Here’s Your Fearless Post-Election Fo recast for Markets

Here’s Your Fearless Post-Election Forecast for Markets

Election Day has finally arrived. If you haven’t cast your ballot already, good luck with the crowds.

Last week, I thought I would be proactive and vote early at my friendly neighborhood public library. My expectation was to avoid long lines, but it still took my wife and I almost an hour to cast our ballots – a full week in advance.

So much for saving time!

Fast forward to today, and plenty of investors are sitting with bated breath, wondering what to expect after all the votes are counted. How will the outcome affect financial markets and the economy?

I’ve already covered the sectors most likely to be affected by the election results in earlier issues – one for a possible Trump victory, one for if Harris takes the win. But that still leaves the question of how the overall market could respond.

As a student of history, I did some research to see what we could expect from markets based on overall performance following prior elections. And the answer is: Don’t expect much – at least, not right away.

As you can see, over the past 92 years, the S&P 500 hasn’t done much in response to an election… at least not immediately after Election Day. Here’s what I found:

So, overall, it seems we can expect stocks to pretty much sit flat in the near term. But when looking at the longer term it’s a different story: In more recent election years, stocks have performed well in the months following the results – with the S&P 500 up 17.6% on average a year after Election Day. And small caps perform even better, up 20.4% on average.

Over the course of our pre-election coverage here at Inside TradeSmith, I’ve provided some guidance about where to look for opportunities depending on the election outcome.

And if we do experience some post-election chaos, we’ve discussed an easy way to hedge your bets.

But the fact is, according to my research, no matter who wins the White House – and no matter which party has the upper hand in Congress – stocks typically follow their own path:

Over the long run, politics and political parties have had very little lasting influence on the financial markets.

For my money, I believe it’s best to let the results come in when they’re ready, and pay a lot more attention to the factors that can have an effect on stocks in the months ahead.

Instead of who wins the keys to the White House, I’m more interested in the seasonal path stocks are likely to take from here – and the path interest rates will follow as the Fed takes stock of the economy.

The Seasonal Sweet-Spot for Stocks has Arrived

And speaking of seasonal paths, we’re entering a period of bullish performance you won’t want to miss:

As you can see in the chart above, the period from November through April has consistently been the best six months of the year to own stocks for the past 75 years – with the S&P 500 posting average gains of 7.2% across the period.

That’s much more preferred than the period from May to October, the worst six month stretch, when stocks average a gain of just 1.7%.

And our own TradeSmith Seasonality indicators confirm this as well:

I mean, what’s not to like about this picture? The S&P 500 is:

Plus, as you can see from the seasonal chart, we should see a favorable tail wind for stocks blowing through the end of 2024.

These Sectors Love Lower Rates

And the seasonal strength isn’t the only thing supporting markets right now. Another factor working in favor of stocks are the expectation of lower interest rates.

The Fed has already cut the benchmark Fed Funds Rate by 0.50%, and should be on track to deliver another rate cut (though perhaps smaller than the last 50-basis point cut) at this week’s policy meeting.

And odds are good the Fed may deliver another small rate cut in December depending, as always, on the economic data between now and then.

As for how much – and how soon – the Fed will cut rates, expectations have been all over the place, as you can see in the chart of Fed funds futures pricing above.

Starting late last year, the Fed kept interest rates on hold for many months, steadily building increased expectations that the Fed would cut more aggressively when they finally began the new rate-cutting cycle. But early this year, the Fed’s tough talk about inflation dashed those high expectations.

By mid-year however, expectations were on the rise once again – with Fed funds futures pricing in up to six rate cuts of 0.25% each. But lately, those rosy expectations have been dialed back somewhat.

Futures odds are currently pointing to three 0.25% rate cuts as the most likely scenario for the next six months.

No matter the pace of rate cuts, however, history says that once the Fed has started a rate cutting (or hiking) cycle, they tend to keep at it for an extended period. While there have been some exceptions in the past, the path of least resistance for interest rates is down, moving forward.

That’s another tail wind for stocks, in addition to the bullish seasonality. The question is, which stocks and sectors can benefit the most from lower rates?

