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John J. Gardner, CFP®, CPM®

blackhawkwealthadvisors.com

Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

September 12, 2024

The Election and Your Investments

How the ’24 Presidential Election Might Impact Your Savings and Investments

What impact on investments from the 2024 presidential election should an investor expect? There are several potential impacts on investments stemming from the upcoming 2024 presidential election that investors should consider. Understanding these factors can help in making informed decisions and adjusting investment strategies accordingly. Below are some key considerations I think are timely and relevant. However, first things first. Regardless of the event and its potential short-term impact on your investment portfolio, the most important consideration is your investment plan. How is your plan doing with respect to your goals? If the plan in place is working, fight the urge to make changes to investment holdings because of the event and chase expected, likely temporary, winners from the outcome. Here’s some potential impacts on the markets and your investment leading up to the election and beyond:

*Market Volatility-

Historically the presidential election has created controversy, speculation, drama and uncertainty. As the lead-up to the election creates uncertainty in the markets, volatility increases. Investors may react to polls, debates, and political developments, which can cause short-term fluctuations in stock prices and bond yields.

*Policy Changes-

Potential tax policy changes, especially this election, can impact your investments. Depending on the outcome, changes in tax policy (such as capital gains tax rates or corporate tax rates) could directly impact investment returns. Higher taxes could discourage investment and affect stock market performance. The unrealistic proposal to tax unrealized gains makes this year’s election more unique than most relative to potential policy changes.

*Regulatory Changes-

Different administrations may impact sectors through regulations (e.g., financial regulations, environmental policies). Industries such as energy, healthcare, and technology could see significant changes based on the winning candidate’s policies.

*Monetary Policy Influence-

Federal Reserve decisions impacting interest rates and their influence on inflation and the macro economy will be closely followed leading up to and after the election this year. The election outcome could influence the Fed’s monetary policy, especially if a candidate’s economic proposals are perceived to conflict with inflation management or economic stability. Potential shifts in interest rates could impact bond prices and stock valuations.

*Sector Performance-

Specific sectors may benefit or suffer, depending on the election results. For example, a candidate advocating for green/clean energy could uplift renewable energy stocks, while a pro-fossil fuel agenda promoting domestic fracking might benefit traditional energy sectors. As this market rotation dynamic and shift in investment fund flow favoring certain sectors at the expense of others can occur, market volatility can increase.

*Geopolitical and Trade Factors-

Depending on the candidates’ positions, trade policies and international relations may change, affecting global supply chains and multinational corporations. Investors with international exposure should monitor potential policy shifts that could impact foreign investments.

*Long-term Economic Outlook-

Potential new policies implemented by the new administration could affect the long-term economic outlook. For example, aggressive fiscal spending could stimulate growth, while tightened regulations might hinder it. Investors should factor this into their long-term planning and asset allocation (as said above, consider sector selection).

In this week’s presidential election debates between former President Donald Trump and Vice President Kamala Harris, the discourse revealed pivotal insights that may significantly influence market dynamics and investor sentiment, particularly among high net worth individuals.

From an investment perspective, Trump’s debate performance was characterized by a focus on economic growth, tax policy, and deregulation, which appeal to investors seeking favorable conditions for business expansion and capital gains. His proposals aimed to stimulate the economy through robust tax incentives and reduced regulatory burdens on corporations, suggesting a potential boon for sectors such as energy, manufacturing, and technology. However, there were concerns raised regarding trade policies and their implications for global markets, particularly in light of ongoing geopolitical tensions.

Conversely, Harris emphasized a comprehensive approach to social equity, healthcare reform, and climate change initiatives. Her narrative aligned with a progressive agenda that seeks to invest in sustainable industries and technologies, which, while potentially disruptive to traditional sectors, may attract long-term investors interested in ESG (Environmental, Social, Governance) criteria. The implications of her policies could signal a shift towards sustainable investing and increased regulatory oversight, which investors need to factor into their portfolios.

