Election Volatility Comes Into Focus With 36 days remaining until the midterm elections, the market is entering a period that has historically been associated with increased volatility. Midterm election years have traditionally been the most volatile portion of the four-year presidential cycle. The first year following a presidential election is often characterized by optimism surrounding a new administration, while the second year tends to bring greater uncertainty and expectations for policy changes. Historically, the period following the midterm elections has often been followed by a market rally. This year, however, the market has demonstrated considerably more resilience than historical patterns might suggest. The S&P 500 closely tracked its typical presidential-cycle pattern through the previous year before diverging over the summer. Rather than experiencing the weakness often associated with the months leading into a midterm election, the market posted a relatively strong summer. The market’s response to geopolitical developments has also been notable. Following the sell-off tied to tensions surrounding the Iran war earlier in the year, stocks rallied, demonstrating continued resilience despite a challenging backdrop. As the election approaches, some of the effects of rising political uncertainty are becoming more visible beneath the surface of the broader market. While the overall U.S. stock market has historically performed under administrations from both political parties, individual sectors can respond differently to anticipated policy changes. One area worth watching is the industrial sector. Ongoing discussions surrounding data-center development, the reindustrialization of the United States and tax incentives designed to encourage industrial investment have been important catalysts for the sector. In recent weeks, industrial stocks have declined relative to the broader S&P 500 as the perceived likelihood of a Democratic sweep of both chambers of Congress has increased. The relationship is worth monitoring because a change in political control could influence the pace of data-center development and the future of certain tax incentives supporting industrial investment. While these trends do not provide a basis for predicting the outcome of either the election or the market, they offer insight into how expectations surrounding policy can influence individual areas of the market. As the election approaches, continued monitoring of these developments can help identify areas of potential downside risk and inform portfolio decisions as conditions evolve. Reasons for Optimism Despite the concerns facing investors, several underlying economic and corporate indicators provide reasons for optimism. One of the most encouraging developments is the strength of corporate profit margins. Profit margins have reached record levels, and there is a direct relationship between corporate profitability and the valuation of the S&P 500. Strong margins suggest that corporate America remains fundamentally healthy, providing an important foundation for current market valuations. The labor market also continues to demonstrate historical strength. Employment remains an important driver of consumer spending, and continued employment growth supports household income and spending throughout the economy. Personal incomes have also turned higher, providing another positive signal for consumer activity. When employment and income remain resilient, consumers generally have greater capacity to maintain spending, which can help support broader economic growth. Beyond consumers, industrial production remains strong, while manufacturing and trade sales have continued to show encouraging results. These measures provide additional evidence that economic activity remains resilient despite the uncertainty surrounding inflation, interest rates, energy prices and the upcoming election. The current concerns facing markets should not be overlooked. However, focusing exclusively on the negative headlines can obscure some of the positive developments taking place beneath the surface of the economy and financial markets. These indicators serve as important reminders that market conditions are influenced by a wide range of factors. While uncertainty and volatility remain part of the current environment, corporate profitability, employment, personal income, industrial production, manufacturing and trade activity all provide reasons to maintain perspective. There are legitimate concerns to monitor, but there are also meaningful signs of underlying strength. Looking beyond the headlines and considering both sides of the market landscape can provide a more complete picture of the current environment. Greg Powell, CIMA® President and CEO Wealth Consultant Email Greg Powell here Bobby Norman, CFP®, AIF®, CEPA® Managing Director Wealth Consultant Email Bobby Norman here Trey Booth, CFA®, AIF® Chief Investment Officer Wealth Consultant Email Trey Booth here Ty Miller, AIF® Vice President Wealth Consultant Email Ty Miller here Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing. The opinions voiced in this material are for general information only and are 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. Economic forecasts set forth in this presentation may not develop as predicted. No strategy can ensure success or protect against a loss. Stock investing involves risk including potential loss of principal. Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor. The post Charts of Optimism first appeared on Fi Plan Partners.
