Analysts are cautioning investors to expect heightened stock market volatility as the 2024 presidential election approaches on November 5. Although recent economic data suggests that the Federal Reserve might begin cutting interest rates, providing some relief to U.S. financial markets, the upcoming election season is likely to bring increased uncertainty. Historically, election years have seen the S&P 500 underperform, with September often being the weakest month. According to CFRA Research, the S&P 500 has averaged a 0.8% decline in September during election years dating back to 1944. Sam Stovall, chief investment strategist at CFRA Research, highlights that August and September have consistently been among the worst months for the stock market during election years, with September showing the largest declines. October, while typically producing gains of over 1%, has been the most volatile month during election years, with a standard deviation 35% higher than other months, reflecting significant market fluctuations. The outcome of the election could also heavily influence market behavior. Historically, volatility has increased when the incumbent party loses the White House, as markets brace for potential policy changes. This year, the switch from President Joe Biden to Vice President Kamala Harris as the Democratic nominee has added another layer of uncertainty, particularly with Harris leading in polls against Republican nominee Donald Trump. Sector-specific impacts are also in focus. The healthcare industry, which has seen strong performance, could face challenges if Harris wins, especially regarding potential drug pricing reforms. This sector rotation could contribute to further market volatility as Election Day nears, potentially driving up the Cboe Volatility Index (VIX). Given the uncertain political landscape, investors should prepare for potential market turbulence in the weeks leading up to the election.

Dennis DeBusschere, chief market strategist at 22V Research in New York, believes that the recent mini-crash has left markets needing “more consistent optimism” to regain momentum. He noted that although recent economic data has eased recession fears triggered by the last jobs report, it hasn’t been enough to spark a rally. DeBusschere highlighted the latest U.S. jobless claims, ISM Services data, and the New York Fed’s August business leaders survey as signs of a strong economy. “The short-term recession scare appears to be over,” he said. Despite the S&P 500 closing just 1% below its July peak on Monday, DeBusschere identified the upcoming payrolls report on September 6 as the “next big hurdle” for the markets. He suggested that this report could have more impact than Fed Chair Jerome Powell’s upcoming speech at the Jackson Hole Economic Symposium. Given the subdued market response to recent data, DeBusschere believes that even more positive news will be necessary to trigger another rally, especially after the recent unwinding of the Japanese yen carry trade. He also pointed out that expectations for small-cap fundamentals remain weak through the second half of 2024, though there’s potential for improvement if economic conditions strengthen. The Russell 2000 index is currently 6% below its July highs. In the tech sector, valuations continue to be driven by long-term narratives, which, according to DeBusschere, suggests there’s still room for gains even as the AI frenzy cools down.

Strategist Warns of Fragile Market Ahead of Powell’s Jackson Hole Speech As Federal Reserve Chair Jerome Powell prepares for his highly anticipated speech at the Jackson Hole Economic Symposium on Friday, market watchers are expecting him to signal a potential rate cut in September. However, if Powell’s message deviates from these expectations, it could put the stock market’s recent rebound at risk. Powell is set to discuss the economic outlook at 10 a.m. Eastern time during the annual gathering, which traditionally draws top U.S. and global central bankers. Although Jackson Hole is not usually a platform for immediate policy signals, this year’s speech will be closely analyzed due to recent market volatility and shifting expectations for the Fed’s rate path. The stock market has seen mixed reactions to past Jackson Hole speeches. Over the last 20 years, the S&P 500 has averaged a 0.4% gain during the conference, with modest positive returns in the following months. However, last year’s event saw the S&P 500 drop 3.4% after Powell indicated that the Fed’s rate-hiking cycle would continue longer than expected. This year, analysts widely believe Powell will emphasize that inflation is easing, which could justify a rate cut in September. However, Steve Sosnick, chief strategist at Interactive Brokers, cautions that investors may be overly optimistic. He suggests Powell might indicate a more measured approach, signaling that while rate cuts are possible, they will be gradual unless the economic data worsens. “I’m preaching a bit of caution ahead of Jackson Hole,” Sosnick said. “The more the market rallies in advance, the more fragile it might become.” U.S. stocks closed the week higher, with the Dow Jones, S&P 500, and Nasdaq all posting their best weekly gains since early November. In addition to Powell’s speech, investors will also focus on the Fed’s July meeting minutes and key labor market data next week.

Stocks Rally as Economic Data Eases Recession Fears The S&P 500 erased its August losses on Thursday, marking a sharp reversal after the index experienced its worst start to a month in eight years. By the close, the S&P 500 was up 0.4% for August, while the Nasdaq Composite was only slightly down. Analysts attribute the recovery to encouraging economic data and strong earnings reports. Retail sales saw their largest increase in 18 months, and jobless claims came in lower than expected. These positive signals helped to counteract fears of a looming recession and increased the likelihood of a 25-basis-point rate cut by the Federal Reserve next month. Walmart’s impressive earnings also contributed to a broad market rally, with consumer-focused stocks leading the way. The S&P 500’s consumer-discretionary sector had its best day of the year, and a “broad-based buying wave,” as described by Mike O’Rourke of Jones Trading, lifted both tech stocks and cyclical sectors. Jay Hatfield of Infrastructure Capital Advisors noted that the market’s rebound was a response to the “irrational recession fears” that emerged earlier in the month. Despite a rocky start to August, including a spike in the VIX to levels not seen since the pandemic, the market quickly recovered. The VIX has since dropped 60%, its fastest decline on record. Over the past six days, the S&P 500 has climbed 6.6%, and the Nasdaq has gained 8.6%, marking their best performance since November 2022. Technology stocks have led the charge, with the S&P 500’s tech sector up 11.5% in the same period. Small-cap stocks have also rebounded, with the Russell 2000 index rising 2.5% on Thursday. Looking ahead, analysts expect continued support for stocks from strong economic data. However, as O’Rourke warned, if the data remains too strong, it might reduce the need for further rate cuts.

The S&P 500, Germany’s DAX, and Japan’s Nikkei 225 have all rebounded from their early August lows, a pattern that Christopher Watling, CEO and chief market strategist at Longview Economics, describes as classic pullback behavior. Watling explains that pullbacks typically unfold in three waves: an initial wave of selling, a relief rally that recoups some losses, and a third wave that retests or breaks below the previous lows. Adding to the pattern, safe-haven assets like the yen and Swiss franc also sold off during this rebound. However, Watling notes that his firm’s model still sees room for a further move toward safer assets. The crucial question now is whether a third wave will occur and what might trigger it. Dhaval Joshi, chief strategist at BCA Research’s Counterpoint service, suggests that the yen carry trade and the AI stock bubble are closely linked, and any of three factors could cause them to unravel. Joshi points out that selling the yen has helped inflate AI stock valuations. By comparing movements in the euro/yen exchange rate to the ratio of the 30-year Treasury yield against the forward earnings yield of U.S. tech stocks, he illustrates this connection. He argues that while the sellers of yen may not be the same as the buyers of AI stocks, these actions are intertwined, creating a reflexive relationship. The AI bubble, he says, has been fueled by leverage from borrowing yen. Even though the Bank of Japan has signaled it will keep interest rates low, the yen remains vulnerable, especially if other central banks cut their rates. Joshi also questions the longevity of the AI stock boom, noting that most tech giants from the early 2000s, aside from Microsoft, eventually faded. He believes Nvidia is unlikely to be a long-term winner, and that only a few companies will emerge as dominant players in AI, putting the inflated valuations of today’s AI superstars at risk. Joshi warns that if any of the three pillars—Japanese interest rates, the yen, or AI investments—start to weaken, the entire structure could collapse.