With the election less than 24 hours away, it is safe to say that investors of all shapes and sizes are likely sitting on their hands today. As such, I thought this might be a good opportunity to take a step back and look at the big picture, macro backdrop.
The Election is Finally Here
Let's start with the election itself. I've received a fair number of calls asking for my take on the outcome as well as the market's response. My answer has been the same for some time now. First, I prefer to avoid offering an opinion on the outcome as well as the candidates themselves. Every American has a job to do at this time of year, so be sure to get out and vote.
As for the question of the market's reaction, I honestly don't know what traders and their big computers will decide to focus on in the near term. However, my view is the stock market really doesn't care who sits in the oval office. History shows that markets do well under Democrats and Republicans alike and that ultimately it is the fundamental background that is more important than the President.
However, I can also say that Ms. Market doesn't really like any kind of "wave." I.E. Either party controlling all three branches of government. The bottom line is stocks like gridlock in Washington. The thinking is as long as neither party can do whatever they please, big policy mistakes are unlikely to occur. And this gives investors comfort.
My Macro Take
Looking at the big picture, I'll argue that the stock market remains in a cyclical bull market, which started in October 2022. And this bull run is occurring within the context of the secular bull cycle that began in March 2009.
The current run for the roses has been based on/driven by central bankers around the world turning dovish, solid economic growth, strong earnings, even stronger earnings expectations (according to NDR, consensus estimates for 2025 are currently above 16%), and a little something called the AI secular growth theme.
Sometimes it is best to keep things simple in this business. As I've opined a time or two previously, if earnings are growing at a strong rate and at all-time highs, it makes sense (well, to me, anyway) that stocks prices should follow suit. So... IF (note the use of all caps here) the earnings come in as expected, the bulls should remain in control of the game.
However (you knew that was coming, right?), I believe investors have been "looking ahead" for some time now. And with a lot of blue skies in most analysts' forecasts, I'll argue that current stock prices reflect a fair amount of the good stuff that is expected to in the coming year. In short, I'm of the mind that investors have been "pulling forward" some of next year's earnings expectations.
This idea and a fair amount of dip-buying has produced a forward P/E for the S&P 500 of 20.90. Ouch.
Although I am definitely a card-carrying member of the-glass-is-at-least-half-full club, a forward P/E in this zone means things have to go right in order for stocks to advance. In other words, those earnings MUST show up in order to produce above average upside from here. Put another way, if something comes along to interrupt those expected earnings, there could be trouble.
You know, something like inflation staying overly sticky and, in turn, the Fed pressing pause on their rate cut campaign. Or geopolitical events. Etc. Etc.
Looking at the bond market, one could argue that stock market investors have once again priced in too much Fed action. How else can you explain the fact that the yield on the United States 10-Year has moved in a straight line from 3.6% to 4.2% since Jay Powell's merry band of central bankers delivered that "jumbo" rate cut. Ok, yes, bond traders may also be fretting about the massive amount of debt the boys and girls in Washington appear to deem normal these days. And yes, yields may also be concerned about the recent inflation and economic data, which suggest that "no landing" (where the economy continues to grow, and inflation doesn't fall to the desired levels) is looking like a real possibility.
Then there are the tech earnings. While some companies continue to kill it, the reports from some of the bigger names in the so-called Mag-7 have underwhelmed the high expectations this cycle. So naturally, our furry friends in the bear camp are telling anyone who will listen that growth is slowing.
The key point here is that while the stock market may not be "priced for perfection," I can argue that it is pricing in those strong earnings expectations. And the bottom line for me is as long as those earnings show up, everything will be fine. However, if disappointment begins to set in on the earnings front, I wouldn't be surprised to see a cyclical bear phase.
History Suggests...
The good news that according to Bespoke, the S&P 500 is enjoying the strongest YTD gains through October since 1936. And history shows that when the first 10 months are strong, the market tends to experience better-than average returns in the final two months of the year.
For example, Goldman Sachs reports that since 1928 the median S&P 500 return from October 27 to December 31 is +5.22%. And in election years the median return in the last two months is +6.25%. When looking at the NDX, median return over that timeframe is +11.74% since 1985. And JPMorgan noted that in election years since 1950, when SPX was up >5% YTD through August, it has been up from Sep-Dec in all 13 instances with an average gain of 7%.
In closing, I plan to remain seated on the bull train. However, I do think it makes sense to keep our eyes open (as in wide open) and be prepared to try and preserve capital if/when the backdrop starts to shift.
Thought for the Day:
Live for today for tomorrow never comes. -English Proverb