The Waiting Game

Election Day is almost here… Early-voting trends… Expect volatility in the next few weeks… Headlines and history don’t match up… Bet on what won’t change… Hedge inflation… Today’s catalyst…

Eight days and counting…

Election Day in the U.S. is a little more than a week away. Early voting is already open where available, and Democrats and women have led the nation in taking advantage, according to University of Florida data.

Reasonably, this could be a signal of voter turnout by Kamala Harris’ supporters. If you’re short-term trading or betting on the election, that might interest you. Place your bets.

But if you’re a long-term investor, I (Corey McLaughlin) would encourage you to think differently…

As we’ve repeatedly said throughout this year – even before Joe Biden was booted from the race by his own party – we expected to hear debates about policies during the race for the White House. (We certainly have.) And we contend the outcome will be consequential politically and even culturally for the U.S.

But the election’s influence on the long-term direction of markets might not matter as much, or at least in the way many people might think it will…

That is, except if you consider that both Harris’ and Donald Trump’s economic proposals – in different ways – are assuredly going to lead to a similar, significant result: adding to the federal deficit, Uncle Sam’s debt issues, and be fuel for inflation down the road.

I’m reminded today of “betting on things that never change” as a long-terminvesting concept. Around elections or anytime when emotions are high and you aren’t quite sure what’s going to happen next, thinking about what won’tchange isn’t a bad idea.

Today, that means betting on more government spending in one way or another by hedging inflation… through owning shares of high-quality businesses (remember, stocks are an inflation hedge) and “hard assets” like gold.

That said, expect volatility in the next few weeks…

Because today’s headlines and historical indicators don’t match up.

If you pay attention to financial headlines or political polls, you’ll see a theme of claims that momentum is in Trump’s favor. I’ve seen enough analysts looking at stocks’ rise lately and over the past few months, and pointing to the trend as evidence that the market expects Trump to win a second term…

However, I can’t shake the “presidential election indicator.” History suggests when the market is up in the months leading up to Election Day, the incumbent or incumbent party is more likely to win the White House.

Specifically, if the U.S. benchmark stock index has been up from July 31 to October 31, the incumbent president or party has won the White House more than 85% of the time since 1928.

The link, if you need to make one, is that a rising stock market means the economy isn’t in shambles or a recession, so folks have fewer reasons to kick out the current president or his party.

History, if it doesn’t repeat, often rhymes. In the 23 presidential elections since 1928, 14 were preceded by stock market gains in the three months prior. In 12 of those 14 instances, the incumbent (or the incumbent party) won the White House.

Conversely, in eight of the nine elections preceded by three months of losses, incumbents were sent packing. This was the case in 2020, albeit by the most razor-thin of margins. From July 31, 2020, to October 31, the S&P 500 Index lost a slim 0.04%.

This year, the S&P 500 has returned about 5.6% since July 31. Unless the markets reverse by the end of the week, this indicator suggests a Harris win.

Another indicator worth thinking about…

Since 1932, the incumbent or incumbent party has never failed to win reelection unless a recession occurred during the current presidential term. Recall that we faced a brief recession in Trump’s term amid the onset of the pandemic.

Now, you can debate whether that has been the case or not this time around. After all, inflation-adjusted U.S. GDP did contract for two straight quarters in 2022 during Democratic President Biden’s term, but the powers that be never called an “official” recession because the unemployment rate was so low.

One could also argue that the Biden administration manipulated numbers and conclusions to produce favorable results in an election year. I won’t argue with you.

We’re seeing it right up until the very end, with the Biden administration scrambling to fulfill a campaign promise four years ago of erasing student-loan debt for as many people as possible.

The latest proposal from the Department of Education, made on Friday and unlikely to become reality by next week, is to cancel student debt for those with a “financially devastating hardship”… including unexpected medical bills and high child care costs.

Really? This is the same federal government that has delivered financially devasting hardships for student-loan borrowers – and the entire country – over decades and decades ever since the U.S. financial system became based on fiat currency.

Few in power tell you that. Yet while we may not like what we hear or see, Mr. Market doesn’t necessarily care what I think.

This is all to say that some strong market history suggests Harris is due to win…

I’m not making a bet on it because I’d rather put money to work elsewhere… But if Harris does win, the market could be in for (downward) volatility afterward given the reported belief about expectations for a Trump victory being “priced in.”

