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  • John M West III, MBA, CFP®

Will the Elections Cause a Slowdown?

Not only is 2024 an election year in the U.S. but national elections are being held around the globe. In fact, over 40% of the world’s population, or approximately 2.8 billion people, are expected to vote in more than 50 national elections. This includes Mexico, the U.K., India, and Taiwan, to name a few. With less than four months until the U.S. presidential election, our conversations with clients have turned to our thoughts on November, as they do every four years. A sampling of questions we often get include: What will the election in November do to my portfolio? Will the election cause the market to sell off or rally? If my candidate doesn’t win, will it be terrible for the markets? The short answer is that it depends on the economy, but history is an important guide.

Since the inception of the S&P 500 (1920’s), there have been 24 U.S. presidential elections. In 20 of those, the S&P 500 posted positive total returns. Of the four instances when the stock market fell, it was due to the Great Depression, the early days of World War II, the 2000 tech bubble, and the 2008 Global Financial Crisis. The last time the stock market fell in a presidential re-election year was 1940. Of course, past performance is no indication of future returns. However, it is important to understand that in cases where we have seen market downturns, they have been due to broader economic factors, which happened to coincide with the election or re-election of a president. Over time, the equity markets respond more to long-term earnings trends and broad-based economic growth, not to changes in political leadership. Remember, politicians come and go, but over the long run, the economy and corporate earnings drive the markets.

With the second quarter in the books, the U.S. economy has continued to skirt an economic recession. A year after the Federal Reserve's last rate hike (July 2023), part of the most aggressive interest rate hiking campaign in four decades, the economy is in pretty good shape. However, a majority of Americans do not feel that way. There is a disconnect between the reality of inflation’s downward trajectory and the perception of many Americans due to stubbornly high prices in some key categories. As higher rates are finally moving through the economy, the data has begun to cool, and we are starting to see signs of slower economic growth. This is evidenced by the Q1 2024 GDP data of 1.4%, the current (July 3, 2024) GDP Now estimate for Q2 of 1.5%, and the unemployment rate that recently crossed over 4% (see Kyron’s Macroeconomic Update). The slowing data increases the likelihood of interest rate cuts later this year.

Even though the data is slowing down, it is important to remember that slowing growth does not always mean a recession is around the corner. However, the consumer is starting to be more mindful of their spending as delinquencies are starting to tick up for both auto loans and credit cards. Furthermore, excess savings are back down to near pre-pandemic levels. On the other hand, positive earnings announcements are expected to broaden even as the economic data begins to cool, allowing the Fed to start cutting rates by the end of the year. This bodes well for equities and fixed income.

As always, we are closely watching the economic data and earnings and will react accordingly. We will continue to focus on quality throughout the portfolios. We remain in the cautiously optimistic camp as the labor market remains solid and the consumer overall is still in decent shape, with a low unemployment rate and a consumer who is willing to spend.

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