A Down Week
Well, it was bound to happen eventually, but stocks finally fell last week, with the S&P 500 Index down about 1.0%. Remember though, the index was higher the previous six weeks, giving us the longest weekly win streak this entire year. After such a strong week, some red on the screen was perfectly normal, especially considering the election is right around the corner. Stocks can’t go up every week after all.
Still, the S&P 500 is up nearly 22% on the year. If the year ended right now that would be the best election year return since a 25% gain way back in 1980. Some additional election volatility is still possible, of course. The good news is long weekly win streaks tend to happen in bull markets, which is another reason we would not panic should more near-term pain take place. Since 1950, we found there were 22 other times the S&P 500 had a six-week win streak (meaning stocks were lower the seventh week) and it was higher a year later 19 times and up a solid 12.6% on average. Yes, the returns over the next month were negative, but after long winning streaks this shouldn’t be very surprising.
An Older Bull Tends to Last
We’ve pointed out each of the past two weeks that older bulls tend to last even longer, but here’s another way to show this important concept. Data shows that once someone hits 65 years old, the odds of making it to 85 years old are quite high. It turns out bull markets are like this too, as we found that once a bull makes it to the start of its third year (like this one has), many more years of gains is actually quite likely.
Going back 50 years, we found there were five other bull markets that made it past their second birthday. Wouldn’t you know it, the worst any of them did was another three years (which happened twice). Meanwhile, the average bull lasted eight years and gained 288% when all was said and done.
No one knows how long this bull will last, but the bottom line is history says be open to this bull market lasting much longer than probably most expect.
Two More Reasons to Remain Bullish
October isn’t quite over yet and there’s a chance stocks could finish higher for the sixth month in a row and eleventh time out of the past twelve months. It turns out when stocks gain five months in a row, they are higher a year later 28 out of 29 times, with a gain of more than 10% on average.
Lastly, when stocks gain ten of eleven months (like now) they are higher a year later nine out of ten times and up nearly 15% on average. In other words, this blast of strength we’ve seen isn’t a reason to turn bearish. In fact, it might be a reason to remain in the “glass half full” camp as we head into 2025.
Important Charts (and Tables) to Know This Election Year Revisited
“American will always do the right thing – after exhausting all other possibilities.” Winston Churchill
The Carson Investment Research Team began covering the election back in March with our “16 Charts and Tables) to Know This Election Year.” With Election Day now just eight days away and early voting taking place in many states, we thought it would be worthwhile to go back and look at some of those charts, both as a reminder of market-related election history and to evaluate where things stand now.
There’s still a lot of uncertainty around this election. The presidential race remains as close as any in modern history, and the House is still a near toss-up. The Republican Party is likely to take control of the Senate but it’s far from a lock.
One place where we do have clarity? If you followed our charts back in March, you would have known that the odds were pretty good that this would be a solid year for markets. Election years tend to be good for markets, especially election years of the type we’re having in 2024. A Democratic president with a split congress has also historically been one of the best combinations for overall market performance.
There were even some charts we shared giving us some hint of the potential outcome of the election, but we would take those with a whole shaker of salt. In the end, historical data, models, and polls don’t pick the president. Voters do. We encourage all our readers to go out and vote.
So here are some of our favorites from our March commentary and how things are looking more than seven months later.
Chart 1: Election Years Tend to Be Higher
What we said then: “The best year for stocks is a preelection year (like 2023), while midterm years (like 2022) are the worst. Election years gain 7.3% on average, but are higher a very impressive 83.3% of the time.“
What has happened: The election year has held true to form and then some, with the S&P 500 up over 20% as of Friday’s close.
Chart 2: Under New Presidents Stocks Underperformed Early and Improved Later
“The problem with political jokes is they get elected.” Henry Cate VI
What we said then: “Historically, stocks have done much better in a pre-election year under a president in their first term (up more than 20% on average), while midterm years for a new president do much worse (virtually flat). That played out this time, with stocks down big in 2022 and bouncing back big in 2023. What matters now is election years, which have seen stocks do much better when a president is up for reelection versus a lame duck president.”
What has happened: This one has certainly held true to form when looking at 2024, with markets shining so far in an election year (2024) under a new president (Biden).
Chart 3: Stocks Have Never Been Lower in an Election Year Under a New President
“American will always do the right thing – after exhausting all other possibilities.” Winston Churchill
What we said then: “Breaking this down more showed that stocks gained during an election year the past 10 times when the president was up for reelection. Not to be outdone, pre-election years have been higher nine of the past 10 times a president was up for reelection.”
What has happened: This was another signal that we were likely in for a good year.
Chart 4: Election Years Have Never Been Lower After a Red Midterm Year
“The best argument against democracy is a five-minute conversation with the average voter.” Winston Churchill
What we said then: “Interestingly, a negative return in a midterm year (like we saw in 2022) has been followed by a higher pre-election and election year every single time. That is 17 out of the past 17 pre-election and election years higher after a negative midterm year. Do you really think this will be the year this amazing streak ends? We don’t and are looking for 18 out of 18.”
What has happened: Odds heavily favor this particular data point holding true, indeed leaving us 18 out of 18 at the end of the year.
Chart 5: Where Do President Biden’s First Three Years Rank?
What we said then: “How have stocks done under President Biden? Don’t shoot the messenger here, but the Dow was up 21.4% his first three years in office, which ranks 11th out of the past 21 Presidents using Dow data back to 1900.”
