2024 Q3 Economic Commentary…
Election years are often marked by increased volatility. Investors are generally uncertain about potential policy changes and their impacts on various sectors. This uncertainty can lead to short-term fluctuations in stock prices. This is especially true when the election outcome is still highly unpredictable.
In many election years, a pre-election rally has occurred, particularly when the market anticipated a favorable outcome for business-friendly candidates. For instance, the Dow Jones Industrial Average saw significant gains in the months leading up to the 1984 and 1996 elections, reflecting investor optimism.
In election years with higher-than-average inflation, market behavior can be more pronounced. Historical instances, such as the 1980 election during a period of high inflation, showed that inflation concerns can exacerbate market volatility. The uncertainty around how new leadership will handle inflation matters more to investors than the election itself.
The year following an election is often a better measurement of future market performance, as investors digest the implementation of new policies. For instance, the first year of Ronald Reagan’s presidency in 1981 saw significant tax cuts and deregulation, which eventually buoyed investor confidence and market performance later the following year. However, the recovery didn’t come without some short-term hardships. In 1981, the stock market rally dwindled quickly as many blue-chip companies experienced profit declines. The economy endured a severe recession in the latter half of 1981 and entered a brutal bear stock market that extended into early 1982. As is the case today, investors pinned their hopes on tax cuts, future cuts in interest rates, and deregulation to lead to a market recovery. They did arrive, and the market did recover, but it was a painful process.
In general, post-election years have often been positive for the stock market. According to data from the S&P 500, from 1948 to 2020, the index has posted an average return of approximately 10% in post-election years. This trend underscores investor optimism as new administrations roll out their economic agendas. However, the impact of high inflation has not been a hindrance in most election cycles, like it is today and was in 1980.
Historically, the period from August to October heading into elections has shown increased volatility. So far, since October of 2022, the market recovery has been led by the emergence of Artificial Intelligence (A.I.) and its effects on all sectors of the economy. Many market analysts believe that A.I. can outrun the negative headwind of inflation. This explains much of the market’s resilience over the last year and a half. However, we now have interest payments on the national debt as the government’s largest expense. Any slowing in jobs and the economy could create a challenging environment, as lower tax receipts will just make those interest payments more difficult to make.
I am a strong believer of the strength of A.I. and the positive impacts it will have on our economy in the years ahead. If A.I. boosts economic output beyond the increase in the money supply, inflation will slow, potentially to the point of falling prices – deflation. Hopefully, if such conditions come to fruition, it will not entitle our elected officials to feel like they can keep spending money at these unsustainable levels.