Global Equity Weekly

November 01, 2024 | 16:35

FiveThirtyEight to Midnight

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Equity markets gave back some gains this week alongside a full helping of economic data, earnings results and ahead of the U.S. election. The S&P 500 slipped 1.4%, with technology giving back more than 3%. While the October payrolls report was clouded by hurricane-distorted data, the big picture is that the economy continues to grow at a solid clip (2.8% in Q3) and inflation continues to mellow.

Since late-September (when betting odds began to really break in favour of Trump), markets have moved to lift longer-term Treasury yields, strengthen the U.S. dollar and push equities generally higher. Note that the polls are close, while betting odds are pricing in a roughly 60% chance of a Trump victory next week, up from about 50% at the end of September. We’d consider these features of the ‘Trump trade’ consistent with our macro view of more pro-growth policy, but potential tariffs and a deeper path for the budget deficit. To be fair, other things have happened since late-September as well, including some stronger-than-expected U.S. economic data that have dialed back Fed easing expectations. Still, if at least part of the trade is already getting priced in, a Trump victory shouldn’t catch the market off guard as it did in 2016.

Now, clearly there are some major economic and market implications coming at us in the next few days as the election gets settled. For that, we’ll refer back to last week’s piece from Michael Gregory and Sal Guatieri, 2024 U.S. Election: Macro and Market Impacts.

More broadly, elections specifically tend to have a muted impact on the equity market when considering it in a few different ways. First, immediate post-election performance doesn’t reveal any discernible positive or negative response looking back at episodes since 2000 (see chart). Meantime, S&P 500 performance has been slightly better under a unified government, with a 10.3% average annualized return since 1951 versus 8.5% under divided government. But that’s not very significant from a statistical perspective and, more importantly, may just be a matter of timing since unified government has happened to coincide with some powerful early-cycle recoveries (eg. 2003 and 2009).

Source: Bloomberg

Where there does seem to be at least somewhat of a trend is strength the year before the election, offset by weakness in the middle of the election cycle (two years after election year). Again since 1951, the S&P 500 has posted 17% annualized returns in the year prior to election year (with 88% of years positive), while two years after (this case would be 2026) has been worst at 3.7% annualized (and just 59% positive). All that to say, most of the market performance around elections is a matter of macroeconomic circumstance—the stage of the economic and monetary policy cycle matter most.

Major Index Performance

North American Sector Performances

(% change over period)

Table 1 - S&P 500 Sector Performance

Source: BMO Economics, Bloomberg

Table 2 - TSX Sector Performance

Source: BMO Economics, Bloomberg

TSX Relative Sector Performance

(relative to the index, year-ago = 100; dashed line = 200-day m.a.)

S&P 500 Relative Sector Performance