As Election Jitters Grow, Here's Why Stocks Can Keep Rising

Tensions run high in presidential election years. Yet the stock market's impressive uptrend since early November seems to press forward an argument: Investing returns can grow no matter who wins.




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The case for positive returns in 2024 rests largely on one key factor: optimism over future earnings. Put another way, strong future profit growth sets up reasonable valuations today.

Factor No. 2? The stock market forecast tends to benefit from a high likelihood the Federal Reserve, after signaling in November it's done raising interest rates, will start lowering them this year.

Lower rates help boost investments by companies and spur acquisitions. They reduce the cost of borrowing and encourage stock buybacks and dividends, ultimately growing investor returns.

Given the current shape of the presidential race, stock market bulls have history on their side — the third positive factor.

Stock Market And The Bullish Presidential Election Cycle

"I don't trade on cycle work, but I'm always aware of it," Mark Minervini, a two-time U.S. Investing Championships winner, said during the Jan. 31 episode of IBD Live. "Based on the presidential cycle, we (might) have a very strong trend from the second half of 2024 to the first half of 2025."

"What we really have is the potential of rates coming down. The market was a little too aggressive in its anticipation of a rate cut in March," Minervini added. However, "you do not look at the wiggles (in price), you look at the trend. And when you look at a first rate cut without a recession coming, that's where the real power (of institutional buying) comes in."

Ned Davis Research, studying a century of history, found the stock market gets a tailwind when the Federal Reserve makes its first cut in interest rates. From 1921 through 2019, the six-month average gain by relevant indexes has averaged 9.9%. Over a 12-month span, the mean gain increased to 14.4%. The median returns, 10.2% after six months and 15.2% after 12 months, are cheery too.

In 2024, growth stocks have made a red-hot start. Innovator IBD 50 (FFTY) pulled back this week, but had climbed as much as 16%. That nearly doubles the 8.2% gain by SPDR S&P 500 Trust (SPY). The iShares Russell 2000 (IWM) exchange traded fund has ascended 3.5%.


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Stock Market In 2016 Election

Nevertheless, one should never rule out sharp pullbacks and wild price movements in the months to come.

Back in November 2016, investors witnessed immense stock market volatility. Dow Jones Industrial Average futures initially fell more than 700 points in the late hours of election night as an election upset brewed. Then the blue chip index surged as it became clear that Donald Trump defeated Hillary Clinton in the race for the White House.

So, eight years later, would a Trump victory this November help fuel further upside in the stock market? Or do investors favor the reelection of President Joe Biden?

"I'll be honest. No one really has a great answer to this," Jim Caron, CIO of portfolio solutions at Morgan Stanley Investment Management ($1.5 billion in assets managed), told Investor's Business Daily. "We don't have a political forecasting model built into our allocation strategy."

Current State Of The Race

Today, it looks all but certain that Trump has wrapped up the Republican nomination. Nikki Haley announced on Wednesday that she's suspending her campaign after losing all but one of the 15 primaries on Super Tuesday. This year pits Trump vs. Biden in a rematch of the 2020 contest.

Trump still has to deal with no fewer than four criminal cases, including a $454 million penalty from the state of New York for his conviction of business fraud. These challenges perhaps remind readers of Sir Winston Churchill, who said "Politics is almost as exciting as war, and quite as dangerous. In war you can only be killed once, but in politics many times."

President Biden is facing challenges and concerns about his mental state and age.

A poll of 980 registered voters by the New York Times and Siena College published March 3 found that 73% "strongly agree" or "somewhat agree" that the 81-year-old commander in chief "is just too old to be an effective president." The poll also found that 19% of those who voted for Biden in 2020 said that "age was such a problem that he was no longer capable of handling the job."

Some Democratic senators have rushed to Biden's defense, including the formidable Dick Durbin of Illinois. Biden suffers from low approval ratings over his handling of the economy, the U.S. border crisis and Israel's war with Hamas.

Similarly poor approval numbers encircled Barack Obama in early 2012. Yet Obama trounced Mitt Romney to win a second term. At the time, the economy wasn't roaring. Yet it staged a mild recovery from the 2008-2009 Great Recession.

Stock Market History On Investors' Side, For Now

At least one market observer notes that Biden's reelection bid benefits bullish traders.

Jeffrey Hirsch, editor of the Stock Trader's Almanac, and Christopher Mistal, the almanac's director of research, cowrote in the 2024 edition that the stock market tends to do well when a sitting president runs for reelection. Since 1949, the average yearly gain by the S&P 500 of 12.8% outweighs an average decline of 1.5% in election years when it's an open field. Why? An incumbent president boosts certainty over future economic policy.

"Sitting presidents have won reelection 15 times and lost six in the past 21 occurrences since 1900," Hirsch added. "Years incumbents won reelection were stronger (in the stock market) early in the year. Years incumbents lost suffered weak starts, but finished strong as unpopular administrations were removed."


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The Turnaround In Stocks In 1980

As an example of the latter outcome, consider Ronald Reagan's landslide win in November 1980 over one-termer Jimmy Carter.