Ultimately, both candidates presented divergent visions for the future economic landscape. Investors should stay keep perspective with regard to any shifts in policy implications on asset allocation, risk management, and sector performance. The debates not only highlighted their stark ideological differences but also served as a critical platform for positioning investment strategies in anticipation of the incoming administration’s priorities. As the election approaches, high net worth individuals and investors in general would benefit from close monitoring of these developments, leveraging insights from the debate to refine their investment strategies accordingly. Tax implications from a potential expiration in 2025 of the Trump TCJA (Tax Cuts & Jobs Act) passed in 2017 may be an especially timely focal point for some high bracket individual tax payers and business owners.

What you can do…

Stick to your plan. While slight adjustments may be prudent, wholesale changes to your investment plan may not be. Other things you can control and should do:

Keep proper perspective. While presidential elections can spark volatility and make markets move in the short-term, history suggests that election outcomes have a muted long-term impact on the stock market. In a report from Retirement Researcher, data from 1926 through 2023 shows the SP 500’s average returns between unified Republican and Democratic administrations is nearly the same. The results below indicate the best election outcome for stocks is a divided one; with a Democratic president and the Republicans controlled at least one house of Congress.

Know the noise. It’s essential to recognize how investor sentiment may sway with political news. While experienced investors typically stay rational, they should still be aware of how market psychology can cause swift changes in stock prices.

Reduce the risk. We can guard against the market uncertainty and reduce the impact of increased volatility. Keep ample cash reserves. Remain diversified. Implementing hedging strategies can protect against downside risk. This could include options, strategic asset allocation, or diversifying into less correlated assets.

Stay true to you. As I said above, stick to your plan. While it’s crucial to be aware of political events, experienced investors should stay focused on their long-term investment philosophy and avoid making reactive decisions based solely on election outcomes.

Here’s an election year version of my “P’s to investment success”: Prudent Portfolio Planning, NOT Politics, Promotes Positive Performance.

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.”

~~John F. Kennedy, 1962

What Happened On This Day September 12, – The Space Shuttle Endeavour is launched by NASA making it the 59th shuttle mission.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in confirmed uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. It is still green. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Market in confirmed uptrend. After a market peak July 16 with the SP500 at 5,670, a market correction ensued with a 10% fall to 5,120 on August 5. The market’s trend turned bullish Tuesday, August 13. The fourth day of a new rally attempt confirmed the rally with a follow-through day. As of yesterday’s closing price the SP500 of 5,555, it is nearly all the way back from the August 5 low.

Here are key market levels as of Monday, September 9.

Recapping Last Week

U.S. equities stumbled into September, selling off sharply after mixed labor market data failed to provide the clarity investors sought on the economy and the path of interest rate policy. The Nasdaq Composite and Russell 2000 indices sank over 5.5%, while the S&P500 dropped more than 4%. Nine of eleven S&P500 sectors lost ground with technology and energy the biggest losers. OPEC delayed plans to hike production after crude oil prices tumbled 7.5% on weak economic data from the U.S. and China. U.S. Treasury yields fell steeply across the curve, with the two-year yield dipping below the 10-year for only the second time since 2022 as investors anticipated a potentially larger rate cut later this month. The employment data painted a muddled picture of a labor market that is softening but not collapsing. Non-farm payrolls rose by 142k in August, but the prior two months were revised sharply lower. On the positive side, the unemployment rate ticked down to 4.2%, while wage growth was slightly above expectations. Data released earlier in the week revealed similar trends, with job openings falling to the lowest levels since 2021, layoffs increasing, and private payroll growth moderating. At week’s end, fed funds futures still indicated just a quarter-point rate cut at the September FOMC meeting. In other news, the August ISM manufacturing PMI came in below forecasts, with a large drop in new orders that sparked recession concerns. Services activity remained in expansion territory, but the employment sub-index inched closer to contraction.

