Get Ready for the Election
Did you hear there’s an election tomorrow? Yes, we are finally there. As we discussed in detail last week, while of course the election matters, historically who is in the White House hasn’t mattered as much to investors as you might think. If the economy remains strong (as we expect), that would matter much more than just about anything else. We will say this about the election — we could see some market volatility this week, although the extra days it took to determine the winner in 2020 actually saw market strength. If we do see some volatility, keep your eyes on the prize and remember the longer-term trends remain quite solid.
Although the S&P 500 fell last week for the second consecutive week, it is worth noting the Dow was virtually flat and small caps were slightly higher on the week. In other words, the headlines appeared to show weakness overall, but the truth is some of the “Magnificent 7” big tech names disappointed and weakness wasn’t very widespread. Bottom line, investors have been quite spoiled with a historic year for markets and it is important to remember that stocks indeed can go down.
The Best Month, Three Months, and Six Months of the Year Are Here
November is historically a very strong month for stocks. The last time the S&P 500 fell more than 1% in November was in 2008, and it has been higher 11 of the past 12 years. Not to be outdone, it is the best month of the year since 1950, in the past decade, and in election years, while it ranks as the second-best month the past 20 years (only July is better).
It is worth noting that the five-month win streak is over and it shouldn’t be too surprising that stocks fell in October, as this month is indeed the worst month of the year in an election year, as pre-election market jitters are real.
Another reason to remain bullish is November, December, and January are historically the best consecutive three months of the year, up 4.4% on average.
Lastly, we hear all the time about how the worst six months of the year are May through October, also known as the “Sell in May” time of year. We pushed back against this bearish narrative many times this year and all we saw is stocks gain five months in a row during this usually bearish time of year.
Well, now we are entering the best six months of the year, where the S&P 500 has gained 7.1% on average and been higher 77% of the time. This indeed could have the bulls smiling.
But what happens when the ‘Sell in May’ period is strong? After all, this time around stocks have gained more than 15% during this usually weak six-month stretch, one of the best gains over this period ever. We found 11 other times the S&P 500 gained double digits from May through October and the next six months … it did even better, gaining 10 times and climbing 13.2% on average, well above the 7.1% average seen in all years.
Here’s What the October Payroll Report Really Tells Us About the Economy
October payrolls were a big disappointment, with job growth clocking in at just 12,000. However, this shouldn’t be a big surprise because we knew Hurricanes Milton and Helene would weigh on the numbers. We just didn’t know how much. The Bureau of Labor Statistics (BLS) said that Hurricane Milton hit right during their data collection week, and the establishment survey responses were well below average (though it’s hard to quantify what the weather impact exactly was). Beyond hurricanes, strikes at Boeing and in parts of the auto industry in Michigan/Ohio also negatively hit payrolls, to the tune of about 41,000 jobs. Ultimately, all of these are likely to be temporary and will possibly reverse in November.
So that was the noisy part of the report. Let’s look for the signal now, and it’s mixed.
Payrolls for prior months were revised lower. September payrolls were revised down by 31,000 to +223,000 jobs, and August was revised down by 81,000 to +78,000 (the first sub-100,000 monthly payroll number since December 2020). By the way, a month (or two, or three) of sub-100,000 job growth is par for the course even during strong labor markets. In 2019, monthly job growth averaged 166,000 but we saw four months with 100,000 or fewer jobs created. Right now, the three-month average of July-September job growth is 148,000 (ignoring October). That’s not bad, but that’s clearly a slowdown from what we saw in the first quarter of 2024, when monthly job growth averaged 267,000.
At the same time, there was good news elsewhere in the report, with data points that were less impacted by the hurricanes.
- The unemployment rate was unchanged at 4.1%, which is encouraging.
- The prime-age employment-population ratio fell from 80.9% to 80.6%, but even this matches the highest we saw in the last cycle (and there could be some hurricane effects here).
