Challenging Goldman’s Prediction of a Post-Election Stock Surge: Goldman Sachs indicates that the expected rise in U.S. stocks following the elections may not materialize.
Although historical market performance often shows a post-election increase,
the past is not a guaranteed indicator of the future.
This report explores the fundamental reasons why this expectation might be misguided.
Historical Performance of U.S. Stocks in Election Years
The U.S. stock market typically performs well during the final months of presidential election years,
often attributed to the fading political uncertainty,
which provides relative stability on Wall Street.
Scott Rubner of Goldman Sachs noted that the S&P 500 index could rise 7%
to around 6270 points by year-end.
However, certain fundamental factors could prevent this increase.
Small Samples and Uncertain Outcomes
Most observations about the seasonal market performance in election years rely on limited samples,
covering only 24.
Data shows that stocks usually decline in
September and October and then rebound in the last months of the year.
Still, this pattern might be due to regular calendar factors rather than direct links to election years.
Impact of Major Events on Results
The best post-election rally occurred in 2020 after Joe Biden’s victory,
as markets focused on the availability of COVID-19 vaccines and economic recovery.
Similarly, in 1928, markets saw a major rally following the Republican candidate’s victory,
only to crash shortly after with the onset of the Great Depression.
This underscores the importance of historical context in market performance.
Possible Scenarios for the Upcoming Elections
Polls suggest three possible scenarios for the upcoming election:
a complete Republican victory led by Donald Trump,
a divided government with Trump in power,
or a divided government with Kamala Harris as president.
While there are chances for a Trump victory and its potential impact on markets,
the situation in 2024 is entirely different from 2016,
when economic conditions were more favorable.
Wall Street’s Expectations and Elements of Uncertainty
Some on Wall Street believe that Trump’s return to the White House could spark a market rally,
but today’s economic situation is different.
The U.S. has high inflation and high price-to-earnings ratios compared to 2016.
Trump’s new plans could also lead to a larger fiscal deficit and additional inflationary pressures.
Importance of Checks and Balances
If Trump wins the presidency but the Democrats hold the House,
investors may feel reassured by the system of checks and balances.
Conversely, Kamala Harris leading a divided government could also stabilize the markets.
Conclusion
While some optimistic predictions about U.S. stocks remain,
forecasting market performance after elections is challenging.
The past does not necessarily dictate the future,
and many economic and political factors influence market direction.
Challenging Goldman’s Prediction of a Post-Election Stock Surge
U.S. Inflation Data Supports Wall Street: The U.S. stock market received a boost at the end of a tumultuous
week after critical economic data bolstered speculation
that the Federal Reserve will pave the way for interest rate cuts in September. Content Gains in Key Indices
Every major group in the S&P 500 index rose on Friday,
driven by bets that the easing cycle the Federal Reserve might implement
will continue to support American companies amid a broadening bull market beyond a narrow group of companies.
The S&P 500 index rose by 1.1%,
the Dow Jones Industrial Average jumped by 1.6%,
the Nasdaq 100 index climbed by 1%, and the Russell 2000 index of small-cap companies increased by 1.7%.
Stock Rotation
While major technology companies have enjoyed substantial gains this year,
concerns about “concentration risks” have come to the forefront after a disappointing start to the earnings season.
The rotation to economically sensitive stocks that dominated in July followed favorable data for the Federal Reserve.
Investors, who for months saw few alternatives to a small group of rising companies on Wall Street,
suddenly found more options. Financial, industrial, and essential materials stocks vastly outperformed technology stocks.
Given their high debt burdens,
Small-cap stocks rose by 10% due to bets that they would perform better if borrowing costs decreased.
Rotation Not Seen in Decades
George Maris of Principal Asset Management said: “We’ve seen this strength in small-cap companies
which is a significant rotation not seen in decades.”
He added: “As we see the potential for earnings to expand and recover,
we will see greater enthusiasm for small-cap companies.
There will be support for this rotation for a long time.”
Economic Data Boost
Friday’s economic data reinforced those bets.
