It seems like the pullback a few months before the election started earlier this year. Some can argue that the sell-off was needed so that stocks do not get too far ahead of themselves. The S&P 500 was up more in the first half of the year than the average full year return in election years. Below are the July returns for the popular benchmarks that investors track (Data provided by Y-Charts & Commonwealth Financial Network):

S&P 500 Index: +0.86%
Dow Jones Industrial Average: +4.27%
Nasdaq Composite Index: –1.57%
Russell 2000 Index: +11.05%
S&P Target Moderate Risk Index: +2.16%

Stocks have been strong through the first seven months of the year. However, it is not abnormal for the market to sell off double digits in the second half of the year. Below is a chart that shows the average S&P 500 pullback in orange with different scenarios of firsthalf market performance. When the first half of the year is positive by more than 10% (like this year), the average pullback in the second half was almost -9%. Election years are very similar, with an average correction of nearly -10% in the second half of the year.

According to the CME Group on 7/30/2024, there is an 85.8% probability that the Fed will cut interest rates at its meeting in September. In theory, when the Fed cuts interest rates slowly and steadily, it should spur economic activity by encouraging lending by businesses and individuals and providing an incentive to invest in risk-on assets such as stocks rather than money market funds or treasury bonds.

This makes sense, as inflation had been cooling for some time. While the Fed seems to have inflation under control for now, the US unemployment rate (blue line in the chart below) has steadily risen for several months. The Federal Reserve has a dual mandate:

1. Price Stability (controlling inflation)

2. Maximizing Employment

This is another reason analysts and investors want to see the Fed cut interest rates. With lower rates, businesses should be able to borrow at cheaper rates, allowing them to continue to expand and, thus, hire more workers.

There is a pretty clear inverse relationship between unemployment and stocks. When one rises, the other falls. We will be monitoring this over the next several months.

As a reminder, September and October have been historically weak for stocks, especially during an election year. Below is seasonal data from Stockcharts.com that shows this weakness:

•  In the past 10 years, the S&P 500 has closed lower in September 67% of the time with an average return of -2.4%
• During the past 4 election years, the S&P 500 has closed lower in September 75% of the time with an average return of -2.7%, and October has closed lower all 4 years with an average return of -5.9%

The silver lining, though, is that election years tend to be overwhelmingly positive in the final 2 months of the year. November has been positive in 3 of the last 4 election years, and December has been positive in 4 out of 4 previous election years.

Our outlook has not changed as we believe stocks will experience some volatility over the coming weeks and months. After the election, when we know who the next president is, we are still in the camp that stocks will benefit from a “relief-rally” to end the year.

As always, don’t hesitate to reach out to our team with any questions you may have.