June 2024 Monthly Commentary

Greetings Team,

In a world not so distant, the grand spectacle of the presidential election is fast approaching. In this month's edition of our newsletter, we explore the impact of past elections on the realm of markets and unveil the sectors that will likely flourish under either a Joe Biden or Donald Trump presidency.

But first, let us delve into the current state of the economy, a landscape filled with uncertainty and intrigue. The first half of 2024 has been marked by significant gains in the stock market. In June, the S&P 500 rose 3.8%, bringing an end to the first half of the year with a surge of 14.5% and an impressive 31 closing records. Now, investors find themselves at a crossroads, pondering whether this rally will continue and if the election and its outcome will chart the course for the future of the economy.

Before we embark on this journey, let us first trace our steps and understand how we arrived at this juncture. Earlier in the year, the market found solace in the anticipation of multiple interest rate cuts from the Federal Reserve. These cuts were meant to counterbalance the tightening measures implemented by a series of rate hikes in 2022 and 2023, which raised the Fed's benchmark rate from near zero to 5.25%-5.50%. It seemed that the elusive goal of taming inflation was within reach, as prices appeared to be cooling. The market reveled in the hope of a "soft landing" for the economy, where tightening measures would cool an overheating economy without causing it to collapse. Alas, reality had other plans. Despite the latest CPI report which showed inflation cooling, a series of previous economic reports revealed that prices were heading up instead of down, shattering the market's optimism. The Federal Reserve, faced with this unexpected twist, revised their interest rate forecasts, signaling that only one rate cut is expected before year end.

So, what does this mean for the economy? With the absence of further rate cuts from the Federal Reserve, at least until year end, the market will have to depend on a strong economy and robust corporate earnings as an alternate source of support. According to FactSet the percentage of S&P 500 companies reporting positive earnings and the magnitude of these earnings were well above the 10-year average. Additionally, earnings growth is starting to broaden as the wealth that was once concentrated in a few tech-focused giants is now spreading to the rest of the market. FactSet predicts a 15% growth in earnings for the tech giants, known as the Magnificent Seven, and an impressive 18% growth for the other 483 companies in the S&P 500. This shift in earnings growth leads us to believe the economy has room to grow. Furthermore, we are increasingly seeing opportunities in small-cap companies which present discounted valuations compared to their larger tech counterparts.

Now, let us turn our attention to the market volatility during election years. These turbulent times often lead to unexpected twists and turns, but fear not, for history has shown that these stormy seas eventually find their way to calmer shores. In fact, the chronicles of the past reveal that presidential election years have often brought average gains of more than 7% to the market. The 2024 campaign presents a unique occurrence, for both presumptive nominees have previously held the coveted position of President. This occurrence brings a semblance of predictability to an otherwise chaotic race, providing us with insights into the market's response to their previous reigns.

In 2016, financials, industrials, and defense stocks did well after Trump won the election. It was a logical outcome, as Trump's "MAGA" philosophy aimed to cultivate domestic growth, lower taxes, and reduced regulations. We also suspect that real estate will do better under Trump, given his personal involvement. Although whispers of a sector on the verge of imbalance have begun to circulate.

Should Biden reclaim the throne, we can expect a continuation of his current policies. Infrastructure should do well under his presidency, fueled by his ambitious spending plans. Ancillary sectors, such as construction and steel, should also continue to prosper. Biden's agenda of "Investing in America" and the CHIPS and Science ACT are likely to continue benefiting US Tech and Semiconductors.

But perhaps more important than who the next President is, the market has celebrated when faced with a divided congress, with average annual gains of 15.1% during these times. On the other hand, when one party controls both the House and the Senate, the market has experienced more subdued gains of only 8%.

In conclusion, while the upcoming election holds great importance and potential impacts on your financial well-being, it is crucial to remember that election outcomes generally have a more subdued and limited impact on the long-term prospects of the markets and the economy. History has shown that markets have a way of finding their footing and embracing the opportunities that lie ahead. Let us remember that the true measure of success lies not in the identity of the next President, but in our ability to adapt and thrive amidst the ever-changing landscape.

Onward and upward, always!

Steven and Daniel