- Wage growth picked up to an annualized pace of 4.5%, and that’s the same pace even if you take a 3-month average. (The 2017-2019 pace was 3.1%.)
- Weekly hours worked was also unchanged and is currently running at the pre-pandemic level. (It is actually higher for non-managerial employees.)
What really matters for an economy that depends on consumer spending is aggregate income growth, i.e. income growth across all workers in the economy. That’s the sum of employment growth, wage growth, and the change in hours worked. Despite the negative revisions to August and September payrolls, and the huge hit from hurricanes and strikes to October payrolls, aggregate income growth is running at a 6.4% annualized pace over the past three months. That’s well above the 4.1% pace we saw pre-pandemic.
There’s Reason to Be Optimistic, But Not Wildy So
The big picture is that the labor market has cooled off a lot relative to where we were at the start of the year, but it’s still in a fairly healthy place right now. But there’s a lot more going on below the surface.
Between mid-2023 and mid-2024, we saw the unemployment rate move higher even as payroll growth remained fairly strong. This was because more people came back into the labor force to look for jobs. However, the dynamics are shifting as the labor market matures. There may be fewer people “coming off the sidelines,” which is going to result in lower monthly job growth, perhaps close to 150,000 – 170,000 a month. Yet if layoffs remain relatively low (as they have), we shouldn’t see the unemployment rate move higher. Going forward, aggregate income growth is more likely to be powered by strong wage growth, rather than employment growth that averages over 200,000 a month.
This also means there are risks to the outlook I sketched out above. It may seem strange to bring up risks when we just saw Q3 2024 GDP growth rise at an annualized pace of 2.8%. Consumer spending was really strong, powered by both income growth and a pullback in the savings rate. But if the savings rate starts to rise again, we could see spending pull back from its torrid pace. Business investment was also strong in Q3, though half of that was from aircraft spending, and that is unlikely to repeat in the next quarter or two. Residential investment (housing) dragged on GDP growth for the second quarter in a row. We’re not optimistic for a turnaround anytime soon, especially with mortgage rates moving back to near 7%.
All this to say, it wouldn’t be surprising to see GDP growth revert to the 2-2.5% range (or even lower) in Q4 2024 and Q1 2025. This is not to say we’ll be in a recession – far from it – but it seems like investors are wildly optimistic. More than the equity market, we’ve seen this in the bond market. Since the Federal Reserve’s (Fed) meeting on September 18, the 2-year US Treasury yield has risen 0.56%-points to 4.16% and 10-year US Treasury yield has risen 0.64%-points to 4.28% (driving mortgage rates higher). This is counterintuitive, since the Fed went big with a 0.50%-point cut at their September meeting and projected more cuts into 2024 and 2025. However, to a first approximation, yields are essentially expected Fed policy rates in the future. If economic growth is expected to be strong, there’s presumably less reason for the Fed to cut rates by a lot.
It seems like investors are a tad over-optimistic about growth and projecting the strong recent economic numbers out into the future. But those numbers are backward looking. Looking ahead, there are risks. For one thing, housing looks to be in a lot of trouble thanks to elevated mortgage rates. There are even risks for the labor market. When job growth is averaging 150,000 – 170,000 a month, it doesn’t take much of a shock to send it below 100,000. That becomes a problem. This is why the Fed needs to continue easing interest rates to mitigate downside risks to the labor market and revive interest-rate sensitive sectors like housing. The good news is that they seem to be attentive to this.
Keep in mind that the Fed was easing rates even in 2019, amidst a solid job market.
It’s about risk reduction at this point, and the good news is that they can continue easing rates because inflation has normalized. That’s thanks to lower gas prices and easing housing inflation. Headline inflation is up 2.1% year over year as of September, which is the slowest pace since February 2021 (as measured by the Fed’s preferred metric, the Personal Consumption Expenditures Index). That should give the Fed plenty of scope to continue to normalize rates.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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