Internationally, China’s disappointing PMI numbers—released over the prior weekend—were one of the catalysts for the nose-dive in stocks and other risk assets. Chinese regulators were considering cutting interest rates on existing mortgages to prop up the beleaguered real estate market. The Bank of Canada reduced its benchmark rate by 25bps to 4.25% as expected, with more cuts likely this year. In Europe, Germany’s manufacturing challenges came to a head as Volkswagen announced it may close several plants for the first time in its history. Lastly, the yen returned to the early August highs, boosted by a falling U.S. dollar and hawkish comments from Bank of Japan Governor Ueda. The move contributed to the overall uneasiness and heightened volatility in global markets

Current View

Yesterday, the stock market shook off a morning sell-off to close higher Wednesday in a bullish reversal. The major indexes fought back and mounted their biggest single-day comebacks in nearly two years. It was a stunning intra-day rebound. The S&P 500 for example, was down 1.6% at its session low and closed 1.1% higher. The Nasdaq composite erased a 1.4% drop and closed 2.2% higher. The Dow Jones Industrial Average rose just 0.3% but still wiped away a 1.8% decline. The technology sector, which bore the brunt of selling earlier this month, led the stock market rebound yesterday. The technology sector ETF soared 3.4%.

The market’s major indexes have extended their rebound this morning. Today, volume is on track to outpace yesterday. Cooling inflation, Fed interest rate cuts, and a renewed positive investor sentiment towards AI is boosting stocks.  As noted above, the stock market’s signal remains in Confirmed Uptrend. With an extremely anticipated Fed meeting on the 18th and the 2024 presidential election now only about a about a month and a half away, stay focused on market trendlines, not media headlines.

• Industry Group Strength:  BULLISH. As of yesterday, 152 out the 197 groups I monitor are up year-to-date. 45 are down.
• New Highs vs. New Lows: BULLISH. As of now, there were 337 new 52-week highs and 69 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.94%. The 10-year Treasury now 3.70%.
• Volatility Index: NEUTRAL. Volatility has been volatile. The “VIX” is near 17. It is up from 16 two weeks ago. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: BULLISH.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 42, the Fear & Greed Index is down from 52 two weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  NEUTRAL. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 43.5%, down sharply from 53.2% two weeks ago. The bear sentiment is now 22.6%, near the same two weeks ago. This reflects a decrease in bullish and bearish sentiment over the last two weeks. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.

• Put / Call Ratio: NEUTRAL. The ratio of put-to-call options is 0.77.  Down from 0.85 two weeks ago. The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

Consumer Credit Increases: Consumers took on more debt in July. Consumer credit jumped at a seasonally adjusted, annual rate of 6% after rising a downwardly revised 1.2% in June. Total credit outstanding rose by $25 billion, more than double expectations. The three-month moving average surged in July to $14.1 billion, up from only $4.8 billion in May. That has moved above the 2010s average of $13.6 billion for the first time since July 2023. Consumer credit outstanding rose 1.9% year-over-year, up from 1.6% last month. The good news is that the impending rate cuts by the Federal Reserve should help make a dent on credit card interest rates. The series for consumer credit does not adjust for inflation. Even as inflation nudged higher month-over-month in July, real consumer credit outstanding settled at 0.3%. That is the third straight month consumer credit has grown in real terms after declining for five straight months.

ISM Service Index Grows Again: The service side of the U.S. economy grew again in August, but momentum faded in response to higher interest rates, slower sales and less customer traffic, a new survey found. An index of service businesses rose a hair to 51.5% last month from 51.4% in July, the Institute for Supply Management said. Numbers over 50% are viewed as positive for the economy. The services side of the economy has powered the U.S. for the past few years, but it’s also feeling the strain of high interest rates and a surge in inflation over the past few years. The good news is the annual rate of inflation has returned close to low pre-pandemic levels and the Federal Reserve is primed to start cutting interest rates in a few weeks. Lower borrowing costs could boost sales, encourage more hiring and spur the economy.

U.S. Productivity Increases: The productivity of American workers rose by a revised 2.5% annual rate in the second quarter, the government said Thursday. The increase was originally put at 2.3% in the preliminary report last month. Output, or the amount of goods and services produced, was somewhat stronger than previously reported. The increase was raised to a 3.5% rate from 3.3%. Hours worked rose at a 1% rate, unchanged from the prior estimate. The revisions to productivity come after growth estimates for the second quarter were upgraded to a 3% annual rate. Productivity has been trending higher, perhaps because of automation and artificial intelligence. The trend is expected to continue into the third quarter. Productivity is the key driver of long-term economic growth. It can also mute the inflation impulse from rising labor costs.

