By Ben Norris, CFA, Senior Investment Strategist, Vice President
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Politics entered the market’s lens last week as the Republican National Convention (RNC) came to a head with former President Trump selecting Ohio Senator J.D. Vance as his pick for vice president. Not much else from the RNC was impactful, and Trump’s speech didn’t break any new ground. The election matchup shifted significantly as Trump began to pull ahead in the polls as President Biden faced growing calls from fellow Democrats to withdraw from the race. Biden spent much of the week rebuffing those calls and remaining resolute in his commitment to face Trump in November; that all changed on Sunday afternoon when Biden tweeted that he would be stepping aside immediately and endorsed current Vice President Kamala Harris. Harris hasn’t officially secured the Democratic party’s nomination, but most polls show that she is the front-runner to face Trump.
I tend to shy away from discussing politics and markets in the same forum. My primary motivation for avoiding a comingling of the topics is that markets don’t particularly care which party is in the White House over a full market cycle. While Republicans and Democrats may believe the policies they lobby for will be better for the economy (and thus the stock market), the data just doesn’t support that belief in a meaningful way. Essentially, if investors are patient enough, markets always go up. It’s a bit like the TV show “Whose Line Is It Anyway,” where host Drew Carey would open with “…welcome to Whose Line Is It Anyway?, the show where everything’s made up and the points don’t matter.” Obviously not everything in American politics is made up, and policies do matter, but the political party in control doesn’t matter as much as many would like to believe.
Based on data going back to 1957, when Dwight Eisenhower was president, either party could make an argument that they generated better results for the stock market. Since Eisenhower, the median return for the S&P 500 favors Republicans, while the average return actually favors Democrats—calculating compounded returns further complicates things. There is also the fact that presidential nominations don’t perfectly line up with calendar years, and several presidents from both parties have been lame ducks with no real influence for the final months of their terms. With November quickly approaching, both parties will likely make the case that they are the party investors should favor, but those assertions should be ignored. Similarly, measures of economic growth are influenced by far too many factors, and policies can have effects that are significantly lagged to the point that their influence on gross domestic product (GDP) would be nearly impossible to accurately assign. With this in mind, the S&P 500 has returned more than 10% annualized over the past 30 years (on a total-return basis), a great result despite the fact that we’ve had two Republicans and three Democrats in the White House, with significantly different policies and world views. While year-to-year returns will be lumpy, an investor that consistently stays invested over the long-term will almost certainly be rewarded.
Just as politics shifted significantly last week, markets also saw a substantial rotation among size and style performance. Several strategists have called for improved performance in small- and mid-cap stocks over the past year, with some calling for an outright change in leadership from the “Magnificent 7” to everything else. Those calls have, for the most part, fallen on deaf ears. While there have been short bursts of strong performance from the broader market, most of the gains we’ve seen since January 2023 have been thanks to a small handful of stocks. Year-to-date, the Magnificent 7 have seen an average gain of 37%, and with a cumulative weight of more than 30% in the S&P 500, they have had an overwhelming influence on the broader index. That trend saw a noticeable shift last week as nearly every other size and style index outperformed the large-cap indices. While mega-cap technology, communication services and consumer discretionary constituents bowed out for the week, more cyclical sectors such as financials, industrials and energy outperformed. By the time the market polls were closed, the Russell 1000 Growth was down nearly 4%, while the Russell 1000 Value was up 0.7%. Similarly, small-cap stocks finally got their time in the spotlight, with the Russell 2000 gaining 1.7% — enough to be the best-performing major U.S. index for the week.
Unfortunately, I’m not sure the transfer of power between the Magnificent 7 and everything else will last. First, prospects for mega-cap earnings growth remain very strong. While these stocks have gotten more expensive on a price-to-earnings basis, they are still expected to grow earnings faster than the rest of the market through the end of 2024. Second, these stocks have served as a safe haven for investors during volatility in this market cycle, and I would expect an above-average level of volatility heading into November. However, looking toward 2025 and beyond, I am increasingly optimistic that small-caps and mid-caps will be front-runners. A falling-rate environment will be supportive for many of these companies that have floating-rate debt on their balance sheets. Similarly, lower rates tend to support more cyclical investments, where small-caps and mid-caps are much more exposed. Finally, the valuation and forward earnings growth for these stocks is favorable relative to their large-cap counterparts. If the U.S. Federal Reserve (Fed) can engineer a soft landing (sustained economic growth paired with steady inflation), I believe we could be in for a more durable expansion versus the short bursts of performance we’ve seen in the past two years.
This week’s economic calendar is headlined by the second-quarter reading of U.S. GDP on Thursday, followed by the Personal Consumption Expenditures (PCE) Price Index on Friday. Both figures will be closely watched as investors attempt to game out what the Fed’s next policy move will be at its July 31 meeting. The second-quarter earnings season will also ramp up this week, with companies such as Verizon (VZ), Tesla (TSLA), Alphabet (GOOGL), Coca-Cola (KO), Visa (V), United Parcel Service (UPS), Chipotle (CMG), Colgate-Palmolive (CL) and 3M (MMM) all scheduled to report results.
| TIME (ET) | REPORT |
PERIOD |
MEDIAN FORECAST |
PREVIOUS |
| MONDAY, JULY 22 | ||||
| None scheduled | ||||
| TUESDAY, JULY 23 | ||||
| 10:00 am | Existing home sales |
June |
3.95M |
4.11M |
| 9:45 am | U.S. Services PMI |
July |
55.0 |
55.3 |
| 9:45 am | U.S. Manufacturing PMI |
July |
51.4 |
51.6 |
| WEDNESDAY, JULY 24 | ||||
| 10:00 am | New home sales |
June |
644,000 |
619,000 |
| THURSDAY, JULY 25 | ||||
| 8:30 am | U.S. GDP |
Q2 |
1.9% |
1.4% |
| 8:30 am | Initial jobless claims |
July 20 |
237,000 |
243,000 |
| 8:30 am | Durable goods orders |
June |
0.6% |
0.1% |
| 8:30 am | Wholesale inventories |
June |
0.6% |
|
| FRIDAY, JULY 26 | ||||
| 8:30 am | Personal spending |
June |
0.3% |
0.2% |
| 8:30 am | Personal income |
June |
0.4% |
0.5% |
| 8:30 am | PCE price index (y/y) |
June |
2.5% |
2.6% |
| 8:30 am | Core PCE price index (y/y) |
June |
2.5% |
2.6% |
| 10:00 am | Consumer sentiment |
July |
66.0 |
66.0 |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market