The Implications of the Upcoming US Presidential Election on the Stock Market

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With the US presidential election just under a year away, there is a possibility for stocks to finish 2023 on a high note and carry that momentum into the following year.

The S&P 500 index has surged 14% in 2023, fueled by Wall Street's fascination with artificial intelligence and optimism surrounding the possibility of the Federal Reserve halting interest rate hikes. Despite concerns over uncertainties such as the upcoming presidential election, historical trends indicate that stocks tend to flourish during the fourth year of presidential terms.

Uncertainty remains: The ongoing geopolitical conflicts in the Middle East, Russia, and Ukraine may instill fear in the market and lead to increased prices for commodities, particularly oil. Economists caution that the delayed impact of the Federal Reserve's interest rate hikes is yet to fully affect the labor market and consumers' wallets.

Moreover, there is the potential for a recession, given that the central banks' benchmark lending rate is currently at its highest level in 22 years.

Many economists and investors have reduced or eliminated their predictions of a recession in recent months, as the labor market and overall economy have shown resilience against the Federal Reserve's aggressive interest rate increases. Market sentiment also suggests that the central bank will not raise rates further this year. According to the New York Fed, which measures recession risks by examining the difference between 3-month and 10-year Treasury yields, there is an estimated 56% chance that the US economy will enter a recession by September 2024.

According to Darrell Crate, managing principal at Easterly Asset Management, the period immediately following Election Day typically brings about a boost for stocks. He explains that elections have a way of eliminating confusion and ambiguity on Wall Street, which investors despise. Crate states that elections provide a clear view on the investment landscape for the next two to four years, allowing for adjustments and refinements to fiscal policies and the resolution of regulatory matters.

Since 1984, the S&P 500 index has typically experienced a 5% increase in the eight weeks following Election Day through the end of the year in election years, compared to a 2.6% increase in non-election years, according to Goldman Sachs. However, next year's rally in stocks may be less pronounced. According to Yardeni Research, during the fourth year of presidential terms since 1932, the S&P 500 has historically gained an average of 6.2%, which is lower than the average gain of 13.5% seen during the third year of presidential terms since 1931.

According to Joe Abbott, the chief quantitative strategist at Yardeni Research, it is logical to take into account the priorities of candidates before voters begin queuing at the polls. In an email to CNN, Abbott stated that presidents and political parties aim to have a robust economy and stock market on their side before embarking on their campaign in the fourth year.

During the first and second years of presidential terms, the S&P 500 has risen 6.7% and 3.3% on average, respectively, according to the same dataset.

Cleveland Fed President Loretta Mester to step down next year

Federal Reserve Bank of Cleveland President, Loretta Mester, will retire from her position next year, as stated by the bank on Wednesday.

Finishing her term on June 30, 2024, Mester is recognized as one of the US central bank's most assertive advocates, known as "hawkish" individuals. These officials firmly stand against inflation, prioritizing it over potential risks to the economy.

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Following a surge in inflation in 2021, Mester, along with several other Fed officials, advocated for larger rate increases when the central bank embarked on raising rates. While some of her colleagues suggested keeping rates unchanged in recent months, Mester, along with a few others, believed that there is still some leeway to raise rates.

The tenure of regional Fed presidents is determined by the duration of their service and their age. Mester has been serving in her capacity since June 2014 and is currently 65 years old.

The Cleveland Fed has initiated a search for Mester's replacement, which will be overseen by a committee chaired by Heidi Gartland, the deputy chair of the Cleveland Fed's board of directors. Gartland expressed the commitment to selecting a new leader who will maintain the exceptional standards set by President Mester in a statement released on Wednesday.

Read more here.

General Motors aims to cut reliance on China

General Motors has partnered with Niron Magnetics, a small start-up based in Wisconsin, to collaborate on the development of electric motor magnets. The primary objective of this partnership is to create magnets that do not rely on rare elements, which are currently primarily sourced from China. According to Peter Valdes-Dapena, my colleague, these magnets, commonly used in electric vehicle motors, utilize "rare Earth minerals" like terbium and dysprosium to facilitate the spinning of a rotor through rapidly shifting magnetic fields.

Niron Magnetics, a company based in Minnesota with a team of 60 employees, has developed proprietary techniques for producing high-performance magnets. The innovative methods utilize iron and nitrogen, elements that are readily available and do not necessitate importation. This approach not only addresses geopolitical concerns associated with mineral imports from China but also greatly diminishes the environmental consequences associated with mining and processing, as stated by Niron's CEO, Jonathan Rowntree.

The technology could also make EV motors less expensive, he said, but declined to say by what percentage.

Read more here.