Factory Orders Rise: Orders for U.S. manufactured goods rose 5% in July, the Commerce Department said last Wednesday. The gain follows two straight monthly declines. According to the report, durable-goods orders surged a revised 9.8% in July on the back of higher aircraft orders. The increase is down slightly from the initial estimate of a 9.9% gain. Non-durable goods orders rose 0.8% in July after being flat in the prior month. Orders for nondefense capital goods, excluding aircraft, fell 0.1% in July, unrevised from the initial estimate. Shipments of these key orders fell 0.3%.

CPI Creeps Back Up: A key measure of inflation rose a touch faster than expected in August, potentially derailing the chance the Federal Reserve would make a steeper cut in interest rates next week. The consumer price index rose a mild 0.2% in August, the government said yesterday. Yet a measure of prices that strips out volatile food and energy costs, known as the core rate, rose a somewhat stiffer 0.3%. That was a tick above forecast and matched the biggest increase in five months. The Fed views the core rate as a better predictor of future inflation since food and energy prices can bounce up and down in the short run. The increase in overall inflation, meanwhile, slowed to 2.5% from 2.9% and hit the lowest levels since early 2021. The Fed is aiming to bring the rate of inflation down to 2%. The 12-month increase in the core rate was unchanged at 3.2%.

NFIB Optimism Index Falls Again: The NFIB Small Business Optimism Index fell by 2.5 points in August to 91.2, erasing all of July’s gain. This is the 32nd consecutive month below the 50-year average of 98. The Uncertainty Index rose to 92, its highest level since October 2020. Inflation remains the top issue among small business owners, with 24% of owners reporting it as their top small business operating issue, down one point from July. The frequency of reports of positive profit trends was a net negative 37% (seasonally adjusted), seven points worse than in July and the lowest since March 2010.

Wholesale Inventories Revised Lower: U.S. wholesale inventories increased less than initially thought in July amid a sharp rebound in sales, casting doubt on whether inventory investment would contribute to economic growth in the third quarter. The Commerce Department’s Census Bureau said on Monday that wholesale inventories rose 0.2%, revised down from the 0.3% gain estimated last month. Stocks at wholesalers were unchanged in June. Private inventory investment contributed to the economy’s 3.0% annualized growth rate in the second quarter. There is hope that inventories could offset some the drag on GDP from a widening trade deficit this quarter. Most of the imports could end up as unsold goods in warehouses. Attention now shifts to retail inventory data, scheduled to be released next week.

Jobs Report Shows Cooling Labor Market: The economy created a soft 142,000 new jobs in August, adding to evidence of a rapidly cooling labor market and keeping the Federal Reserve on track to cut interest rates later this month. Hiring was also a lot weaker in July and June than previously believed, indicating the U.S. added the fewest jobs in the last three months since early in the pandemic in 2020.

ADP Employment Shows Slowdown in Hiring: U.S. businesses generated just 99,000 new jobs in August, paycheck company ADP said, to mark the smallest increase since 2021 in another sign of a rapidly cooling labor market. Virtually ever indicator except layoffs shows the labor market is a lot weaker now than it was just last spring. Job openings have fallen sharply, hiring has slowed, the unemployment rate has risen and it’s taking people longer to find work. The most new jobs were created in education and health as well construction, which may have benefited from warm weather. Employment fell in manufacturing, information and professional businesses. Companies are more cautious about hiring because of a slowing economy and uncertainty surrounding the presidential election. Both candidates are proposing policies that worry business leaders.

U.S. Auto Sales Shrink: Sales of new cars and trucks fell 4.4% in August, unable to overcome high interest rates and a somewhat slower economy. U.S. automobile sales rose at an annual rate of 15.1 million last month, down from about 15.8 million in July, according to Ward’s Intelligence. The figure reflects how many new vehicles would be sold in the entire year if the same number were purchased each month as were sold in August. Sales of new cars and trucks in the U.S. are still being depressed by high interest rates, however. Car purchases play a big role in retail sales and overall consumer spending, the main engine of the economy. Rising car sales tend to be an indicator of a strong economy.