The Carter administration (1977-1980) deregulated certain sectors of the economy, such as air transport. This eventually led to growth of travel, boosting the economy. Yet high oil prices and the botched hostage rescue at the American embassy in Tehran hung over Carter like a dark thunderhead cloud. Carter's "malaise" speech in August 1979 became a teaching point.

The S&P 500 wiped out early gains and dived 9% early in the year 1980. It hit a low of 98.22 on March 27. Then a thunderous rally commenced in mid-April. The stock market benchmark peaked around Thanksgiving that year at 141.96, up 44.5% from the March 27 low. Despite a December dip, the S&P 500 ended 1980 with a 25.8% return, excluding dividends.

The Dow Jones Industrial Average closed the year at 963.99, up 14.9%. Three trading days later on Jan. 6, 1981, the Dow closed at 1,006.49, its first close above 1,000.

Growth Amid Lower Inflation

Of course, this year isn't the late 1970s.

The economy is growing. The latest reading on fourth-quarter GDP showed an annualized increase of 3.2%. That follows a robust 4.9% gain in Q3 of 2023.

The Federal Reserve Bank of Atlanta's GDPNow estimate recently modeled 2.1% growth in 2024 in real gross domestic product, downshifting a 3% forecast. High prices for food, rent, education and services still weigh heavily on Americans. But inflation has been moving back toward the Fed's long-term target of 2%.

On Feb. 29, the core price consumption expenditures (PCE) index rose 2.8% year over year in January, way down from the terrifying 5%-6% levels in 2022.

Meanwhile, the election years of 1996 (Bill Clinton's reelection), 2004 (George W. Bush's reelection), 2012 (Obama's triumph) and 2016 (Trump's reelection loss) showcased a healthy pattern for investors.

In each of those election years, the stock market bottomed out in the first six months of the year or by summer's end. Then the S&P 500 rose with gusto into the November presidential election.

Why Pullbacks In Election Years Can Be Healthy

Will 2024 repeat this pattern? Midyear corrections are normal, especially when the stock market has rallied hard in prior years.

The Nasdaq took off in January 1995. It snapped a yearlong downtrend at 775 as fund managers received signals from Alan Greenspan and the Federal Reserve that it was done with monetary tightening. It had hoisted rates by 300 basis points beginning in the spring of 1994.

From January 1995 through May 1996, the Nasdaq surged more than 65%, rallying in 15 out of 17 months and notching all-time highs. The government achieved an astonishing budget surplus. Clinton and Congress benefited from the "Pax Americana" peace dividends received in the years following the end of the Cold War.

So, the correction of 19% in June and July of 1996 in stocks did not seem out of line.

Looking at the Nasdaq from August to October of 2023, the index corrected as much as 13% to a low of 12,543. Then the Nov. 1 follow-through day arrived, hinting a tradable rally had begun. The yield on the benchmark 10-year Treasury bond plunged after hitting a 16-year high of 4.99% in October 2023. By late December, the 10-year's yield dropped to 3.78%.

Since then, U.S. inflation figures have edged a bit higher than expectations. The bond market has trashed previous predictions that the U.S. central bank would cut interest rates five or six times.

The CME FedWatch tracking of fed funds futures traders indicates an almost 70% chance that a quarter-point cut would take place at the June 12 Fed meeting. However, by year end, the majority of traders are only expecting three to four cuts of 25 basis points each. In total, that would send the fed funds rate from a 5.25%-5.5% target range to a level topping around 4.5%-4.75%.

Corporate Earnings Outlook

Yardeni Research forecasts an 11% rise in S&P 500 earnings this year to $250. That means that the popular index, at around 5,130 today, trades at 20.5 times 12-month forward earnings. High? Yes, but not egregiously high. Yardeni sees S&P 500 earnings adding another 10% in 2025 to $275.

Rising earnings play a key factor in many institutions' stock market forecast. Of course, a surprise crisis could wreck these views.

Still, what drives these profit increases? Fund managers view generative AI as one key to help corporations accomplish their work more efficiently while expanding revenues. These investments could bolster profit margins.

According to First National Bank of Omaha, 94% of organizations are investing in artificial intelligence.

Tech Driving Stock Market Profits

"We see transformative potential in artificial intelligence," Matt Spyers, the Nebraska bank's chief technology officer, wrote. "With the latest advancements in generative AI, we have opportunities in data analytics, risk management, fraud detection, software development and digital experiences. These technologies are not merely tools for driving productivity, but also catalysts for unlocking new capabilities."

According to FactSet, the consensus analyst forecast also calls for 11% S&P 500 growth this year after a modest gain in 2023, led by the technology (17.8% EPS increase) and communications services (17.2%).

Marvell Technology (MRVL), which has rallied 73% from its October low of 46.07, is expected to accelerate the bottom line from a year-over-year drop of 4% in the January-ended fiscal fourth quarter to gains of 56% and 79% in Q1 and Q2. Mild sales growth would help this boost.

In the IBD Big Cap 20, which has vaulted 19.5% on a price-weighted basis from Jan. 1 to March 5, CrowdStrike (CRWD), Datadog (DDOG), Dutch chip lithography systems giant ASML (ASML) and AI data center server provider Super Micro Computer (SMCI) have posted amazing growth in profits. The four companies together posted an average EPS gain of 75% in the latest reported quarter. Super Micro joins the S&P 500 index on March 18.


