The Weekend Edition is pulled from the daily Stansberry Digest.

The Election Cycle Is Playing Out Again

By Corey McLaughlin

Emotions will be stirred and analysis issued...

As we move on from this week's presidential debate, the play-by-play has already begun.

From here, in the short term, you may see parts of the market reflect certain ideas about taxes or health care reform from either side. And you'll hear who everyone thinks is going to win the presidential race.

All of this may present trading opportunities.

(Among other things, I'm interested to see how Kamala Harris' idea of price controls for cereal and other foods plays out going forward... or if that part of the economic agenda has gone into a dark place, never to be seen again.)

But remember our frequent, perhaps disappointing view on the long-term impact of presidential elections on the market...

Over time, the outcome of the election tends to matter less and less than the dates on the calendar – and what the market is saying.

Since I started working at Stansberry Research, I've learned a few big things about the market and presidential election years. I've also written the Digest through an entire cycle, and I've been fortunate to learn from all the bright minds on our team. Firstly...

Respect the presidential election cycle...

History has clearly shown that a "presidential election cycle" exists. The market tends to act a certain way in each of the four years in the cycle. You can debate the "why," but a century of market history shows that it's true.

Broadly speaking, as our colleague and True Wealth editor Brett Eversole wrote in DailyWealth in 2022...

Stocks perform OK during a president's first year in office. Then, in the second year, they go through a major slump. That's when the worst returns show up. Many believe this happens because of the uncertainty around midterm elections.

After the midterms, certainty returns to the markets... and Year 3 leads to the biggest returns. Year 4 is also usually another solid year as we head into the next presidential election.

The pattern is more or less playing out again this year.

The S&P 500 Index's average return in presidential election years has been around 11%. And stocks finished higher roughly three-quarters of the time.

The S&P 500 is up roughly 17% in 2024. And with concerns and uncertainties about the economy (and politics) ahead, perhaps a trim is due before year-end.

Not only that, but the market tends to predict the election winner...

Most people assume it's the other way around...

They look at the stock market and try to think about which companies or sectors will "win" if a certain candidate makes it to the White House, or if one party ends up controlling Congress.

It's true, some parts of the economy may benefit from the specific policies of Democrats or Republicans. And there may be near-term trading opportunities that ride on the likelihood of either side winning. But that's not the most telling information to consider.

Whoever wins, we will end up with more debt as a nation. We will want to own inflation protection, like shares of high-quality stocks and other assets that can't be printed because Congress or a central banker says so.

We will sleep easier that way.

Just take a look at the following chart. It shows that the U.S. government hasn't run at a surplus since 2001. And it has suffered losses of $1 trillion or more since 2019...

Between this chart and all the blather of the debate, we're only more convinced that nobody can protect and grow your wealth better than you.

If you need to scratch an election-prediction itch, though, look to stocks first...

History shows the candidates don't tend to guide the market. The more reliable gauge is to look at what the market is doing to see who will win the election.

In brief, if the stock market is up from July 31 to October 31, the incumbent party's candidate generally wins. When the market is down, it's a more likely victory for the challenger.

It's not a perfect predictor, but the evidence is compelling. I last discussed this in a July Digest...

In the 23 presidential elections since 1928, 14 were preceded by gains in the three months prior. In 12 of those 14 instances, the incumbent (or the incumbent party) won the White House.

Conversely, in eight of the nine elections preceded by three months of stock market losses, incumbents were sent packing. This was the case in 2020, by the most razor-thin of margins. From July 31, 2020, to October 31, the S&P 500 lost a slim 0.04%.

And, perhaps appropriately, the election result was slim in Biden's favor (and contested by Trump). In any case, this indicator was again "right" about the election result, as it has been about every one since 1984.

Pay attention to how the market performs over the next two months if you want to predict who might win in November. And don't forget about one more feature of election season...

The "recession factor" is strong...

Since 1932, the incumbent or incumbent party has never failed to win reelection unless a recession has occurred during his time in office. That's also what we had in 2020, albeit briefly amid the COVID-19 panic.

This makes sense. If voters are upset with the economy, they want change. Whether that change works or is "right" is another story. (In most cases, the answer is simply "more spending" and inflation and debt, but I digress...)

Today, the unemployment rate has been generally trending higher since April 2023, up to 4.2%. We're seeing various recession indicators flash (the Sahm Rule and an uninverting yield curve). The Federal Reserve is signaling it will cut interest rates.

Defensive sectors of the market, like consumer staples, have become the leaders.

It looks like prerecession or early-stage-recession market behavior.

Yet while the economy may indeed be weakening as we speak, it's unlikely that you'll hear an "official" recession declaration before Election Day. That's not a conspiracy theory, but a matter of timing.

The job market may be showing the most warning signs right now. But the other part of the "recession" equation, GDP, is still holding up...

Estimates for the current (third) quarter still call for GDP growth in the 2% range. But if GDP growth turns negative by the end of the quarter, folks won't wait around to talk about a recession.

The first third-quarter GDP estimate is due on October 30. Wouldn't that be some timing – a week before people head to the polls? Otherwise, though, any further economic weakness isn't likely to come to light until after the election.

Then we'll deal with the next four years.

Good investing,

Corey McLaughlin

Editor's note: Today, we're seeing the return of market volatility... a presidential election that could go down as the most contentious in modern history... and a looming interest-rate decision that could affect millions of Americans.

But if you've been paralyzed since the summer tech sell-off, you could be making a serious mistake. That's why on Thursday, September 19, Marc Chaikin – founder of our corporate affiliate Chaikin Analytics – is going on camera to share what he sees coming in the next 90 days.

Marc will even reveal the name and ticker of his No. 1 stock to buy to prepare... and his No. 1 stock to avoid. Get the full story here.

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