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Market Update – September 2024
As Cat Stevens once said, “Oh baby, it’s a wild world out there…” We have an election year, extreme political rhetoric heightened by the emergence of social media over the last decade, two regional wars, and an economy that is tinkering on a hard or soft landing. However, as investors we must ignore the white noise and focus on what really impacts the markets.
Let us dig into each of these worries and how they might impact markets. Before we do that, we must remind ourselves of what drives the markets. It is not typically regional wars, political rhetoric, or even democrat versus republican leadership. Earnings and valuations drive the market longer-term. Let us address each item individually:
Election Year:
Bottom line, the markets, like we have seen this year so far, are positive in election years. There is way too much political rhetoric, mostly fear mongering, in an election year. This is just white noise. Meaningless in terms of market performance.
New Presidency:
Either way, we are going to have a new president in 2025. The typical research you might find on market performance under each party is entirely too high level and simplistic. Should any president get credit for the internet and information boom of the 1990s? George W. Bush took over right at the peak of the bubble in 2000. He didn’t cause the bubble, there was nothing he could do to stop it from popping. When your data point is small, huge outliers like these two grossly impact the numbers.
What is even more important is as an investor, the stock market is positive on average, regardless if there was a democratic president with a unified party, democratic president with a split congress, republican president with a unified congress or republican president with a split congress.
From my perspective, it is not whether the market will be up, it is which industries will prosper under a certain administration.
Industries that tend to perform well under a republican president often benefit from policies that favor deregulation, lower taxes, and increased defense spending. Some of these industries include:
- Energy: Policies that favor fossil fuels and reduce environmental regulations can boost the energy sector.
- Defense: Increased defense spending typically benefits defense contractors and related industries.
- Financial Services: Deregulation and tax cuts can positively impact banks and financial institutions.
- Healthcare: Reduced regulation and changes to healthcare policies can benefit pharmaceutical companies and private healthcare providers.
Industries that tend to perform well under a Democratic president often benefit from policies that emphasize regulation, environmental protection, and social programs. Some of these industries include:
- Renewable Energy: Policies that support clean energy initiatives can boost the renewable energy sector.
- Healthcare: Increased focus on healthcare access and regulation can benefit healthcare providers and pharmaceutical companies.
- Technology: Investment in innovation and infrastructure can positively impact the technology sector.
Regional Wars:
As long as they stay regional, the market can still flourish. If the market does not, historically it is not due to regional wars but instead domestic issues. From an investing point of view, this is white noise.
Hard or Soft Landing:
First there is an adage in investing which states, “don’t fight the fed.” Bottom line, it just means if the Federal Reserve (fed) is increasing rates, which makes it more costly to borrow, be cautious because earnings (it almost always gets back to earnings) will suffer. Likewise, be optimistic if the fed is lower rates because earnings typically increase.
When inflation hits or threatens to start rising too much, the fed typically increases rates to slow the economy. A hard landing is when the fed increases rates too much and the economy ends up in a recession. A soft landing is when they are successful in either avoiding or reducing inflation by increasing rates but the economy avoids a recession.
This is THE question in my opinion regarding where the market goes from here. The good news is the fed has been successful in managing this process over the last two decades. However, past performance does not guarantee future performance. If we can avoid a recession and can expect 4 more rate cuts in 2025 (recall, don’t fight the fed), it bodes well for stocks. Valuations might put a lower ceiling on the upside but the rate cuts also put a higher floor on the downside.
If a recession is in the cards, there will be volatility to the downside, better stated as a buying opportunity. The one caveat is a black swan event, which we can’t predict.
Considering all of the above, I believe in being cautious due to valuations and the possibility of a recession but not afraid of the presidential election or regional wars (if they become more than regional, the strategy should be reconsidered).
