Biden out. Other than the biggest one-day drop since 2022, the biggest news this week has been that President Biden has dropped out of the race. Leaving former President Trump running against current Vice President Harris for president this November. For a New York minute there was a chance for an open democratic convention, but after President Biden endorsed Kamala Harris most other potential candidates and party bigwigs followed suit, Ms. Harris is the presumptive Democratic Party nominee for president this year. All that remains is what appears like a rubberstamp vote by the delegates.
This of course brings into play a potential change in our Sitting President Running election year seasonality analysis. With Biden out it begs the question that the negative implications of our Open Field election scenario would be in play now. The last time we carried the Open Field line in our election seasonal pattern chart was in the
February Outlook (it’s also on page 11 of the
2024 Almanac). When it became apparent that Biden was running, we felt it was irrelevant and removed it from the chart moving forward.
We have gleaned all the Open Field elections and there is no comparable year. 2024 is an unprecedented year. In prior Open Field election years there were unknowns running for president. For example, in 2016 Trump was unknown as a politician and Hillary Clinton, while she was First Lady, a U.S. Senator and Secretary of State she never campaigned or ran for president. In our humble opinion, even with Biden out, 2024 is not an Open Field election. What we have now are two known entities. Donald Trump is a former president running for a second term and Kamala Harris is a sitting vice president who campaigned for the highest office in the land last election before dropping out in December 2019.
It’s not trading like it either. We are in the midst of the correction, but the market is down only 3-9% across the major averages and we are still up substantially for the year and significantly above the comparable election year seasonal patterns. This appears to be the mean reversion correction from a very overbought condition we have been expecting. There is no comparison from our perspective except the straight election year scenario. As of now the market is still way above average election year gains.
In the updated election year seasonal chart below, we have stripped out all the other lines. The players may have changed but the election year pattern remains the same. The S&P is currently down 4.7% from its recent high which is steeper than the average second half of July election year pullback, but the timing is similar. From here we expect volatility to remain more elevated than it has most of the year, rallying in August, then retreating again ahead of the election into late October followed by a November-December upside move to new highs.
Small Caps Come Alive
After struggling for the better part of the past four years the small caps have rallied sharply this month. All year long the Russell 2000 languished, oscillating between positive and negative until jumping 11.5% higher over five trading days from July 10-16. Clearly the small caps are rallying on the long-awaited beginning of the Fed easing cycle with it all but guaranteed the Fed will begin cutting rates at their September meeting.
However, the Russell 2000 election year pattern chart below shows a rather pronounced rally from late July into mid-September that does not appear on the All Years seasonal pattern on page 46 of the 2024 Almanac. Upbeat economic readings have juiced this election move for the small caps. This Russell 2000 move is an encouraging sign for the economy and a bullish indication for small caps and the market as a whole for the year. The September-October pullback lines up with the S&P’s above.
Technical Support
The notoriously weak second half of July is delivering the mean reversion correction we warned you about. How far it goes remains to be seen. As of today’s close, both S&P 500 and NASDAQ have fallen below their pink line 50-day moving averages. Both indexes touched near term support at their intraday lows today near S&P 5390 and NASDAQ 17000. If these levels fail to hold it looks like the March intraday highs around S&P 5265 and NASDAQ 16500 are the next near-term levels of support. This equates to a 7.1% correction for S&P and 11.5% for NASDAQ. Keep your eyes on these levels.
Bull Still Rules
Despite all the upheaval in the political arena and the tech selloff, the bull market is still intact. Election year forces have been boosted by the AI-Tech Boom and the economic soft-landing scenario all year long. After this rally respite and the usual August-October volatility, we expect the bull to hit new highs near yearend. Today’s upside surprise GDP reading and the tame quarterly PCE inflation reading that’s contained in this GDP Q2 Advance Estimate underscores the resilient economy and that a September Fed rate cut is cued up.
Our bullish election forecast remains on track, but we do expect some volatility over the next few months, both upside and downside. So, strap in as this unique election year evolves. Our strategy has us positioned well. Stick to the system and be patient. We expect a better buying opportunity later in Q3 or October just ahead of the election.
Pulse of the Market
Absent the benefits of tech-heavy weighting, DJIA got off to a rather sluggish start in July. But that changed quickly on July 11, when CPI came in cooler than expected and the odds of a September rate cut jumped. The ensuing rotation out of tech into basically everything else pushed DJIA to new all-time closing highs (1) above 41,000. Similar to the first time DJIA closed above 40,000 in May, celebrations were short-lived with DJIA briskly retreating. As of the close on July 24, both the faster and slower moving MACD indicators applied to DJIA (2) were negative, confirming the rapid loss of positive momentum.
![[Dow Jones Industrials & MACD Chart]](/UploadedImage/AIN_0824_20240725_DJIA-MACD.jpg)
Last week’s flight from tech lifted DJIA to its third straight weekly gain (3) and resulted in the worst weekly losses for S&P 500 (4) and NASDAQ (5) since mid-April. Prior to last week’s tech retreat, NASDAQ had logged six straight weekly gains and a streak of 11 weekly gains in 12 weeks. S&P 500 was nearly as strong except for one additional weekly loss. Despite recent weakness, DJIA has also extended its streak without a Down Friday/Down Monday (DF/DM) another four weeks to 14. To find a streak equal to or longer you have to go back to early 2021 during the height of the last bull market.
Aside from some solid numbers during the week ending July 12, market breadth remains a concern with NYSE Weekly Advancers barely outnumbering Weekly Decliners (6) in numerous, recent advancing weeks. AI enthusiasm fueled concentrated market gains, but now that earnings have exposed the sizable costs associated with rolling out AI and the likelihood that investors may have to wait longer than previously thought to see a return on the investment, other sectors of the market may look more attractive. In the near term, market volatility has returned and could linger through the balance of the “Worst Months.”
Somewhat consistent with the theme of rotation, Weekly New Highs spiked to their highest level since June 2021, last week while Weekly New Lows dropped to the lowest level since last December (7). If the volatility of last week and this week has just been about rotation into sectors and stocks that stand to benefit from anticipated interest rate cuts, then we should see similar numbers for New Highs and Lows this week. If that does not materialize, then the market could be in the anticipated seasonal pullback.
Over the past four weeks the 30-year Treasury bond yield has been essentially unchanged (8). The market may prefer falling interest rates, but unchanged did not seem to hurt either. Tepid Q1 GDP appears to have helped cool inflation modestly while today’s advance estimate of Q2 GDP was 2.8%, which is neither too hot nor too cold. The economy does appear to be heading toward a soft landing.