The Federal Reserve’s preferred measure of core inflation in the U.S.,
the core Personal Consumption Expenditures (PCE) index, rose moderately in June,
while consumer spending remained strong. Separately, U.S. consumer sentiment in July fell to its lowest level in eight months.
Tim McDonough of Key Wealth said:
“The Federal Reserve can still put its cards on the table at the July meeting,
paving the way for the first cut in September.”
Moves in Stocks and Indices
TheS&P 500 index rose by 1.1%, the Dow Jones Industrial Average climbed by 1.6%,
and the Nasdaq 100index increased by 1%.
Meanwhile, the Russell 2000 index of small-cap companies rose by 1.7%.
Homebuilders achieved a record and shares of 3M, known for producing sticky notes,
which rose the most since 1980, thanks to bullish expectations.
The 10-year Treasury yields fell by five basis points to 4.19%.
Strong Economic Background
Quincy Krosby of LPL Financial said: “The continued inflows into small-cap companies
despite political tides and mixed economic signals indicate that investors
see a strong economic background combined with lower interest rates.”
Shift in Stocks
The rotation comes from major technology companies,
following a massive rise in their shares that pushed theS&P 500 to nearly 40 record highs this year alone.
An equal-weighted version of the S&P 500 index,
where companies like Nvidiacarry the same weight as Dollar Tree Inc.,
outperformed the main U.S. stock index for the third consecutive week.
This is a notable shift in a metric that has lagged behind the main U.S. stock index for months.
This comes as optimism about monetary easing eventually drives investors away from tech giants perceived as safer bets.
Craig Johnson of Piper Sandler said: “There has been a significant shift from growth stocks,
or large-cap companies, to value stocks,
or small and mid-cap companies, and we believe this will continue.”
He added that “our breadth indicators have confirmed this seismic rotation,
along with technical evidence suggesting investors are wary
of concentration risks in the ‘Magnificent Seven’ and other leading large-cap companies.”
Earnings Reports
According to economists surveyed by Bloomberg News,
the Federal Reserve is likely to signal its plans to cut interest rates in September next week,
a move they say will initiate quarterly cuts until 2025.
Nearly three-quarters of the survey participants believe the Fed will use next week’s gathering
to pave the way for a quarter-point cut at the next meeting in September.
In comments on the latest inflation data, David Russell of TradeStation said:
“It looks like the tide has finally turned,”
adding: “Investors can now focus on big earnings next week and worry less about prices and rates.”
Krosby noted that the earnings reports are to be released next week
from a large group of tech giants will be a crucial test for a market
trying to find direction amid mixed economic data and historically negative seasonal patterns.
Elevated Risks
Indeed, traders will scrutinize many earnings announcements from major tech companies.
Risks were already high for the group before this earnings season,
and they have increased significantly after their shares dropped
due to disappointing results this week from two of these giants. Apple, Microsoft, Amazon, and Metaare scheduled to report their results next week.
Matt Maley of Miller Tabak + Co. said: “Earnings are
likely to remain the most important issue as we move into August,”
adding: “If this earnings season continues to pressure tech stocks,
there is a good chance it will cause investors to rotate towards cash instead of small-cap stocks.”
Potential Economic Slowdown
According to Michael Hartnett of Bank of America,
the rise in the shares of the largest U.S. tech companies
is also at risk of fading further if the U.S. economy continues to slow.
The strategist, bullish on bonds for the second half of 2024,
said signs of economic slowdown would fuel the rotation toward stocks
that have lagged behind the expensive tech giants this year.
Hartnett added that recent data indicates the global economy is “sick,”
and the dominance of major tech companies could be lost with “one bad job report.”
Fear of Rate Cuts
And now, here is a tip from Strategas: “The fear for markets and earnings is not a pause but a rate cut.”
The market tends to perform much better between
the last rate hike in a tightening cycle and the first cut in an easing cycle,
according to Jason De Sena Trennert and Ryan Grabinski of Strategas.
On average, the market reaches its lowest point 213 days after the first Fed
rate cut in a series of rate reductions.
According to the firm, operating earnings for the S&P 500 indexdeclined
by about 10% on average in the 12 months following the first easing.
