It was another remarkable week, both in the financial markets and on the political landscape. What might this mean for investors moving forward?
First, regarding last week, the big political news over the weekend is that President Biden will not seek re-election. This will be the first presidential election since 1976 without a Bush, Clinton, or Biden on a ticket. Last week also featured the Republican National Convention. On the market front, although the US stock market hit new highs early in the week, both the S&P 500 and Nasdaq ended with losses. In fact, they suffered their largest weekly losses since April, with the S&P 500 down 2% and the technology-focused Nasdaq down nearly 4%. However, the significant rotation within the US stock market continues, as small-cap and value stocks strongly outperformed. The performance reversal has been so sharp that value stocks have now outperformed growth stocks over the past year.
Looking ahead to this week, beyond the political news surely dominating the headlines, we have important economic and earnings updates. First, we get the advanced report of 2Q24 GDP. Economist consensus expectations are for a +1.9% growth rate, while the current Atlanta Fed’s GDPNow expectation is at 2.7%, compared to 1Q24’s GDP of 1.4%. Additionally, the Fed’s preferred inflation measure — the Core Personal Consumption Expenditures (PCE) Index — is released this week, with expectations for 2.5% year-over-year growth, down slightly from last month’s 2.6%. On the corporate earnings front, this is also a big week, with reports from major companies including Alphabet (Google) and Tesla. Earnings growth for the second quarter is currently tracking a growth rate of 9.7%, which would be the best since the fourth quarter of 2021.
What should investors expect moving forward? Historically, weakness in the equity markets is normal this time of year. According to research from Bespoke Investments, over the last 25 years, the weakest period for the S&P 500 has been from mid-July through mid-October. In the six presidential election years during this period, the median performance was essentially flat, but with significant volatility. Even in years when the S&P 500 was significantly higher through mid-July, the forward three-month performance was still skewed lower. This seasonal pattern coincides with the latest investor sentiment showing the most bullish readings of the year. Typically, when sentiment reaches a bullish extreme, forward returns tend to be below average.
As for the political backdrop and its potential impact on financial markets, history suggests that the stock market tends to be volatile during periods of political uncertainty, especially concerning election outcomes and policy directions. Rather than a traditional “October Surprise,” it seems we are experiencing weekly surprises, which is unlikely to change soon.
In summary:
Stay invested. Stay diversified. Stay disciplined.
If you have any questions or comments, please let us know at strategists@brinkercapital.com or at rusty@orion.com. Thank you for your time and trust. See you next week!