But if an original AFL team triumphs, then stocks fall in the year ahead.
But as all die-hard football fans will tell you, the Kansas City Chiefs – an original AFL team – won the last Super Bowl … and yet the Dow is still up 14% year to date. And according to an AARP study, there have been several other misses in recent years.
So much for that indicator.
So, let’s set aside the wacky Wall Street divinations and focus on the hard data. Starting with Exhibit A…
Impact on Key Sectors: If Harris Wins
The chart above shows how well - or not so well – the various S&P 500 sectors have performed under Republican and Democratic presidents since 1970.
For instance, Consumer sectors often perform best under Republicans, often driven by tax cuts that boost conspicuous consumption. Meanwhile, the Technology, Energy, and Health Care sectors have traditionally outperformed under Democrats.
While this is a bit of a generalization, it offers valuable clues about which sectors to prioritize based on the final election outcome. Just remember, there are always exceptions.
For example, Consumer Staples and Consumer Discretionary stocks have historically performed best under Republicans. However, a major part of Trump’s platform is tighter immigration policy.
Considering today’s already tight labor market and recent wage inflation, this could put pressure on profits for the most labor-intensive stocks and sectors:
As shown above, this includes both the Consumer Discretionary and Staples sectors, along with Industrials and even Technology, all of which are among the most labor-intensive components of the S&P 500.
Another potential exception to this rule is Technology, which historically performs best under Democrats. Technology also just happens to be the least-regulated of all sectors, as shown below - but that may not be true for long.
Biden’s Justice Department and the Federal Trade Commission have ramped up anti-trust heat on technology companies. This includes a recent high-profile ruling that Google’s parent company, Alphabet (GOOGL), is an illegal monopolist, with the government potentially recommending its breakup.
And if these anti-trust enforcement actions continue under a Harris presidency, they could put pressure on some of the Magnificent Seven market leaders - Google, Apple, Microsoft, and others - which collectively account for over one-third of the S&P 500 Index’s recent profits.
I’ll leave you with one last chart and my bottom line take.
It is statistically true that since 1928, stocks have experienced more positive years with Democrats in the White House than Republicans. However, the Democrats may have a somewhat unfair advantage.
That’s because since 1928, Democrats have occupied 1600 Pennsylvania Ave for 48 years, compared to just 44 years spent with Republicans in residence. Given that stocks generally tend to go up over time, Democrats hold a slight edge with positive yearly returns of 57%, compared to the Republicans’ 43% returns.
What stands out even more is what we can learn from on the right side of that chart. While the political party in office holds only a slight edge for stocks, whether corporate profits are expanding or contracting is a much more significant driver of stock returns.
Simply stated, when profits are increasing, stocks are up two-thirds of the time. In contrast, when profits are decreasing, stocks are up just one-third of the time.
That’s why it’s more important to keep tabs on quarterly profit results – and especially earnings estimate revisions – than it is to focus on who’s leading in the polls.
Mike Burnick’s Bottom Line: You’ve probably already heard some of the stats I mentioned above also trotted out in the financial media as Election Day approaches. And while they are based on hard data, they’re also built on a foundation of rather small sample sizes.
Plus, there are always exceptions to the historical rules of thumb I’ve mentioned earlier. My best advice for getting your investment portfolio through Election Day is simple: Don’t overthink it.
Everyone is feeling anxiety about the election, and we’re bound to have more volatility between now and then. But don’t let fear of the unknown derail your well thought out investment plans.
Your best bet is to wait until after the election and assess how the markets react to whatever the outcome. And no, I don’t mean you should plan to make wholesale changes to your portfolio on Wednesday, Nov. 6 at 9:30 a.m.
Instead, wait for the dust to settle for several days, or even a few weeks, and see what trends emerge afterward. You can bet your bottom dollar that I’ll be watching very closely – and I’ll be sure to let you know about the market trends as they unfold.
Good investing,
Mike Burnick Senior Analyst, TradeSmith
P.S. With Election Day just around the corner and market volatility expected to rise dramatically going into it, it’s even more important to prepare for what’s coming next.
In my previous columns, I’ve shared insights into how market trends have historically aligned with election outcomes. But there are always exceptions to these rules.
That’s why our trusted affiliate, The Freeport Society, is hosting an exclusive Day After Summit – a live event designed to prepare you for the critical 24 hours following Election Day. We’re bringing together market experts like Charles Sizemore and Louis Navellier to help you navigate these turbulent waters.
On Tuesday, Oct. 29 at 7 p.m. Eastern, they’ll break down what’s coming and share proven strategies to position your portfolio for success, no matter what happens in the election’s aftermath.
