Election Mania

*Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

DJIA

• 52-wk: +29.91%
• YTD: +11.74%
• Weekly: ±2.68%

S&P 500

• 52-wk: +41.06%
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• Weekly: ±0.96%

NASDAQ

• 52-wk: +46.47%
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• Weekly: +0.16%

SPDR S&P Retail ETF

• 52-wk: +30.37%
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• Weekly: -3.35%

Weekly Market Recap

• Global stock markets experienced mixed movements this week, with the Nasdaq climbing to an all-time high amid Big Tech earnings announcements and days away from the U.S. Presidential election.
• Alphabet's Q3 2024 earnings crushed estimates, showcasing earnings per share of $2.12, a 37% increase from the previous year, a key driver of the tech sector's performance this week.
• Core Personal Consumption Expenditures (PCE) met economists’ expectations with the Fed likely to remain on track to cut rates next week; the September jobs report was mixed.
• U.S. mortgage rates jumped for the 5th consecutive week, with 30-year reaching 6.72%. Homebuilder D.R. Horton reported earlier than anticipated, reflecting FQ4 2024 outcomes that disappointed investors.
• Treasury yields fluctuated, with the 10-year rising as high as 4.35% following stronger-than-expected economic data from the U.S. job market, signaling continued economic resilience.
• Tariff disputes between the EU and China escalated with increased tariffs on electric vehicles from China, impacting automakers and contributing to geopolitical trade tensions.

The election loomed over the markets last week, with both investors and businesses assessing potential outcomes and subsequent policy shifts. Global markets experienced mixed movements amid Big Tech earnings announcements and the U.S. Presidential election, which is days away. Analysts continue to speculate on each candidate's policies and their impacts on various sectors and industries. The tight race between Kamala Harris and Donald Trump has heightened market uncertainties, with implications for fiscal and trade policies. Both domestic and international markets are keenly observing election-related developments, with investors balancing portfolio decisions amidst the backdrop of potential political changes. In particular, the technology, healthcare, and financial sectors are closely watched, as policies from either administration could significantly reshape these industries.

The September jobs report reinforced the notion of economic strength, a softer number of job openings, and a rise in layoffs and discharges. Mixed signals reflect a labor market transitioning through various economic challenges, including workforce strikes and weather-related disruptions. Meanwhile, September Personal Consumption Expenditures (PCE) data showed a 0.3% increase month-over-month, aligning with forecasts while showcasing persistent pressures on consumer spending. These indicators underscore consumption pattern resilience despite inflation, which continues to influence the Federal Reserve's stance as it approaches the November FOMC meeting.

Big Tech stocks, particularly those from the Magnificent 7, were in the spotlight this week. Alphabet's (GOOGL) Q3 2024 earnings stood at the forefront as a major market mover, with a notable earnings per share increase of 37% year-over-year. Alphabet demonstrated significant growth in revenue and profitability, reinforcing its position against competitors like Microsoft (MSFT) and Apple (AAPL), which also beat both top and bottom lines. Analysts note that this performance reflects Alphabet's successful diversification efforts and cost-control measures, leading to positive investor sentiment and an upward tick in its stock price, despite broader economic uncertainties. Meta Platforms (META) also surpassed expectations, but its share price slipped amid its cautious outlook on growth and increased spending plans for AI-related infrastructure, reflecting ongoing pressure on the company's profitability. These MegaTechs' results are likely to influence the broader perception of tech sector performance, as the Magnificent 7's financials are crucial since they collectively contribute to the S&P 500's earnings growth and major indexes for influential status within global markets.

As we approach the Presidential election, uncertainty is once again at the forefront of investors' minds. The current economic environment, marked by elevated inflation, geopolitical tensions, and fluctuating market conditions, adds complexity to an election already laden with divisiveness.

While we cannot predict the election outcome with certainty, it is crucial for investors to prepare for different scenarios to position their portfolios accordingly.

Put Politics Aside – Focus on the Markets

We all understand this is a divisive atmosphere and a heated election.

To effectively navigate the election, it is essential to set aside any political bias and objectively assess how different election outcomes could impact the financial markets.

Let us break down what to expect before, during, and after election day, and how each candidate's potential victory could affect the flow of money.

Before the Election (Nov 2nd-4th)

The days leading up to the election are likely to be characterized by caution and volatility. Investors may reduce exposure to stocks, particularly in sectors most sensitive to policy changes.

Historically, the markets have seen elevated volatility ahead of elections.