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Profit Surprises Still Matter In 2024 Stock Market

Datadog's earnings are seen slipping 5% this year but bolting 23% higher in 2025. Analysts predict an 8% dip in ASML's 2024 profit and a 50% rebound next year. Datadog shares fell hard this past week, losing nearly 7% and splitting its 10-week moving average for the first time in four months.

Due to this new wave of technology and innovation, Caron of Morgan Stanley argues that a true cyclical recovery in the economy is critical for the rest of the S&P 500 firms to do well.

"It's very important to focus not just on earnings but where the earnings surprises are coming from," Caron said. "I've heard a lot of throwaway comments that the rest of the stock market will come back. I don't disagree. But what is the catalyst?"

Caron's doubt comes amid few signs of a spike in joblessness. Yet while the unemployment rate remains near five-decade lows, total U.S. unemployment rose to 6.3 million in 2023, the highest level since the first quarter of 2022, according to the Bureau of Labor Statistics.


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Small Caps In Stock Market: Golden Days Ahead?

Could attractive valuations provide a catalyst for growth among small-cap and midcap stocks and serve as a fourth bullish factor? Some fund managers say yes, and rising strength within this class of equities could boost stock market forecasts on Wall Street.

The Russell 2000, up 15.1% in 2023, hit new 52-week highs in March. At the March 4 peak of 2,091, the small-cap stock benchmark was back in positive territory for 2024. One positive sign on a technical basis: A pair of sell-offs in January failed to sling the index below its 50-day moving average, which has been rising since early December.

Robert Maltbie, president of Santa Monica, Calif.-based small-cap research firm Singular Research, notes that in terms of total market valuation, the entire Russell 2000 still does not add up to the multitrillion-dollar values awarded to a few of the Magnificent Seven tech giants.

What This Ratio Means For Smaller Firms

Maltbie thinks the PEG ratio — price-to-earnings multiples divided by expected earnings growth — is highly attractive in small cap stocks. Using a normalized P-E ratio of 16 and expected EPS growth of 11% for profitable firms in the Russell 2000, a 1.45 PEG ratio is compares favorably with a PEG of 2.35 for the seven largest tech firms (a 40 P-E ratio divided by an estimated 17% growth in earnings).

"This obsession with the Magnificent Seven is founded in reality, but we're reaching valuations that are comparable with the rest of the market," Maltbie said. His Argonaut hedge fund has doubled the S&P 500's gain in 2024 so far. "We're going into a stock picker's heaven. It reminds me of the stock market in 1992, 1995, and 1998."

The current stock market uptrend isn't exclusive to tech. The S&P 500's financial, health care and industrial sector indexes have comparable year-to-date gains to the S&P 500, if not better.

Stock Market Forecast: Election Impact On Taxes

Joe Kalish, chief global macro strategist at Ned Davis Research, sees both investors and corporations shouldering a higher tax bill in the event of a Biden win.

"Biden hasn't met a spending bill he doesn't like," Kalish wrote in a Feb. 28 note to clients. "The Trump tax cuts would expire at the end of 2025, and taxes are likely to be raised on the wealthy."

Also, continued deficit spending could sap the economy's long-term strength. Why? The nonpartisan Congressional Budget Office sees interest rate payments as a portion of yearly GDP ballooning from a current level of 2.4% to 3.9%.

The Case For Gold In 2024

Higher gold prices hint at growing fear over inflation and the economy; a further surge could impact the stock market forecast for the rest of the year.

University of Chicago research finds when bonds show a negative inflation-adjusted return, investors crowd into safe-haven assets. This is not the case now. But if inflation spikes again and the Fed fails to temper it with monetary policy, gold could surge again. Just look at what happened in the mid-1970s and more recently since May of 2019.

Alex Ebkarian, chief operating office of precious metals dealer and broker Allegiance Gold in Calabasas, Calif., points to the historic "hanging chad" presidential election of 2000. That race, pitting George W. Bush and Al Gore, exemplified how gold buffered investors' portfolios in times of stock market stress.

While the year 2024 may not resemble 2000, investors may want to pay close attention to 2025 and 2026, which are typically the weaker years of stock market performance during the four-year presidential cycle.

"In 2000, where there was palpable nervousness about the outcome, gold served as a hedge against uncertainty," Ebkarian told IBD.

"Starting with the year leading up to Bush's presidency and during his first two years in office, gold rose 11% due to the dot-com bubble bursting, 9/11 (terrorist attacks) and stock market volatility," he added.

The Nasdaq hit a March 2000 peak of 5,132, then tumbled nearly 79%. The index hit bottom at 1,108 in October 2002.

Gold futures on Friday ramped higher an eighth straight day and surpassed $2,200 an ounce, making new all-time highs along the way. Over a 20-year stretch, physical gold has reaped a 396% total return, sealing compounded annual growth rate of 8.3%.

Please follow Chung on X/Twitter: @saitochung and @IBD_DChung

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