A growing number of Wall Street strategists predict that the outcome of the U.S. presidential election will set the stage for a U.S. stock market rebound through the end of 2024, even though the S&P 500 has already risen 21% this year.
Market watchers such as Morgan Stanley's Mike Wilson and JPMorgan Chase's Dubravko Lakos-Bujasa said this week that U.S. stock indexes will move higher once a candidate is declared the winner. Meanwhile, strategists at Jefferies LLC said weakness in the week leading up to a vote is usually a good sign for stocks in the month that follows, so last week's plunge could be a bullish sign.
Of course, how long it will take for clarity on the president and the makeup of Congress after Tuesday’s vote is anyone’s guess. Harris and Trump have been running neck and neck in polls, which has helped to curb risk appetite in recent weeks. U.S. stocks hit record highs last month, driven by Federal Reserve rate cuts, a recovering economy and a boom in artificial intelligence.
While U.S. stocks are coming off their first monthly loss since April, a drop of less than 3% is much milder than the average historical drop of 4%-5% seen before the presidential election in October, according to Deutsche Bank.
Meanwhile, inflows into U.S. stocks have been strong this year, at about $500 billion, according to the bank, a stark contrast to previous years when inflows came only after elections.
Calls for a year-end rebound have historical reasons, as the end of the year tends to be a period of seasonal strength for U.S. stocks.
Morgan Stanley's Wilson believes the election could be a "reckoning event" that sets off a year-end rush to buy stocks. He sees the S&P 500 hitting 6,100 during that time, a gain of about 5.5% from Tuesday's close of 5,782.76.
JPMorgan’s Lakos-Bujas said stock markets will be solid through December once the presidential election is known. He expects stronger investor confidence and lower volatility as the economy and corporate earnings remain resilient, prompting investors to unhedge and refocus on the Fed, a combination that will drive further gains.
To be sure, the outlook for stocks also depends on what happens in Congress. For example, Lakos-Bujas said that with political gridlock in Washington, stocks would do well regardless of who wins the presidential election.
Jefferies strategists led by Andrew Greenebaum believe that in the final weeks of a presidential election year, the performance of the S&P 500 in the days leading up to the election will be more important than which party wins the White House.
The firm's analysis shows that if the market rises in the week leading up to Election Day, stocks tend to fall in the month after. However, if the S&P 500 is weak before Election Day, it will perform best after Election Day, averaging a gain of about 4% by the end of the year. Last week, the benchmark fell 1.4%.
They say small-cap stocks present opportunities as confidence builds, outperforming the S&P 500 after a presidential election. In non-recession election years, the Russell 2000 has averaged a 7% return in the eight or so weeks that follow, based on data going back to 1980.
“Especially given the strong underlying economic backdrop and the Fed’s shift toward lower rates, we think this could be a more compelling opportunity once the event passes,” Greenbaum wrote in a note to clients on Tuesday.
Article forwarded from: Jinshi Data