Following the recession scare earlier this month, U.S. financial markets seem to be giving the all-clear. This is because economic data seems to clear the way for the Federal Reserve to begin lowering interest rates.
But market experts say there is still no go for the stock market as the 2024 presidential election season gets underway. Based on the SPX 0.22% success of the S&P 500 during election years in the past, stocks may have a slow and volatile time between now and November 5.
Based on past results, September seems to be the worst month for the stock market during presidential election years. According to CFRA Research, the S&P 500 has dropped an average of 0.8% each month in September. This makes it the worst month during election years since 1944.
Sam Stovall, chief investment strategist at CFRA Research, said, “August and September are historically two of the three worst months for price return in an election year.” “Since World War II, the averages for election years have gone down in February, August, and September. September has been by far the worst, both in terms of its average decline and the number of times it has gone down.”
Even though October usually has a monthly gain of more than 1% during election years, it has had the most volatile monthly returns with the biggest standard deviation since 1944 (see table below). The standard deviation shows how far apart stock prices are from the mean. Standard deviation is high when stock prices go up and down a lot. This means that the market is more volatile.
As a whole, October has been about 35% more risky than the other 11 months of the year, Stovall told MarketWatch on Friday. “And July and August are usually good months in election years because that’s when both parties hold their national conventions and candidates keep the promises they made during the campaign.”
History also shows that whether the current party wins or loses the President seems to have an effect on market volatility and stock returns.
Since 1927, the S&P 500 has been more volatile before elections and in the months after when the incumbent party didn’t win the White House. This may be because of the uncertainty caused by likely policy changes, according to Thomas Poullaouec, head of multi-asset solutions, Asia Pacific, at T. Rowe Price, and Nathan Wang, a solutions analyst at the investment-management firm.
In contrast, when the current party kept the president, stock market volatility generally went down before the election and slowly rose afterward, Poullaouec and Wang wrote in an August note.
“But things are different this year…” “I don’t think the old patterns will help with what the market might be predicting,” Stovall said. “Since Harris is said to be ahead in the polls, why is the market going up now?”
An expert in macroeconomics at Easterly EAB Risk Solutions, Arnim Holzer, said that the change in the Democratic Party nominee from President Joe Biden to Vice President Kamala Harris and “the pace of the turnaround” in the presidential election polls has made markets even more volatile.
Harris is ahead of Trump right now in most national polls and betting markets. Trump is the Republican nominee. The former president has a 46.4% chance of winning the presidential election in November. On July 15, the first day of the GOP convention in Milwaukee, that chance peaked at 66%. RealClearPolitics took the average of six betting markets and found that Harris is now at 52%. This is after the Democratic convention in Chicago began on Monday.
“The market usually doesn’t pay attention to election implications, but the speed with which the presidential election polls have changed since the early strong Trump polling made investors act,” Holzer said. He also said that the sector rotation in the stock market that could be caused by a Trump victory could cause volatility between now and Election Day.
For instance, investors in the health care field have a clear choice when it comes to the election for president: Trump. There is some chance that the former president will change laws and rules that could have a big effect on how much money health insurers, hospitals, drug companies, and medical device companies make.
FactSet data shows that the healthcare sector SP500.35 0.14% of the S&P 500 has grown 4.3% over the past month, which is more than the 1.7% rise in the S&P 500 as a whole.
This year, healthcare stocks have seen strong earnings growth. Weight-loss drugs like Ozempic and Zepbound have taken the pharmaceutical industry by storm. However, Holzer told MarketWatch on the phone on Friday that some of that growth should be taken with a grain of salt, especially since this is an election year.
“Even though Harris is gaining ground in the polls lately, healthcare stocks haven’t shown any worry about the policy that a Harris administration might use to lower drug prices,” Holzer said. “Unexpectedly, healthcare also did better than the S&P 500. However, if the current polling trends continue, we think that Democratic policies on drug pricing may begin to hurt managed care and pharmaceutical returns as the election goes on.”
Between Trump and Harris, the presidential race is “neck-and-neck.” Holzer said, “Investors have to take into account that some of the optimism around the healthcare sector will be tempered [if Harris takes office], or at least investors should recognize there is a possibility that companies are not going to face a fully open market.”
Holzer said that the Cboe Volatility Index (VIX) is expected to go up in the next two months because of market changes caused by the election. The VIX 3.65%, which is used to measure fear on Wall Street, went up 8.4% to trade at 15.88 on Tuesday, according to FactSet.
Stocks in the U.S. ended down on Tuesday as investors waited for Federal Reserve Chair Jerome Powell’s speech at the Kansas City Fed’s annual conference in Jackson Hole, Wyo., on Friday. Powell is expected to talk about the scope of possible interest rate cuts. A study by FactSet found that the S&P 500 fell 0.2%, the Nasdaq Composite COMP fell 0.3%, and the Dow Jones Industrial Average DJIA fell just under 0.2%.
