Bet on Banking This Election Season

The stability of bank stocks could be worth a bet if pre-election volatility ramps up

Managing Editor
May 14, 2024 at 2:30 PM
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Subscribers to Chart of the Week received this commentary on Sunday, May 12.

Back in January, we looked at the major indexes and what we might expect to see from stock performance amid another volatile election year. With (unbelievably) almost half of 2024 already under our belt, today we’ll be looking at an updated version of our January data, as well as popular sectors to watch during this time frame, specifically pointed to how the second half of an election season tends to have impact.

As of Friday, May 10, the Dow Jones Industrial Average (DJI), Nasdaq Composite (IXIC), and S&P 500 Index (SPX) now sport a 5%, 9.4%, and 9.9% wins, respectively. However, look at the November-December gains from all three major indexes: 13.6%, 13.3%, and 16.2%. For the Dow and SPX, a good chunk, if not all, in the Dow’s case, of 2023’s gains came in the final months of the year. The kick at the finish line is even more interesting considering the potential onslaught of volatility expected as we continue through the quadrennial presidential election.

The U.S. is firmly in the midst of its 19th presidential election cycle, and Schaeffer’s Senior Quantitative Analyst Rocky White pulled data since 1949 to see what history is telling us to expect for the potentially volatile remainder of the year. Unsurprisingly, we tend to see a performative shift on Wall Street during the election season.

In January, we noted that per White, the fourth year in an election cycle has a robust 7.28% average return with a very encouraging percent positive of 83%. However, there hasn’t been a lot of upside, with an average of about 12% pulling in positive, while all other cycle years have an average positive of about 19%. Below is an updated table, where at first glance the return for the second half of an election year sees a fourth presidential cycle year with an average return of 4.2%, positive 83.3% of the time.

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However, White reports that from a broader perspective, there seems to barely be any difference at all between the two halves. The first quarter of the third cycle year does a lot of work for the first-half stats. Other than the first half of the third year, the second half of election years (year four) have been the most consistently positive.

While we’re mostly stuck to speculating the "why" behind the changes in sentiment during election cycles, investors may be more likely to purchase stocks following elections, once the uncertainty about which administration will be shaping policy over the next four years is removed.

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In January we looked at the best S&P 500 stock performers for the second half of election years since 2000, but this time around we wanted to take a closer glance at sectors. Specifically, which sectors may be the safest route to go down if you’re looking for a more stable investment during an unpredictable time for the United States.

One of the sectors that stands out on White’s list of the best S&P 500 stocks to buy during the second half of election years since 2000 is banking, which holds eight of the 25 spots. As one of the most highly regulated sectors, the relative stability of the financial sector seems the way to go for the volatile second half of an election year.

Wells Fargo & Co (NYSE:WFC) made it second from the top on White’s list, rolling out six returns over the election years since 2000, with an average return of 18.8%, positive all six times. Despite being fifth from the bottom, Raymond James Financial Inc (NYSE:RJF) sees impressive returns as well, with 83% of its six returns during the same time frame pulled in an average of 21.5%.

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It’s safe to say the days of a "typical" election year in terms of both market performance and political theatrics are over. It’s simply too profitable for news cycles to not stir up and amplify division. But as a contrarian investor that’s instructed to cut through the noise, these tables, especially that of the top 25 stocks, can serve as a loose guide to whether America’s election season can lead to notable gains for tired investors. Because after all, is there anything more American than hedging your bets on both Wall Street and America’s future simultaneously?

 

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