Ten Stock Trader editor Greg Diamond also talks about this in this setup (and others) in week’s free Diamond’s Edge video, which you can watch farther down in today’s Digest. As Greg explained…

We’ve had this grind higher, and a lot of that has been attributed to a potential Trump win. That is the consensus, anyway… That could very well be the case, and you get this parabolic move higher if Trump indeed does win.

Or it could be a “sell the news” event. The market has already priced in that Trump would win, and then we have this drop-off. The other situation is there is a surprise and Harris wins. Would that be something that the market takes [in] with a volatile environment?

Greg’s eyeing up trading opportunities around the election and says we’re in for a lot of volatility no matter which way the market goes in the next few weeks.

That said, if you’re a long-term investor, you should be aware of this – a sell-off could present a buying opportunity. But also think about what won’t change no matter who wins the White House (or whenever the result is decided). Hedge your portfolio against inflation… and maybe some “chaos” too.

As a practical matter, the composition of Congress will also matter just as much as who wins the White House…

Depending on the outcome of the congressional races, presidential agenda items could be moot points for at least the next two years.

Then, again, even a “sweep” of Congress by either side may not matter as much or how precisely you might think it would over the long run. Here’s one of my favorite stats on this subject, which we shared earlier this year courtesy of our Dr. David “Doc” Eifrig…

Since 1926, the U.S. has had 13 years of unified Republican government (with the GOP simultaneously holding the House, Senate, and presidency). In those years, the market returned an average of 14.52% per year. There have also been 34 years of unified Democratic government. In those years, the market returned an average of… 14.52%.

The machinations of the Federal Reserve, the economy, and the thousands of businesses and millions of individuals wash out most of the effects a president might have on the stock market. Sometimes, something like a big tax cut can boost stocks, but that’s a rarity.

What’s more, some folks favor a split Congress – with one party controlling the Senate and the other the House – because it means significant legislative changes are less likely. That stability can be bullish for stocks. We’ll be waiting on those outcomes next Tuesday night, too.

More than anything today, oil prices were a catalyst…

The prices of Brent crude and West Texas Intermediate – the international and U.S. benchmarks, respectively – dropped by about 5% today as the market digested Israel’s much-anticipated response to Iran’s missile attacks earlier this month.

Israel didn’t attack energy infrastructure, instead seeking out military targets. And it didn’t appear to give Iran obvious reason to plan its own retaliatory attacks, at least for now. The countries are still at war with each other, though, directly or via proxies in the region.

Lower oil prices were a boost for risk assets today. Global war developments continue to matter.

The major U.S. indexes mostly rose, with the Russell 2000 Index outperforming to close 1.6% higher. The Dow Jones Industrial Average was 0.6% higher, the benchmark S&P 500 was up 0.3%, and the Nasdaq Composite Index was about even.

The long-term trends for the major U.S. stock indexes look sturdy. All are trading above their 50-day and 200-day moving averages.

Bitcoin pushed higher today, too… up nearly 3% to above $69,000.

Meanwhile, bond yields keep screaming higher, with the U.S. 10-year Treasury yield approaching 4.3%. That’s up from 3.6% a little more than a month ago, right around the time the Fed cut interest rates by 50 basis points.

This means bond investors don’t think bond prices (which trade inversely to yields) are worth the long-term risk considering what might be coming next… like more, higher inflation.

You may sense a theme here. Prepare accordingly.

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New 52-week highs (as of 10/25/24): Booz Allen Hamilton (BAH), Alpha Architect 1-3 Month Box Fund (BOXX), Maplebear (CART), Gilead Sciences (GILD), HealthEquity (HQY), PayPal (PYPL), ResMed (RMD), Sprouts Farmers Market (SFM), Summit Materials (SUM), Texas Pacific Land (TPL), and The Trade Desk (TTD).

In today’s mailbag, feedback on Dan Ferris’ Friday essay, which in part talked about the idea of dead investors getting the best long-term returns… Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

“And one day we will all be as dead as those dead folks…” – Subscriber Ransom F.

All the best,

Corey McLaughlin
Baltimore, Maryland
October 28, 2024