It may be a holiday and the markets are closed, but like it or not, the 2024 election revs up big time today.
Iowa holds its caucuses tonight, and New Hampshire follows next Tuesday with the nation’s first primary election.
Get ready for the onslaught of polls, pundits, and political ads… as if we haven’t already had that.
I have no interest in getting into politics, but I do have an interest in making money. Which means I also need to have an interest in the election.
Longtime Power Trends readers know I’m a data freak. I don’t trust my emotions, gut feelings, or political viewpoints for that matter when investing.
But I do trust data – the right data analyzed the right way. It’s the reason my Quantum Edge system identifies winning investments about 70% of the time, and has been shown in independent back testing that it could have beaten the market 7-to-1.
My research firm recently went deep into the data showing how stocks perform in presidential election years. Let me share what we found so you can use the analysis to your advantage.
Think of it as your voting guide for stocks. I’ll leave the political decisions to you…
Stocks Historically Rise During Election Years
The first thing to know is that stocks typically move higher during election years. In the 11 presidential election years since 1980, the S&P 500 gained 5.8% on average.
If you’re a student of market history at all, you know that’s about half of what stocks usually do in all years.
But before you get discouraged, consider that the S&P 500 was higher nine of 11 times – an 82% win rate.
And then consider that the two down years both contained massive outlier events that skew the averages.
The tech bubble began bursting into a million pieces in 2000, sending the NASDAQ into a 75% tailspin from March of that year all the way through October 2022. And the biggest down year of all, 2008 at -38.5%, was the Great Financial Crisis that almost took down our entire system.
Take out those two outliers, and the S&P 500 is positive every other presidential election year since 1980… averaging 12.5% gains.
That’s more like it.
The market this year more closely resembles those positive years. In fact, the clouds that have hovered over the market – namely inflation and interest rates – have started to part. Inflation is largely under control. Interest rates are falling. And the Federal Reserve will likely start cutting rates – I think here in the first quarter.
Through it all, both consumers and corporations have remained impressively resilient.
We also broke down presidential election years by quarter, and I must say that 2024’s bumpy start stayed pretty close to the script. Since 1980, the first quarter is higher just over half the time, but the average return is negative (-1.5%).
Here again, the biggest down years for Q1 were heavily impacted by historical anomalies. We already mentioned the Great Financial Crisis in 2008, and the 20% thrashing in 2020 was from the COVID pandemic and most everything shutting down.
It’s too early to say if this year’s first quarter will be a bust. And if the Fed were to surprise folks at its Jan. 31 meeting and either cut rates or speak more clearly about future cuts, we could easily see an impressive bump.
Either way, odds increase that stocks will be higher in subsequent quarters. The best quarter in election years is the second quarter, which averages 3.1% gains.
The strategy: Any first-quarter pullbacks – which would be natural given both the data and the breakneck rally to end 2023 – should be good buying opportunities.
Not necessarily across the board, but in the right stocks. The stocks with strong fundamentals and technicals that Big Money is pouring into. The stocks that give you the highest probability of making big money.
Where to Invest Now
If you’re looking to take advantage of these buying opportunities, I would highlight a couple of data points to know where to look.
First, find the current strength.
In a word: Technology.
The sector saw some profit-taking in the first trading days of 2024, but in my Quantum Edge system’s latest data run, tech again tops the list as the strongest sector with a Quantum Score of 61.2.
Technology was the strongest sector for all of 2023, and I don’t expect that to change anytime soon. It’s where we find the biggest growth and the most transformative innovations. That’s why four of the five biggest winners in our TradeSmith Investment Report portfolio are tech leaders.
We also want to use the data to find stocks that typically outperform in election years. Like small-cap stocks, which have nearly doubled S&P 500 stocks since 1996.
Notice how small-caps typically struggle in the first month (-2%) and first quarter (-1.4%) of an election year, but then pick up significant momentum in the second half of the year (+10%). Another reason to buy the dip and then ride the rip.
Also keep health care stocks on your radar. Our research showed them to lead the way in the last seven presidential election years with the sector gaining 7.5% on average. It’s the best-performing sector in these very early days of 2024, and it’s the second strongest in my system’s rankings.
I don’t think it’s a coincidence that the highest scoring stock in my Quantum Edge system is a tech stock, and the second strongest is a health care stock.
I’ve been bullish on 2024 for a long time anyway, and election year data doesn’t change that. If anything, it coincides with my expectation that the Fed will start to cut rates soon, which could supercharge the rest of the year as it pulls record amounts of cash off the sidelines.
Editor, Jason Bodner’s Power Trends