What has happened: President Biden’s ranking will likely improve with strong returns so far in his fourth year. A split Congress may have helped the dynamic, as discussed below.
Chart 6: Stocks Tend to Do Better Under a Democrat as President
What we said then: “Another popular question is how stocks do based on which party is in the White House. Now is when people might want to throw something at me, but it is what it is. Historically, stocks have done better with a Democratic president versus a Republican in power. As with many of these numbers, we would take this with a grain of salt. Despite the tendency to view the president as responsible for the economy, the president alone often has a relatively small impact compared to broader economic forces. Do you think the fact that 10 of the last 11 recessions started under a Republican president is because a Republican was in the White House? We don’t.”
What has happened: While markets have continued to do well under President Biden, our main takeaway from this is simply not to forecast market returns based on the party of the president.
Chart 7: A Split Congress Tends to Be the Best for Stocks
“If the opposite of ‘pro’ is ‘con’, then the opposite of progress must be Congress.” Sam Stovall
What we said then: “Who is in the White House can matter, but we’ve found the make-up of Congress might matter more. In fact, a split Congress has been much better for investors, as stocks incredibly have gained the past 13 times we’ve had a divided Congress! Maybe the best Washington is one that can’t get anything done? Or maybe it’s that what does get done requires compromise and common cause and is not just political overspending to reward constituents. Those checks and balances the founders put in place might be even more important than we realized.”
What has happened: The odds of having a split congress (independent of who is in the White House) are probably slightly better than a coin toss right now. But even if we have a single party controlling both the House and Senate, the majorities are likely to be very narrow, giving the more centrist members of Congress a lot of influence. That will bring some of that spirit of compromise into play even if we have unified government, keeping both parties from giving in to their worst legislative excesses no matter who is elected.
Chart 8: Stock Performance Based on Party Makeup
What we said then: “Speaking of which, let’s not forget what friend of Carson Investment Research Sam Stovall once told us. If the opposite of ‘pro’ is ‘con,’ then the opposite of progress must be Congress! That’s a joke you can use all year now.”
What has happened: Looking at 2024, we do have a split Congress (Democratic Senate and Republican Congress) along with a Democratic president. Historically that has been a policy friendly mix, and I think it’s fair to say that applies to 2023 and 2024. A narrow Democratic majority in the Senate and narrow Republican majority in the House limited fiscal excesses while allowing some bipartisan legislation to progress. We discuss above why some of the features that make divided government market friendly will likely still be present in 2025, even if we see a sweep.
Chart 9: It’s the Economy Stupid
“If voting made any difference, they wouldn’t let us do it.” Mark Twain
What we said then: “How investors feel going to the polls always matters, as we’ve found that if there was a recession in the two years before an election then a president up for reelection usually loses. And if there was no recession, they would usually win. In fact, this has worked every time since Calvin Coolidge way back in 1924, who was reelected despite a recession in the previous two years. But then Coolidge had only become president in August 1923 when President Warren Harding died unexpectedly, and the economy was already rebounding at that point.”
What has happened: Well, this one is forward looking. We have not had a recession in the last two years, which should favor Harris. In fact, the economy has been pretty good the last two years. Maybe we see this reflected in Harris still being the favorite to win the popular vote. There should probably be a qualifier that voters are very sensitive to inflation and since prices stay “high” even once inflation normalizes, memory of inflationary periods tend to persist beyond their impact, potentially distorting voters’ perception of the economy.
Chart 10: Stocks Can Predict Who Will Win in November
“Bipartisan usually means larger than usual deception is being carried out.” George Carlin
What we said then: “Lastly, how stocks do the three months before an election also has some predictive ability. If stocks are up, the incumbent party usually wins and if they are down, the incumbent party usually loses. This didn’t work in 2020, but it has worked 20 out of the last 24 elections.”
What has happened: This indicator would suggest Harris is the favorite. Stocks are forward looking and have signaled little concern with the economic outlook of late. But the stock market is not the final arbiter of American prosperity and while the economy is the main issue voters have focused on historically, it’s not the only issue. Ultimately, voters, not markets, will select the next president. Well, technically, the electoral college, but voters choose the electors.
“In America, anyone can become president. That’s the problem.” George Carlin
Over the years, we’ve seen many investors let their pollical beliefs get in the way of their investment choices, often to their detriment. Some people didn’t like President Obama, but if they let that dictate how they invested they missed big gains. Likewise, some people didn’t like President Trump, but if they got out of the market because of it they also missed big gains. And currently President Biden’s approval rating is quite low, but stocks have soared and are at all-time highs. The bottom line is a strong economy is what will drive stock gains, not who is or isn’t in the White House. Policy has an important roll to play in fostering a growth-friendly economic foundation, but it’s a slow-moving force.
Markets care less about the impact of this or that president or Congress as much as the cumulative impact of our overall political dynamic. The market’s judgement over the last 45 years is that the overall dynamic has been pretty good. Neither Republicans nor Democrats deserve credit for that. If anyone deserves credit, give it to the electorate, whose slow preference over time has been a thoughtful pragmatism over the excesses of ideology. Which party does that point to this time? We’ll let the voters choose. And if they’re wrong, and sometimes they are, they’ll have a chance to change their minds in just two short years.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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