Last week we at Cornerstone pointed out how we thought the labor market is slowing down. The June jobs report agrees. Despite the headline of jobs added (206,000 actual versus 190,000 consensus expectation), unemployment rose by 0.1% to 4.1%:
Also, the prior month was revised down 111,000 jobs, which is a big revision:
To us, the message remains clear: the labor market is slowing.
Previously, the Federal Reserve was reluctant to reduce interest rates despite softer inflation because of the perceived strong labor market. This is arguably now less the case and was exemplified by Fed Chair Jerome Powell’s testimony in front of Congress last week, where he became significantly more doveish.
Furthermore, government jobs accounted for most of the upside in the data. Private payrolls, which the market focuses on, came up short (136,000 jobs added versus an expected 160,000):
The government added 70,000 jobs compared to estimates of 45,000. Is the government adding jobs a reason for the Fed to stay hawkish? Highly doubtful. Frankly, the market doesn’t care about government jobs because they don’t add to the economy.
This recent data put welcome downward pressure on interest rates. The one-year Treasury rate dropped to a 4% handle as of this writing, a level not seen since May 2023:
At the same time, the 10-year Treasury was at 4.195%, which is down from 4.74% a mere two months ago.
This reflects the fact that the Fed has more reasons to be dovish compared to after its June meeting. As we know, the Fed has a playbook for dealing with a softer jobs market: turn doveish.
It Likely Doesn't Matter Who's First To 270 Electoral Votes
Let's now touch on everyone’s favorite topic: election season. Let the mudslinging begin! (just kidding)
After the most recent debate, nerves are beginning to run high heading into the November election. However, that's perfectly normal. Presidential candidates tend to highlight society’s biggest issues, and campaigns reinforce those negative narratives in the media.
It's no wonder investors get spooked around this time every four years.
But the purpose of this post is to remind our clients and readers not to make that mistake. Today we want to set the record straight by reviewing history and explaining our time-tested tactical strategy heading into elections.
Simply put, the appropriate way to handle politics as an investor is to be completely agnostic. Investors tend to over-extrapolate how much politicians will impact what matters most to stocks, which is earnings and interest rates.
A recent Capital Group (American Funds) study found that investors overwhelmingly favor cash over stocks in election years. Since 1992, investors have invested over five times more in money market accounts than in equity funds in election years. In other words, political jitters have cost investors extraordinary gains.
For example, check out the stock market performance in each year of the four-year presidential cycle:
Since 1928, the third year of a president's term has been by far the best for stocks, with an impressive 18.1% average gain. It’s the least emotional year in a four-year term. The midterm election year (year two) has consistently been the weakest by far because it holds the greatest risk of actual change due to blowback against the incumbent. It’s not about the party, it’s about change which leads to uncertainty.
Thus, the data is clear: dumping stocks over electoral uncertainty has been a losing strategy. That said, the political jitters of 2024 could be a real tester. Why is that? As the chart below shows, in election years since 1979, the S&P 500 averages second-half performance of 4.03%. However, when first-half performance tops 7% or more (like this year), the expected gain more than doubles to 8.65%:
Up to now, the evidence supports removing emotion and holding equities.
If you're feeling unsettled about a potential switch in the Democratic nominee or a surprise Republican win, that’s understandable. But for investors it likely doesn't matter who's first to 270 electoral votes at all.
Everyone has their own political preferences, but investing needs to be agnostic, unemotional, and based on data. See, stocks tend to like both parties.
In truth, there isn't a strong correlation between equity performance and which party controls the White House:
The two outliers above are explained by the greatest scandal in American politics so far (Nixon) and a domestic terrorist attack (Bush). So, staying invested doesn't seem like a bad idea.
We know there are a few different scenarios that can play out regarding the House of Representatives and the Senate. For stocks, these races tend to matter more than presidential ones, despite increased attention on the latter.
The key is to forget picking parties. The clearest trend when analyzing markets historically under various scenarios is equities do best when Congress is split, with different parties controlling the House and the Senate (i.e., gridlock is good).
Since 1933, stocks have risen 13.6% under Democrats with a split Congress and 13.7% under Republicans with a split Congress:
This is likely because investors don't like uncertainty. Shared political power forces incrementalism, making big policy changes and legislative surprises significantly less likely.
We can argue that 2023 and the first half of 2024 are perfect recent examples. Stocks soared with the GOP running the House and the Democrats controlling the Senate.
The other historical performance trends in the chart above are a mixed bag. But here's the bottom line: stocks have done best when the same party doesn't control the House and Senate, regardless of who resides at 1600 Pennsylvania Avenue.
To summarize, let’s pull back the curtain on the two big tactical playbook takeaways we implement at CFS:
- Resist the urge to sell stocks because of the election.
Remember how stocks perform historically in election years, especially when they start the year as strongly as in 2024. History tells us that if Congress is divided, which is likely, the 2025 outlook is even more bullish.
- Buy into pre-election selling.
Many investors can’t resist emotionally dumping stocks before elections. This “emotional tax” creates opportunities for investors reliant on tactical, data-based analysis.
Rely on data. Stay the course.
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* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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