The likely answer is in the chart below:

As you can see, in the 1-to-3 years after the Fed’s first interest rate cut, both Healthcare and Consumer Staples are the top performing sectors in the S&P 500.

And over the two- and three-year period after the start of a rate-cutting cycle, Financial and Consumer Discretionary stocks also join the party, outperforming the S&P 500 alongside the Healthcare and Consumer Staples sectors.

That’s currently a compelling and potentially profitable tipoff coming from the historical data. Because neither Healthcare nor the Consumer Staples sectors have performed all that great over the past year.

In fact, both are among the bottom three sectors by performance at the moment, along with Energy, according to our TradeSmith Analytics tools, as you can see here:

This means Healthcare and Consumer Staples stocks may well be poised to play catch-up with the rest of the stock market in 2025.

If so, a simple TradeSmith Screener focused on healthy (Green or Yellow Zone) and high-quality (Business Quality Score > 70) stocks in the Healthcare and Consumer Staples sectors could deliver above average profit opportunities in 2025 – and beyond.

But, if you’re still worried about post-election chaos ensuing, there are other hedging options available besides the CBOE Volatility Index (VIX).

Debt, Deficits, and Debasement – Oh My!

If there’s one thing politicians on both sides of the aisle are guilty of, its spending money we just don’t have in the bank. Our national debt and fiscal deficits have been growing larger for decades – no matter which party rules the roost:

So, investors are right to be concerned that legislators in Washington, DC have an incentive to inflate away the debt by debasing the dollar. That’s why gold has been on a tear this year, as you can see above.

The yellow metal has already doubled in value since 2000. And according to some analysts I respect, it could double again in the years ahead. Gold has always been considered a go-to hedge against loss of purchasing power, and an alternative currency to the ever-shrinking buck.

And on the subject of alternative currencies, have you seen how well Bitcoin (BTC/USD) has performed lately?

Money flows into digital assets topped $900 billion recently, as Election Day approached. Year-to-date money flows in crypto are on a $27 billion pace, almost three times more than the previous record in 2021. And of all the cryptocurrencies on the market, Bitcoin has been far and away the leader – with year-to-date flows of $25.5 billion.

Both gold and Bitcoin could be long-term alternatives to a deflating U.S. dollar, but both also look a tad overbought at present. Consider them as hedges, but consider the possibility of a pullback.

Mike Burnick’s Bottom Line: There you have it – your post-election guidebook and fearless forecast has come to an end. Election Day is here, polls should be closing shortly, and we’ll have results soon enough.

But regardless of who wins the White House and Congress, remember that stocks are in a seasonal sweet spot – and that the Fed is cutting interest rates, regardless of the victors.

Those are two very powerful positive forces for stocks. And certain sectors (Healthcare, Consumer Staples) and asset classes (small-cap stocks, gold, Bitcoin) may be poised to outperform the overall market given these tailwinds. Just be sure to remember the advice I gave you in a previous column: Your best bet may be to wait patiently until the dust settles, then see what market trends emerge.

Good investing,

Mike Burnick
Senior Analyst, TradeSmith

P.S. Just because the long-term effects of the election may take a while to show themselves, that doesn’t mean you should sit on your hands in the short-term: Patience and inaction are very different things… and the tailwinds coming to the market in the days ahead won’t affect every position equally. It’s important to prepare yourself – and there’s only so much time.

That’s why our trusted affiliate, The Freeport Society, held an exclusive event to help investors prepare for the critical 24 hours following Election Day. Market experts Charles Sizemore and Louis Navellier joined forces last week to offer guidance when it comes to navigating these turbulent waters, regardless of the election’s final results.

Charles and Louis believe careful positioning will be the key to success in the coming weeks – so they made sure to record their discussion for those who missed the live event.

But with Election Day coming to a close, tonight is your last chance to hear the insights and strategies from these two experts while there’s still time to act on them – before the window of opportunity closes.

Click HERE to watch the event recording, before it’s too late. Charles and Louis believe this window of election volatility could make for one of the most important market opportunities of the year – and you’ll want to know just how to make the most of it.