May 6th, 2024
For much of the last decade, we seem to have endlessly endured some form of chaos dominating the news cycle and looming over the market.
Thus far in 2024, the most prominent uncertainty hanging over markets and general economic health, has been the rate of inflation and its impact on the Federal Reserve’s interest rate policy. Will the Fed cut, and when? And as we move towards the second half of 2024, another event is on the horizon that could bring uncertainty-induced volatility to the markets: the 2024 Presidential Election.
Inflation – Rate cuts, or Rate Hikes?
2024 was supposed to be the year of three rate cuts according to the Fed Chair, Jerome Powell, at December’s FOMC meeting. A reversal of inflation data in January and February, showing higher prices month-over-month, was merely dismissed as a seasonal anomaly and that inflation would likely resume softening. However, after March CPI data revealed a continuation in the trend of hotter-than-expected inflation, the timeline for rate cuts seemed to become much more uncertain. Core CPI data now shows price increases accelerating in the three, six, and twelve-month annualized time periods.
The reaction from equity markets was more lukewarm than some would have expected. A modest pull back from all-time highs and an uptick in 10-year Treasury yields was the worst of it. Though several market pundits cried of rate hikes coming down the pike. However, concerns of hikes were short lived – at last week’s FOMC meeting the Fed kept rates unchanged, as most anticipated, but investors were more interested in hearing Jerome Powell at his press conference. Powell delivered a relatively dovish commentary, in which he suggested the bar for additional hikes is relatively high and rate hikes remain an unlikely scenario. Meanwhile, US payroll report was spectacular – ‘as good as it gets’. Investors embraced the message, sending stocks higher and yields lower.
Thus far, the resilience of the US economy has given the Fed a considerable lifeline to push off rate cuts. Data on the economic front continues to surpass expectations as earnings once again delivered for Q1 (as you’ll read below). Perhaps we could be nearing a point where equity investors simply deem Fed policy as a footnote in financial news rather than the main event? One could hope.
Election Year Uncertainty, or Certainty?
For those exhausted by the political dysfunction in Washington D.C., the looming election season can be stress-inducing, as it may seem like another possible crisis threatening the economy and financial markets. Yet, historically it seems that presidential elections amount to not much more than a distraction, and the market returns are likely to have a less causal effect and more coincidence.
In some ways, this election is a bit less of a mystery than those of prior years. The primaries have barely started, but the candidates are already decided. For better or worse, both candidates are known commodities, each having already served a term as president. Yet polling indicates the race could be another close election, and perhaps the biggest uncertainty is whether the loser will concede or attempt to reverse the outcome.
There have been a multitude of studies on the topic of market returns under different political parties. The consensus is that Democratic Presidents have enjoyed better market returns, averaging 14.8% going back to 1926 compared to 9.3% average return for Republican. Having said that, we know that Presidents don’t control the economy and outside factors can greatly influence the data. The economic cycle has its own rhythm outside the Presidential cycle, and there is a large degree of luck at play in determining who gets the glory for the booms, and the blame during the busts. A US Bank study looked at S&P 500 returns 3-months post-election and concluded that the best outcomes occurred when a Democrat was elected president, but Congress was at least partially controlled by Republicans.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Market Update
Global Equities: Stocks sold off early in the month on news of hot inflation, and beginning its recover in the final week of April as economic data and corporate profits came back positive. The S&P 500 finished the month down -4.65% while the Nasdaq fell -5.04%. The Dow Jones Industrial Average finished the month down -5% and Small Caps pulled back drastically with Russell 2000 down -7.06%. Developed International stocks fell just -3.27% while Emerging markets out performed for the month of April with a gain of +0.36%.
Economic Update
GDP Miss: First quarter Gross Domestic Product was estimated to be around 2.3%, which would have been the seventh consecutive quarter over 2% growth. The actual reading came in at just 1.6%, however, due to a higher trade deficit and weaker inventory growth. Consumer spending remained robust. This was the first estimate, and the data may be revised higher in the coming months. This week the Atlanta Fed issued its first estimate for second-quarter GDP, projecting a 3.9% growth rate.
Charts of the Month
Presidential Market Cycle
Continuing on the theme of election year performance. Our first chart explores the long-term average behavior of the market going back to 1953. Showing that the fourth year of the Presidential cycle has historically been an overall positive event for markets. There appears to be a tendency for the market to pull back in the second half of the final year of a President’s term, but this effect is somewhat exaggerated by the Financial Crisis fallout in August-September 2008. Despite the historical worries of ‘the election year’ concern, statistically these concerns seem to be unfounded.
Earning Growth
Our final chart for the month. As we navigate our way through Q1 2024 corporate earnings, which are expected to come in 3.2% higher than the previous year, we have seen previous quarter’s strong corporate earnings have provided the impetus for investors to push stocks higher. With US large-cap companies currently holding record cash reserves, higher rates are unlikely to deter the mega-caps from engaging in capex spending or increasing dividends. Aside from the Utilities sector, it looks like Q1 will see a continuation of the “rich get richer” trend with growth-oriented sectors such as Tech and Communications Services once again outperforming. Small and mid-caps will have to wait for rate cuts to emerge.
