Will stocks and elections correlate again?

Markets rip on Fed pauses The Federal Reserve last hiked interest rates on July 26, and stocks typically rally when it holds them steady. Despite lower inflation, we expect a cautious Fed to remain on pause into the back half of next year, with perhaps one to three strategically timed cuts. Historically, policymakers have avoided altering monetary policy in presidential election years from Labor Day through Election Day. So, it might ease at the FOMC meeting July 31, Nov. 7 (two days after the presidential election), and Dec. 18. Forecasting $275 in earnings in 2025, our year-end 2024 target S&P 500 price is 5,200. P/E’s should expand to 19 times. The narrow rally in technology stocks that dominated the first half of 2023 should broaden over 2024, with U.S. large-cap value, small-cap growth and international stocks performing well. 

Investors vote with their feet Over the last century, there has been an 88% positive correlation between the performance of the equity markets and economy and the result of presidential elections. In the last 24 elections, when the performance of the S&P 500 was negative on a price-only basis in the three months (August, September and October) leading into the November election, the incumbent lost the re-election bid nine out of 10 times. But if the stock market was positive in that period, the incumbent won 12 out of 14 times. Furthermore, in all six times the economy was in recession in the two years prior to the election, the incumbent president was not reelected. In contrast, in a growing economy, the incumbent survived every time (12 instances). 

November curveball? An estimated 28% of Americans don’t want a Biden/Trump rematch, and there’s a growing chance that they may get their wish. In a recent Monmouth University poll, Biden’s job approval rating plunged to a record low of 34%. Threatened with the possible invocation of the 25th amendment, Biden could be replaced at the Democratic convention in Chicago in August with a popular governor, such as Gavin Newsome, Gretchen Whitmer, J.B. Pritzker, or Phil Murphy. Despite 91 indictments across four criminal cases, former President Trump enjoys a commanding lead among Republicans. But if Colorado is successful in keeping him off its ballot and other states follow suit, governors such as Nikki Haley or Ron DeSantis may find themselves in the pole position at the Milwaukee convention in July. Independents now account for 46% of registered voters, compared with 28% for Republicans and 24% for Democrats. A third-party Independent candidate such as Robert Kennedy Jr. or a No-Labels candidate such as Sen. Joe Manchin could generate real traction this cycle. After a choppy stock market during the August-October period, we expect a powerful post-election sigh-of-relief rally.

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