The bulls keep charging despite election uncertainty

Does the market hate uncertainty or not?

The old aphorism says stocks fare worst when traders’ crystal balls are cloudiest. Well, heading into the presidential election’s finale – and with the proverbial future of the free world at stake – it doesn’t seem like the future could be any more uncertain.

Pollsters have called the contest a toss-up for months, yet stocks have continued to climb higher. The S&P 500 is up over 11 percent in the past six months and 21 percent year to date.

Seriously, one would think a race this tight would cause stocks to collapse, if the market truly hated not knowing the result in advance. Right?

Robert Pearl, co-founder and wealth advisor at G&P Financial, agrees with the maxim that the market tends to react negatively to uncertainty. However, he said that in this instance, there is more certainty than the dead-even polls may suggest.

“The market seems to have high confidence that the Senate will likely remain under Republican control. A divided government would likely temper the policies that a Harris administration might attempt to implement, resulting in more moderate outcomes,” Pearl said.

It is also important to consider the impending expiration of the Tax Cuts and Jobs Act (TCJA) at the end of 2025. In his view, this will force politicians to act before the 2026 midterm elections.

“Historically, no politician wants to raise taxes on individuals right before a midterm, which increases the likelihood that the TCJA will be extended,” Pearl said.

Likewise, Theodore Brooks, chief investment strategist at Nordwand Capital, still thinks the market cares about uncertainty. His belief is that risk equals volatility, which is increased when it’s harder to ascertain the direction of capital flows and sentiment. 

“The market marching higher over the last three months is certainly true. But for the last month ... that movement has more or less stalled as US equities since early October are largely flat to down small,” Brooks said. “In our view, you’re also seeing some rotation in that composite performance, with some less-well-owned parts of the market getting a bid as way to balance risks and not be as overexposed to the same crowded longs.” 

Will Sterling, partner at TritonPoint Wealth, is also in the camp that believes political and economic uncertainty matters to markets. He just sees that uncertainty bubbling “below the surface” even as the S&P 500 waltzes higher.

“The VIX Index, a measure of expected S&P 500 volatility, sits at 20.45 versus the one-year average of 15.2. The MOVE Index, a measure of US bond market interest rate volatility, sits at 136.25 versus the one-year average of 106.65. This tells us that while the water may look placid on the surface, there are some currents underneath that exist,” Sterling said.

Meanwhile, Sean Dann, director of investment research at Marshall Financial, said the market understands there will always be uncertainty in the political sphere. Nevertheless, in his opinion there are a myriad of economic forces, such as Thursday’s Fed rate decision, that are likely to have a greater long-term impact on stocks than even the picking of a new commander-in-chief.

“Politics make up one small slice of the full economic pie [that] market participants are tracking, and so far in 2024, there has been much more good than bad to feast on,” Dann said.

He adds that the impact of the president on market returns has been incredibly limited. Of presidents that served at least one full term since 1950, nine of 11 have seen positive market returns, and both Republican and Democratic administrations have posted solidly positive cumulative returns.

“Political interest in the economic sphere will always peak around the election, but historically, long-term political influence in markets is usually more limited than most would think,” he said.

Along similar lines, Viraj Patel, executive vice president and head of asset allocation at Fiduciary Trust International, points to the recent moves higher in the volatility indexes to prove that the markets do not like uncertainty. He adds that once the near-term uncertainty around who wins the presidency along with potential policy implications becomes clear then markets will return their focus back to Federal Reserve policy, as well as economic and corporate fundamentals.

“Keep in mind that while short-term market volatility surrounding presidential cycles is always present, over the long term it's mostly just noise,” Patel said. “Since 1928, stock market returns during presidential election years of around 9.8 percent are nearly identical to non-presidential election years!”

Moving on, Andrew Graham, managing partner at Jackson Square Capital, said he believes the ambiguous 50/50 "too close to call" election set up has resulted in risk-off positioning, rather than positioning for alpha generation. In his view, hedge fund traders have already reduced their risk over the past few weeks. 

“Estimates of gross portfolio exposure in the US are at their lowest levels since March 2023. Long-only clients have also reduced risk into the election," Graham said.

Finally, Cole Christian, senior wealth manager and director of investments at Hightower Wealth Advisors, advises clients to lean into a different market maxim, “Vote with your ballot, not your portfolio.” 

“As investors, we can only control a few things: the kind of risks we take and how much risk we take,” Christian said. “No one can predict the future! Instead, prepare for this fact by being properly diversified and taking an amount of risk that directly supports your own unique goals.”