Three Trends to Know.
One of the few certainties of investing is that markets don’t like uncertainty. And one of the biggest uncertainties always surrounds elections and their potential impact on the market outlook. Sometimes that impact is significant, sometimes less so, but it is often very difficult to forecast accurately. Case in point: The 2024 presidential and congressional elections. The presidential race seems to take a new — and surprising — turn almost weekly. Constantly fluctuating polls suggest a very tight race.
Nonetheless, it seems very unlikely either party would win the Oval Office, control the House of Representatives and win a filibuster-proof majority in the Senate of 60 seats. In short, it is likely that there will still be some guardrails in the legislative bodies, if not divided government. This sets up a generally favorable scenario from an investor’s perspective as the pace of legislative changes is slower than a clean sweep and offers greater stability for investors.
Still, investors may want to consider adjusting their portfolios in the weeks leading up to the election. At the very least, they should be aware of three trends that may shape the markets and could influence portfolio decisions heading into the election.
1. Expect a spike in volatility. Historically, the months leading up to a presidential election carry a higher level of volatility than during a non-election year.
Already we are seeing signs of increased volatility, with the late July and early August selloff that saw many of the market leaders this year – namely, the so-called Magnificent Seven stocks – decline well off of their highs for the year.
Investors may be able to manage market volatility through a covered call strategy, consisting of an actively managed basket of high-quality dividend paying stocks that can seek income while hedging against market declines through tactical option writing on individual stocks. Covered call strategies have tended to do well when volatility has increased, as the option premium from selling the calls generally increases with the volatility.
In short, volatility can be painful, but it can also be an opportunity to reposition a portfolio.
2. Market cycles — and the Federal Reserve — still matter. It’s true that certain sectors and industries may perform better – or worse – in the months leading to an election as the market gauges the impact of policy proposals. However, the two party’s policies are not the only lens to view market performance. Generally, the market and economic cycles play an even more important role in how stocks trade broadly and at the sector level than who is in the White House. Many economists believe we are in the midst of a late cycle, and expectations are high that the Federal Reserve is likely to start cutting interest rates in the next few months.
The shifting macroeconomic environment has two potential implications for investors.
- First, investors may want to consider income-focused strategies or funds. Companies offering attractive dividends are appealing if bond yields fall as interest rates come down, and if growth is slowing.
- Second, investors may want to shift away from large-cap companies and toward small-cap firms. Earnings forecasts for small-cap companies have remained strong, and small-cap stocks have tended to benefit more from lower interest rates, which have helped reduce their debt levels.
3. Be ready to take advantage of opportunities. The heightened volatility, a shifting interest rate regime, and the potential for policy impacts on sectors and industries all underscore the importance of being on the lookout for tactical or longer-term opportunities. For example, although it is extremely difficult to time the markets, a selloff in a sector that represents a long-term trend that is transforming economies or societies — a so-called thematic investment — may represent a sound entry point for investors over the long term.
Summing up
Although markets don’t like uncertainty, and there is plenty of that to go around in this election, market observers like to look to history for guidance. As seen in the graph, the good news on that front is that presidential election years have generally been pretty good ones for the markets.
Furthermore, as seen in the chart below, the average return of the S&P 500 Index since 1928 during election years is 11.6%, which outperforms its long-term average.
Of course, past performance does not indicate future results, and given the uncertainty this year, there is no guarantee that would occur in 2024. That’s why the most important strategy for investors this year is to maintain a diversified portfolio, while being disciplined and focused on your long-term goals.
Related ETFs
- DIVO: Amplify CWP Enhanced Dividend Income ETF
- HCOW: Amplify Cash Flow High Income ETF
- QSWN: Amplify BlackSwan Tech & Treasury ETF
- IDVO: Amplify International Enhanced Dividend Income ETF
- SOFR: Secured Overnight Financing Rate SOFR ETF
- COWS: Amplify Cash Flow Dividend Leaders ETF
Index definitions:
The S&P 500 Total Return Index (S&P 500), is a market-capitalization weighted index of the 500 largest U.S. publicly traded companies.
The Nasdaq Composite (Nasdaq) is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange.
The Dow Jones Industrial Average (DJIA) is a price-weighted index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange and the Nasdaq.
The 10 Year Treasury is represented by the Bloomberg US Treasury Bellwethers 10 Year Total Return Index that measures the on-the-run (most recently auctioned) U.S. Treasury bond with 10 years’ maturity.