Stock Market Surge and Election Speculation

The stock market continues to reach new heights, prompting speculation that a potential Donald Trump presidency is a driving factor. However, experts caution against attributing the market's success solely to election developments.

On Tuesday, the S&P 500 closed at a record high, while the Dow Jones Industrial Average achieved the same feat on Monday. The market saw a slight dip due to declines by Goldman Sachs and other contributing factors.

With the New Hampshire primary around the corner and Trump's increasing chances of winning the presidency, chatter has intensified about the impact of elections on the markets. Following his victory at the Iowa Caucus, presidential candidates Vivek Ramaswamy and Ron DeSantis have dropped out, leading to a more condensed playing field within the GOP.

Julian Emanuel, Chief Equity Strategist at Evercore ISI, has been inundated with client questions about the potential market effects of a Trump win. He suggests that small-cap stocks, which generate 79% of their revenue in the U.S., may benefit from Trump's proposed 10% tariff on imported goods. In contrast, the S&P 500, which only derives 59% of its revenue domestically, might be less impacted.

Bank stocks are also anticipated to receive a boost. Trump's appointee at the Federal Reserve, Michele Bowman, opposes a regulation that would increase bank capital requirements. This proposed regulation was initiated by Fed Vice Chair Michael Barr following last year's bank failures. The removal of this regulatory burden could enhance bank lending, as noted previously.

Despite these factors, the SPDR S&P Bank ETF has experienced a 0.8% decline this year, while the Russell 2000 has fallen more significantly by over 2%.

Barry Knapp, Director of Research at Ironsides Macroeconomics, argues that the market rally cannot be solely attributed to the presidential election's outcome. According to Knapp, banks would be performing strongly regardless of whether a Trump or Haley victory was expected.

Uncertainty and the Stock Market

Introduction

The stock market is currently facing a great deal of uncertainty, and this is evident as oral arguments on a lawsuit that disqualifies the former president from Colorado's Republican primary ballot are scheduled for February 8. According to Anna Rathbun, the chief investment officer at CBIZ Investment Advisory Services, it is too early for the market to be influenced by the 2024 election. Rathbun explains, "The market needs to see a lot of these uncertainties filtered out first."

Labor Day as a Turning Point

Many investors, including Rathbun and Knapp, believe that Labor Day will be a crucial point at which investors will begin to take into account the outcome of the national elections. Rathbun notes that, apart from the die-hard party loyalists, people will be influenced by how the economy feels and performs over the summer and into the fall.

Historical Data

Analyzing historical data reveals interesting trends. In the three months before President Joe Biden's victory in 2020, the S&P 500 rose by 2.26%. Conversely, it fell by 1.9% in the three months before President Trump took office during the same period. It is worth noting that Hillary Clinton was favored heading into election day.

Current Factors Driving the Stock Market

Currently, the stock market is being driven by a combination of factors. Firstly, signs of a strong economy are contributing to market exuberance. Additionally, unwavering support for technology companies has led to record highs this month. Retail sales and jobless claims data have provided evidence of a smooth-running economy, despite uncertainty surrounding Federal Reserve rate hikes. Furthermore, the promise of artificial intelligence has boosted tech names like Nvidia and AMD, resulting in double-digit gains this year.

Conclusion

In conclusion, while the upcoming elections hold significant importance, they will have to wait before they truly impact the stock market. Investors are keen on first witnessing the resolution of uncertainties. Only after experiencing the performance and feel of the economy throughout the summer and fall will they start considering the outcome of the national elections.