Backseat Drivers (For Now)

Watching and waiting for the U.S. election... Last-minute positioning... Long-term thinking... What the market is predicting... 'Smart money' betting... Greg Diamond: Stagflation is here and volatility is near...

It's Election Day eve...

And you and I (Corey McLaughlin) aren't the only ones watching what happens tomorrow... You know those key economic meetings we mentioned last week? From the Federal Reserve and the Chinese government (reportedly about discussing fiscal stimulus)?

Well, both are taking backseats to the U.S. election results this week.

When Fed members gather for a formal two-day policy meeting, the central bank usually begins on Tuesday and releases its latest policy decision on the second day. But this week, the schedule is pushed back a day... It'll start on Wednesday, with the decision and Fed Chair Jerome Powell's remarks waiting until Thursday.

And regarding China, investors might want to temper expectations about a large-scale fiscal stimulus announcement coming later this week. Rumors swirled last week about such a move, but as the Wall Street Journal reports today...

According to people involved in policy discussions, that is wishful thinking: A bazooka isn't coming – at least not this year.

Hopes rose for bolder stimulus action when a key Chinese legislative session was postponed until this week. Some investors and analysts viewed it as a sign that Chinese leader Xi Jinping was waiting for U.S. election results to potentially adjust his stimulus plan – especially if Donald Trump, who has pledged sweeping tariffs on Chinese products, looked set to return to the White House.

The people involved in policy discussions say that scheduling issues involving some participants in the legislative meeting caused the delay.

If you ask me, "scheduling issues involving some participants" sounds like a very convenient excuse... More likely, Chinese policymakers want time to consider the U.S. election results for more than just a few days. As the Journal also reported...

Beijing is discussing how the U.S. election's potential impact will affect market sentiment in China.

Well, then. The same could be said about the election and market sentiment in the U.S. It appears a lot of folks are waiting on the outcome, and certainly watching what will happen...

Last-minute positioning...

Over the weekend, a poll of voters in Iowa showed Kamala Harris with an unexpected three-point lead over Donald Trump in the state. Perhaps responding to this news, today's market action didn't fit the "Trump trade" we've seen over the past month or so...

Today, longer-term bond yields fell, with the 10-year Treasury dropping about nine basis points back toward 4.3% and the 30-year dipping below 4.5%.

Still, the latter remains about 50 basis points higher than it was in mid-September. So the broader higher-yield trend since then – be it from expectations of Trump winning the White House, or just higher inflation no matter who wins because of more spending and the Fed already cutting interest rates – hasn't reversed.

Meanwhile, Trump has been seen as a larger proponent for cryptocurrency than Harris. Bitcoin – which has also traded in tandem with stimulus expectations in China lately – dropped below $68,000 today from above $72,000 in the middle of last week.

And the major U.S. stock indexes were "mixed." The small-cap Russell 2000 Index was 0.5% higher, but the benchmark S&P 500, Nasdaq Composite Index, and Dow Jones Industrial Average were down slightly.

The S&P 500 traded just above its 50-day moving average, a technical measure of a short-term trend, for a third straight day.

We won't be surprised to see volatility ahead, no matter who wins. (Our friend Greg Diamond has more thoughts on this in today's Diamond's Edge below.) And this is a politically and culturally significant election.

But remember the long term...

Outside short-term noise and volatility, politics tend not to influence the stock market in the way or by as much as a lot of people might expect. As our colleague Sean Michael Cummings wrote in an edition of the free DailyWealth newsletter a few months ago...

You might be inclined to think that Republican pro-business policies spur market outperformance, or that Democrat social programs fuel economic growth...

But the truth is, American business and American politics function in separate worlds. Bull runs and bear markets unfold in their own time, regardless of who is in office.

To investigate this, I looked at returns in the S&P 500 Index for every presidency going back to Franklin D. Roosevelt. Then, I annualized the data.

This gave me an apples-to-apples comparison of stock performance no matter how long a president stayed in office.

The chart below shows annualized stock returns by president, including party affiliation. And performance has far less to do with politics than you might assume. Take a look...

If you're up on market history, it should come as no surprise that the stock market has performed well through most presidencies. But finding a clear pattern between stock performance and presidential party is more difficult than it seems.

You could tie yourself in knots trying to make logic out of stock returns in certain presidential terms. As Sean continued...

Stocks have performed more than twice as well under Democratic presidents [13% average annualized return] as they have under Republicans [6%]. So based on the data above, you might conclude that the Democrats are the better party for stocks.

But again, this would be an oversimplification... because we can't know whose policies are driving market gains.

For example, take the 25% annualized return during Bill Clinton's presidency. Should we credit the gain to Clinton himself? Or was it the conservative economic policies of his predecessors – Ronald Reagan and George H.W. Bush – taking effect?

Or was it simply a case of "right place, right time" as the dot-com boom took over the market?

The answer is there's not a surefire way to know.

Again, I am not saying this election is not important for the country, and our present and future. For instance, the path of geopolitics and the major wars ongoing in the Middle East and Ukraine could take different turns depending on who wins the White House (which could then impact markets)... So can certain domestic policies, depending on who is president and which party controls Congress.