For example, in 2020, the S&P 500 experienced a sharp 7% decline in late October, as uncertainty loomed over how policies would affect taxes, healthcare, and energy.

Leading up to the 2024 election, we could see a similar pattern. With heightened political tension and polarized public opinion, some investors may prefer to sit on the sidelines until results are clearer.

Expect increased volatility, with the VIX potentially spiking 10-20% as options markets price in the uncertainty of both potential outcomes.

Defensive sectors such as utilities, consumer staples, and healthcare could see a boost, as investors seek safer harbors amidst the uncertainty.

Gold Mining Stocks Are a Bargain. Here’s How to Buy In.

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Remembering the Value of Bonds in Investment Portfolios

Many investors may remember 2022 as a year when diversified portfolios did not seem to deliver. Stocks and bonds both suffered declines in tandem, as inflation’s upside surprise caused the Federal Reserve to shift quickly from quantitative easing (QE) to quantitative tightening (QT) and aggressively raise the benchmark Fed funds rate from 0.1% to 4.4%.

Bonds (10-year U.S. Treasuries) posted two consecutive years of declines for the first time since 1958-1959, and stocks fell -18% in 2022 before recovering the next year. 10-year U.S. Treasury bond yields soared (and prices fell) in the years following the pandemic, while the 7-10-Year U.S. Corporate index also slid by over -20%. The bear market in bonds coincided with the bear market in stocks.

As a result, many investors heralded the ‘end of the 60/40 portfolio.’ But those who questioned the future veracity of diversified portfolios were getting a key point wrong. Stocks and bonds are not supposed to be perfectly uncorrelated assets, meaning that when one ‘zigs’ the other ‘zags.’ We know this to be the case from history.

Looking back at the late 1960s and 1970s, we find an environment when stocks and bonds started moving in the same direction (positive correlation), which was also a time when inflation shocked to the upside (much like 2022). The 1973 oil embargo catalyzed already creeping inflation, and inflation expectations also started to drift higher. Positive correlation between stocks and bonds took hold.

It wasn’t until the late 1990s when a negative stock-bond correlation resurfaced, which was also the time when inflation expectations fell back down to more normal/neutral levels (slightly less than 3%). That negative correlation lasted for a little over 20 years, which meant that diversified stock-bond portfolios were largely effective at mitigating volatility and hedging against weak growth.

2024 and beyond looks more like the late 1990s from an inflation perspective than in the 1970s, with inflation expectations anchored around 3% (at least for now). While this may suggest a higher likelihood of a negative correlation between stocks and bonds than a positive one, it’s important to remember that long-term, the correlation between U.S. stocks and bonds is far closer to zero than it is to 1.0. This means the two asset classes basically have no predictable relationship when it comes to directional movement. When one zigs, the other can zig too. Or it can zag. Or neither.

The point here is to remind investors that the inclusion of bonds in investment portfolios is not a decision about correlation. It’s a decision about reducing volatility, generating income, or both. History tells us that bonds are reliable income generators, and they also tend to exhibit less volatility than stocks over time, which can be useful for investors with a more conservative risk tolerance. If an investor also has less need for long-term growth and/or a shorter time horizon, bonds can play a crucial role in the asset allocation decision in those cases, too.

Bottom Line for Investors

Anchored inflation expectations and moderating growth tend to favor a negative stock-bond correlation, which would strengthen a ‘balanced’ portfolio’s ability to mitigate downside capture during a period.

Volatility should increase dramatically this week. Fasten your seatbelts.

Factors this week I'm focusing on this week:

1) Tuesday is ELECTION Day

2) FOMC announces its monetary policy

3) Earnings season rolls on roughly 20% of S&P 500 companies reporting

Richie

DATA: Barron’s print edition page 29 11/4/24 Market Week Teresa Rivas

Paragraph: one Seeking Alpha online 11/3/24 Last Weeks Market Recap Seeking Alpha

Paragraph: two Epoch online edition 11/1/24 Only 12,000 Jobs Created Andrew Moran

Paragraph: three Weekend Wisdom Zacks online edition 11/2/24 Tactics that Work in Good and Bad Markets Jeremy Mullin

Paragraph: four Mitch on the Markets online edition 11/2/24 Remembering the value of a 60-40 Portfolio Mitch Zacks

Paragraph: five Barron's print edition 11/4/24 page 23 Gold Mining Stocks Are a Bargain. Here's How to Buy in. Andrew Bary

Paragraph: Six Closing remarks & factors I’m looking at. Richie Naso

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