Presidential election years tend to be very volatile and choppy in the latter stages going into the election. There were two indicators that we’re watching closely. The first is the economy itself. If the economy historically is growing strongly into the election, the incumbent party retains the White House 100 percent of the time. But if the economy is slowing in a recession, the party that’s out of power regains control of the White House 100% of the time. Now, we’re not in recession now, and in my mind, there’s zero chance that the National Bureau of Economic Research is going to declare a recession in between now and election day. So we’re watching closely things like the Sahm Rule1, the leading economic indicators, manufacturing ISM, inverted yield curves to try to get some clue as to the direction of economic growth. The stock market is the other indicator that we’re watching closely. Over the course of the last century, if the S&P 500 is collectively positive in the three months going into the election, August, September, October, historically by an average of about 5.5%, then the incumbent party has won their bid for re-election 83% of the time. But if the stock market is negative in those three months, historically by an average of about 4 percent, then the party that’s out of power has regained control of the White House 83 percent of the time. So we’ll be watching the volatility of the financial markets very closely over the next couple of months.
Investors vote with their feet, and those issues will have a bearing on how stocks perform. But once we get past the election and we get all this noise and nonsense behind us, we do expect that stocks will enjoy a powerful end-of-year sigh of relief rally that we believe, in all likelihood, will take stocks up to new record highs.
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1 The Sahm rule is a heuristic measure used by the United States‘ Federal Reserve to determine when an economy has entered a recession. It relies on monthly unemployment data and signals the early stages of a recession when the three-month average unemployment rate moves above the lowest three-month moving average rate over the last 12 months by half a percentage point or more.
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