Fed Beige Book Shows Weakness: Nine out of 12 Federal Reserve regional districts reported flat or declining economic activity in August, according to the central bank’s so-called Beige Book report released last Wednesday. That’s up from five districts that reported weak conditions in the last report in mid-July. Across the country, employment held steady but consumer spending ticked down in most districts, the survey found. Reports of layoffs remained rare but firms were reducing workers’ shifts and hours and leaving advertised positions unfilled. Manufacturing activity dropped in most districts. Residential construction and real-estate activity were mixed, with most districts reporting softer home sales. According to the survey, prices increased modestly. Wage growth was modest, and increases in nonlabor input costs and selling prices were tame. Looking ahead, contacts generally expected things to remain stable or improve. Contacts in only three districts anticipated slight declines.

Job Openings Fall to 2021 Levels: U.S. job openings fell to their lowest levels in 3½ years, returning to pre-pandemic levels in another sign the labor market has softened and that people can’t find work as easily. Job postings fell to 7.7 million in July from a downwardly revised 7.9 million in June, the Labor Department said last Wednesday. That’s the fewest openings since January 2021. New openings have fallen steadily from a record 12 million in 2022. Fewer industries are hiring and jobs have become harder to find. The chipping away of the labor market has caught the attention of top officials at the Federal Reserve and spurred them to put more focus on employment instead of inflation. Although many openings are never actually filled, the trend in job postings provides clues about the health of the broader economy. The number of job openings for each unemployed worker inched down to 1.1, putting it slightly below the 1.3 average shortly before the pandemic. The ratio had surged to a record 2.0 in the immediate aftermath of the pandemic. The waning demand for workers has persuaded the Fed the time has come to lower interest rates. High rates put in place to squelch inflation have largely done their job, but they’ve also slowed the economy and discouraged businesses from hiring.

U.S. Trade Gap Widens: The U.S. international trade deficit widened 7.9% in July to $78.8 billion from a revised $73 billion in the prior month, the Commerce Department said Wednesday. This is the largest monthly trade gap since June 2022. Economists surveyed by The Wall Street Journal had forecast the deficit would widen to a seasonally adjusted $79.1 billion from the initial estimate of $73.1 billion. Imports rose 2.1% to $345.4 billion in July. The increase was led by capital goods and industrial supplies. Exports rose 0.5% to $266.6 billion. There is no hint of slowing imports, which would signal domestic demand weakness. The trade gap widened sharply with China in July. The surge may reflect efforts to get goods into the U.S. before the election brings more tariffs. The wider trade deficit has been a drag on GDP growth for the first two quarters of 2024.

ISM Shows U.S. Manufacturing Still in Slump: A key barometer of U.S. factories was negative for the fifth straight month, signaling the manufacturing side of the economy is still in a deep slump that might not end until after the presidential election. The Institute for Supply Management’s manufacturing index edged up to 47.2% from an eight-month low of 46.8%. Numbers below 50% signal the manufacturing sector is shrinking. ISM reports on manufacturers and service-oriented companies offer a window into the health of the economy. The prospect of lower U.S. interest rates is expected to give manufacturers a shot in the arm after a prolonged slump. The Federal Reserve is all but assured to start cutting rates in mid-September in response to a slowdown in inflation.

Construction Spending Down: Construction spending fell in July, as U.S. companies and the government scaled back projects across the nation as interest rates stayed elevated. Spending on construction projects fell 0.3% in July to $2.16 trillion, the Commerce Department reported las Tuesday. Construction spending reveals how much the government and private companies spend on projects, from housing to highways. The more the U.S. spends on construction, the higher the level of economic activity.

John J. Gardner, CFP®, CPM®, AIF®

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.

Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It’s Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®). As an AIF®, John is also an Accredited Investment Fiduciary.

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