You may even find a short-term tailwind for a particular sector or asset class based on the results. Increased volatility can also be great for some strategies, like selling options. But think long and hard before allowing presidential politics to influence going "all in" or "all out" of your investing decisions and path of achieving long-term goals.

Because once the results are in, we will turn our attention back to things like Fed policy... corporate earnings... the labor market... and inflation...

The president of the U.S. and makeup of Congress play a role, but some things (like more debt) never change.

If anything, thinking the other way around is a wiser bet...

The market tends to predict who wins the White House.

If stocks are up in the three months prior to Election Day, the incumbent president or party has won about 85% of the time since 1928. Plus, since 1932, the incumbent or his party has never failed to win reelection unless a recession occurred during the current presidential term.

I'll contend we had a recession for two straight quarters in 2022 during Joe Biden's term – and the markets acted like it, with the S&P 500 falling 20%-plus and bottoming that October – but we won't get many who agree with us, certainly in the mainstream media.

In any case, the U.S. benchmark was up 3.3% from July 31 to October 31 this year. This indicator suggests Harris is in line to win this year. We'll see soon enough.

Either way, we expect the country's debt load to grow in the years ahead and inflation to reaccelerate, possibly in the short term based on the current workings of the economy. To this point, one "hard asset" held steady in value today. That's gold, which is trading near an all-time high.

One more thing before we go today...

The response has been overwhelming to our friend and Wall Street legend Marc Chaikin's brand-new presentation that we mentioned last week.

In short, Marc – the founder of our corporate affiliate Chaikin Analytics – says the "next phase" of the market is approaching later this week. That's when we get into the heart of third-quarter earnings season with announcements from big names like artificial-intelligence darling Nvidia (NVDA).

This upcoming period in the markets will lead to "very big surprises, which will accelerate the rotation of smart money we've already seen this year," Marc says. And he has come up with a short-term trading strategy – that tracks "stealth accumulation" in certain stocks in the market – that he says you can pair with a long-term portfolio to take advantage.

Marc says he has waited his entire five-decade investing career to unveil this strategy. He also applied his "stealth" system to Stansberry Research's stock recommendations... creating a brand-new portfolio of the 10 highest-performing stocks that our Stansberry editors have recommended.

Click here to get all the details.

New 52-week highs (as of 11/1/24): Alpha Architect 1-3 Month Box Fund (BOXX), Maplebear (CART), Gilead Sciences (GILD), Illumina (ILMN), London Stock Exchange Group (LNSTY), Packaging Corporation of America (PKG), Sprouts Farmers Market (SFM), Summit Materials (SUM), Toast (TOST), Texas Pacific Land (TPL), Twilio (TWLO), and Zoom Video Communications (ZM).

In today's mail, a couple responses to our discussion about GDP data in Friday's mailbag... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"It's nice to see an explanation of the gov't. statistics from what the gov't says vs. reality. In short, everything the gov't tells us is a lie. Isn't it interesting that the initial reports are touted by the media, but the 'revised' #s, almost always reflecting poorly on the gov't, somehow don't get the same treatment." – Subscriber Robert B.

Corey McLaughlin comment: To be clear, I think the GDP data is accurate so far as what it measures – I'm not saying the numbers are made up. But the way the data is presented doesn't reflect reality enough, in my view. And government numbers, in general, are rarely explained in a way that reveals any truth about what policy does to the value of the dollar.

To your last point, I think the idea that "revised" numbers don't get a lot of attention is as much of an indictment of media or independent thinking as the government reporting is – and it's an opportunity for those who dig into the details.

"The GDP statistics are not accurate according to the writer that was quoted. Is that a fault of EITHER party or is it just the way things have always been done? Each party will blame the other one but how much control do they really have over the numbers?" – Subscriber H.S.

McLaughlin comment: In short, I believe there's enough "fault" to go around to both major parties. Here's something we wrote way back in January. It's the kind of thing we think is important to remember when listening to politicians...

Says the sitting president [Joe Biden]: The economy is great, inflation is on the decline, and "we" created millions of jobs. In reality, more than two-thirds of the jobs "created" since 2021 were simply just recovered from the start of the pandemic... Back then, the government's unemployment rate spiked from 3.5% to 15% in two months with the "old" economy shut down. Nearly four years later, the rate is at 3.7% [It's now 4.1%].

Says the other [Trump]: "We have an economy that's so fragile, and the only reason it's running now is it's running off the fumes of what we did." Meaning, of course, greenlighting more than $3 trillion in stimulus programs... which helped ignite 40-year-high inflation (and hundreds of billions of dollars of fraud)... before the $2 trillion more in stimulus still to come that was pushed into law by the present administration.

Where is the debate about that? Or the U.S.'s debt-to-GDP ratio of 120%, and what it means and implies? Or that the current reported debt of $34 trillion and counting assumes the government will never make another Social Security or Medicare payment? As Stanley Druckenmiller points out, factoring in those obligations would swell the U.S. debt closer to $200 trillion.

Who cares? Or at least that's how they act. The future is someone else's problem.

On that pleasant note...

All the best,

Corey McLaughlin
Baltimore, Maryland
November 4, 2024

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Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.

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