In a fairly baffling reversal from just two weeks ago, the stock markets in the U.S. have not only recovered but are now climbing to never-before-seen heights.
The Dow Jones Industrials have surged better than 400 points since the end of last week, pushing above the index's previous record-high set more than a year ago. The benchmark S&P 500 has likewise jumped to fresh record levels. After Tuesday's closing bell, both the DJIA and SPX are now trading above their previous high-water marks: the Dow is approaching 18,400 while the S&P is within striking distance of 2,150.
As a point of comparison, stocks around the world were plunging at the beginning of July due to the shock of the referendum that will supposedly pull Great Britain out of the European Union. In the course of two days, the Dow plummeted 900 points. However, since the immediate risks of this decision by the U.K. electorate seem to have been safely pushed off into the future, investors are once again piling into equities. This has helped extend the second-longest bull market ever on record.
Despite the reasons to be deeply concerned about a possible stock market correction, the rush into the equity markets is somewhat predictable. Government bonds are offering historically low yields, making riskier assets more appealing by comparison. At the same time, signals that the Federal Reserve will keep interest rates low—or perhaps even cut them—has fueled more chase for yield.
Impact of an Election Year
Something worth noting is the history of how the markets typically perform when the country is in the midst of a presidential election.
Due to the tendency for Washington to attempt to boost economic performance in election years in order to create the appearance that "everything is fine" and remain in power, stock markets typically outperform when presidential campaigns are underway. It is historically the best annual performance for equities in the four-year presidential cycle.
Yet, somewhat paradoxically at the same time, the uncertainty and volatility inherent in an election without an incumbent president running is what stock markets dislike the most. Few events generate as much potential change (at least in the public's perception) as a new resident in the White House.
Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac, sees the uncertainty of the 2016 race hurting the outlook for stocks. "People don't like the upheaval and uncertainty of an open-ended race" like this year's contest, Hirsch said. Moreover, the U.S. markets tend to fall during a president's second term—especially during Year 8, which is generally the worst, losing 1.2% on average since 1900.
Can Conclusions Be Drawn?
There is obviously no way to predict how markets will behave with anything approaching perfect accuracy. Nonetheless, it isn't difficult to imagine a scenario where the current all-time highs for stocks is actually a sign that a significant corrective downturn is just over the horizon.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.