As market historians, we find rare market events fascinating as they provide perspective and historical parallels. This presidential election cycle is notable for several reasons: Trump is the first former president convicted of felonies, and he is the first candidate shot on the campaign trail since 1972. The biggest surprise was Biden withdrawing from the race. There are five cases since 1900 when the incumbent chose not to seek re-election. All but one occurred before the 22nd amendment established presidential term limits. The lack of an incumbent did not derail the typical second-half election-year rally (see chart).
At the time of our 2nd half outlook release, we identified three key factors: steady earnings growth, the June CPI report suggesting a Fed easing cycle starting in September, and political uncertainty. These factors triggered a shift from mega-cap tech stocks to small-caps and Value, improving market breadth. This rotation led to one of the biggest short-term moves to small-caps and Value in years, prompting us to shift to neutral on small-caps versus large-caps and Growth versus Value. The S&P 500 recently dropped 8.5% on fears of a recession. As long as macro and corporate fundamentals remain solid, look for the market to resume its uptrend.
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