Highlights
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The August jobs report showed more softening on the labor front.
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Large Cap stocks rebounded while mid and small cap trailed.
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Interest rates continued to decline during the month.
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How do elections impact the stock market?
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Economic Update
Employment
The August employment report showed a weaker-than-expected jobs number, with non-farm payrolls increasing by 142,000, which lagged the consensus estimate of 165,000. June and July payroll figures were also revised down by a total of 82,000. The unemployment rate ticked down to 4.2% from 4.3% in July. Both the participation rate and the employment-population ratio remained unchanged.
Overall, the report reflects a slowdown in job growth, with the three-month average now at 116,000 new jobs per month compared to an average of 197,000 over the past 12 months. The unemployment rate has risen from its early 2023 low of 3.4% to 4.2% in August.
Stocks and Bonds
Volatility remained elevated in the first week of August. The S&P 500 lost over 6% in the first three days while the VIX index, which tracks expected near-term market volatility reached 65.73. As the month progressed, volatility declined, and the S&P 500 finished with a gain of 2.4%. However, four of the Magnificent Seven (Microsoft, Amazon, Alphabet, and Tesla) were down for August, which limited the NASDAQ to a gain of only 0.7%.
The Dow Jones Industrial Average ended the month up 2.0%, setting four new closing highs. Mid-cap and small-cap stocks, however, gave up some of their gains from the previous month, with the S&P 400 (mid-cap) down 0.1% and the Russell 2000 (small-cap) down 1.5%.
Foreign stocks outpaced domestic markets for the month, with the MSCI EAFE index, which tracks developed markets outside the U.S. and Canada, rising 3.3%. Emerging Markets also saw solid performance, with the MSCI Emerging Markets index up 1.6%.
At the sector level, gains were widespread during the month of August. Nine of the 11 sectors were up for the month, led by more defensive areas such as Consumer Staples, Real Estate, Health Care and Utilities.
Energy stocks declined during the month on the back of a drop in crude oil prices. Communications Services, Technology and Consumer Discretionary were also among the weaker sectors in August.
Treasury yields continued to decline during the month of August, with shorter rates dropping faster than longer. The yield on the 2-year treasury note declined by 0.38% while the 10-year was down 0.18%. Both the 2-year and the 10-year finished the month at a yield of 3.91%.
Falling rates continue to boost returns on fixed income. All the benchmarks in the chart below were up during the month and have generated respectable total returns over the past 12 months.
Elections and the Market
In the unlikely case that you hadn’t noticed yet, 2024 is an election year. Passions tend to run just a tad higher every four years, but what does history say when it comes to the impact of the Presidential election on the stock market?
Going back to John F. Kennedy’s inauguration in 1961, there have only been two presidencies where the S&P 500 posted negative returns: Richard Nixon and George W. Bush.
Over that 63-year period the S&P 500 saw the highest absolute returns under Presidents Clinton, Obama, Reagan, and Trump. On an annualized basis the market compounded at 15.2% under Clinton, 13.8% under Obama, 13.7% under Trump, and 10.2% under Reagan. (While Biden’s term is not yet complete, through the end of August, the S&P 500 has compounded at 10.7%, which would place the market’s annualized return ahead of Reagan’s if that trend continues for the next few months.) Note: returns for each presidency are measured from inauguration day through the end of each respective term.
Takeaway #1: The market has generally trended upward regardless of who occupies the White House.
However, stocks have shown strong returns under Democratic presidents. What if one had only invested when there was a Democrat in the Oval Office?
Again, as the chart below demonstrates, if one were to invest only when “their party” controlled the Executive Branch, regardless of which side one may fall on they would have left a significant amount of return on the table. From the beginning of JFK’s term in 1961 through June 30, 2024, the S&P 500 has compounded at 7.37% on a price-only basis (i.e. not reinvesting dividends.) Under Republican administrations the returns were just under 2% and under Democrat administrations it was 5.32%.
Takeaway #2: Although the market has historically performed better under one party, the evidence suggests that staying fully invested remains the most prudent long-term strategy.
How about volatility leading up to a presidential election? The CBOE Volatility Index (or VIX) is a measure of expected volatility for the S&P 500. When things start to look rocky the VIX index typically spikes higher and then settles back down once the horizon begins to clear.
The chart below shows the average of the daily VIX levels during all presidential election years since 1992. Again, the data shows that anxiety typically rises in the lead up to election day.
Similar to past election years, 2024 has already seen a spike in volatility.
Takeaway #3: It’s common for stocks to reflect investor uncertainty in the lead-up to an election. However, historically, once the election is over, market volatility tends to cool down as inauguration day approaches.
The bottom line: When it comes to investing, history shows that the best strategy is to separate your personal feelings about a candidate or political party from your investment decisions. While each administration affects the markets and economy, their time in office is short compared to an investment horizon that can span decades.
Instead, focusing on owning a well-diversified portfolio tailored to your personal goals and objectives will serve you best in the long run.
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