Readers may recall the market letter from this time last year about seasonality. It discussed average returns during different times of the year and how this period, November through January, is typically the best. Last year the S&P 500 was up nearly 17% over those three months. This year, in addition to normal seasonality we also have the election cycle to overlay, which since 1954 has demonstrated average positive post-election returns of 5.6% over the ensuing 3 months and 8.6% after 6 months. Usually, September and October are challenging for investors and come with “October Surprises” and market sell-offs and even market crashes like in 1907, 1929, 1987, and 2007. Traders have been bracing for a market correction for many weeks now. In September we got a steep but very brief sell-off of around 6%, but the indices managed to fully recover and actually posted gains in both September and October. Objectively, this is a positive development, but it brings with it some anxiety. If stocks didn’t go down during the historically worst period of the year, what will they do when they should be going up, continue to march higher or take a breather?
Historically when markets show strength during otherwise tough times that is a very positive signal. So, bucking the lackluster autumn trend in favor of positive market performance should bode well. There is an old axiom on Wall Street, “buy in October and get yourself sober.” This strategy is referring to both buying during weakness and buying ahead of the year-end rally (i.e. put your worries aside and the bottle down and make some money.) We can’t know for certain what is driving markets higher this time around, but a plausible explanation could be the election. Markets don’t like uncertainty much more than they don’t like any single political party. In fact, the stock market has performed its best when there is a Democratic president and a Republican congress. All spring and summer volatility was relatively low and the markets were chugging along. Then Biden dropped out and volatility spiked to its highest levels of the year. Stocks sold off roughly 10% before bottoming a few weeks later. Calm returned to the markets at roughly the same time polls were showing the Democrats leading in the presidential race. Then in September polling started switching in favor of the Republicans taking the White House and there was another spike in volatility and a sell-off in the markets. Calm returned again and since then the S&P has moved sideways to higher.
So, where does that leave us as investors and money allocators? We don’t position our portfolios according to seasonal tendencies alone or simply who will sit in the Oval Office. We have to look at the totality of data points. And the current evidence indicates that we are in a strong and healthy bull market. This is a market that’s solidly up on the year, bucking seasonal trends, expanding breadth (more stocks going up than going down), and booking robust earnings from the dominant market leaders (GOOG, AMZN, AAPL, NVDA, TSLA). The main element that could put a halt to the bull run is the election. There almost certainly will be increased volatility in the coming weeks (as seen today.) One could almost think of the election as a giant earnings report. When a company posts earnings the stock will often move greatly in one direction or the other. Usually, the move is not exactly dependent on whether the report was good or bad but rather if it was unexpectedly good or bad. Traders will also typically “buy the rumor and sell the news.” This means that rumors of some good development or product can cause traders to bid the price higher only to see it fall again once that product is officially announced or actualized. Perhaps this is what we will see with the election. If one candidate winning is already “baked in” to the markets, we could see a sell-off if the expected takes place. Or we could see selling pressure arise from an unexpected or undesirable outcome. Either way we will be cautious over the next several weeks even if we believe this bull market is healthy and still has legs to run.