Election Day Reality Check

Stocks closed sharply higher today despite much election hand-wringing in the media. The Dow, S&P 500 and Nasdaq all closed up over 1%. Commodities were broadly higher as well. On the other hand, the bond market mostly sold off. Of late, longer-term bond yields have drifted higher in acknowledgment of stronger economic growth. Or maybe, as investment author Jeremy Siegel says, we’re just “reverting to the normal structure of interest rates, which is long above short. And we have not completed that transition yet.” Anyway, I’ll tell you what bond yield moves DON’T signal, and that’s panic.

For the most part, capital markets are not pricing-in a disorderly election. That said, we monitor a couple of signs that suggest some election-related volatility. First the VIX Index, which uses options trade volume to predict stock market volatility over the next 30 days, climbed to 23 on Halloween. That’s a two-month high. And Bloomberg’s US Put/Call Ratio Composite jumped to a two-month high yesterday. Both indices calmed down today. Finally, the price of gold continued to rise last month even though the dollar strengthened. It’s possible that some traders were buying gold-related financial assets as a hedge against election trouble. But long-term investors are looking past a temporary blip. Jim Lebenthal, portfolio manager for Cerity Partners, says, “It’s often foolish to change your investment stance on the basis of an outcome of a presidential election. You’re more likely to be wrong than right, and there’s a lot of history on that.”

More importantly, recent data suggest the US economy is on solid footing. Last week we learned that the economy grew at an annual rate of 2.8% during the third quarter compared with 3% in the prior quarter. Consumer spending, the largest contributor to overall growth, accelerated 3.7%. At the same time, the report’s inflation gauge slowed to an annual rate of 2.2%. A separate report from the Bureau of Economic Analysis (BEA) noted consumer spending accelerated in September with headline inflation decelerating to 2.1%. Yet another report from ISM showed marked improvement in services business activity last month. So growth remains healthy and inflation is under control. That should give the Federal Reserve wiggle room to cut interest rates again (in 2 days).

Over the last several years economists have consistently underestimated growth and repeatedly called for a slowdown. That trend continues. At the beginning of this year surveys anticipated 2025 growth would slow to about 1.7%, but that figure has since ticked up to 1.9%, and it may still be too low. Some, like Bloomberg’s Eliza Winger, say the economy may “look strong, but beneath the surface things are less stable. Consumer spending, the main growth driver, has been narrowly boosted by upper-income households, while lower-income ones have grown more price-sensitive.” This view misses the forest for the trees. Yes, there is some bad news and some sectors of the economy (like manufacturing) are challenged. But the predominance of data paint a positive picture.

Most important, third quarter earnings season is progressing well. About 400 of the S&P 500 companies have reported results, with aggregate sales growth of 4.5% and profit growth of 7%. That’s a down-tick from the prior quarter, but probably good enough to keep the rally alive. What’s more, about 74% of these companies beat Wall Street analysts’ profit expectations. Not surprisingly, the Magnificent 7 are expected to report relatively higher profit growth – somewhere around 16%. These companies are benefiting the most from AI-related capital spending.