Stock Portfolio Updates: Election Year Drawdowns Happen By: Jeffrey A. Hirsch & Christopher Mistal | August 08, 2024 | Email | Print

Considering the heightened market volatility over the past week let’s take a step back and calmly evaluate market conditions. Election year drawdowns happen. In the table below the average election drawdown for S&P 500 is 13.4% since 1952 and 21.2% for NASDAQ. At the August 5 lows S&P was down 8.5% and NASDAQ was off 13.1%. This is well within the range of historic election year drawdowns and less than the average drawdowns of 13.4% for S&P and 21.2% for NASDAQ.

 

 

We’ve been warning of a mean reversion pullback for this overextended market running on AI-boom fumes. The selloff may have been a little faster and more furious than we anticipated, but nevertheless high-flying stocks and the market got their comeuppance. While the market has staged a bit of a bounce back, we suspect the correction is not over. 

 

The support levels we highlighted in the August Outlook two weeks ago for the S&P 500 of 5190 and NASDAQ of 16500 have been breached, which suggests we could test the April lows (S&P 4954/NASDAQ 15223), which would be a 12.6% correction for S&P and 18.4% for NASDAQ. This is just shy of the average election year drawdowns in the table above. 

 

The mid-July pullback we expected arrived right on cue. This pullback and the market’s steep trajectory bring into consideration the uneasy comparison to 1987 as you can see in the chart below. This is not to say we expect a 1987-style crash or market action in 2024. We don’t. It can’t happen with the circuit breakers now in place. Plus, as illustrated in the chart below the 1987 market was much more extended than 2024. Q1 1987 S&P was up 20.5% while up 10.2% in Q1 2024. At this juncture in 1987 S&P was up over 35% year-to-date. At the high this year S&P was up 18.8%.

 

 

The 1968 analog is the one that’s calling out to us now. Both are election years with a democratic sitting president that dropped out of the race and democratic convention in August in Chicago. There are many other, economic, market, political and geopolitical comparisons we can draw, but most important to us is that the market in 2024 is now closely tracking the 1968 trend, especially after the recent selloff. We’ll be keeping a close eye on this.

 

 

While the market may have overreacted, this sort of pullback is overdue and likely not over. August-October seasonal weakness is clearly in play and the action over the past two weeks brings our Open Field Election Year Pattern back in play as well (see chart below). This does not mean we are heading into the red for the year, but it does suggest the market may struggle over the next few months during the seasonal weak period and leading up to this now more uncertain election. But remember since 1952 there have been “Only Two Losses Last 7 Months of Election Years” (see 2024 Almanac, page 80).

 

 

 

Over the past three weeks through yesterday’s close (August 7), S&P 500 sank 7.0% while Russell 2000 dropped 9.1% higher. Over the same period the entire stock portfolio slipped 3.3% excluding dividends, interest on cash, and any trading fees. An increasingly large cash position (due to positions being closed out when stops were triggered) helped buoy the overall portfolio. Every market capitalization slice of the overall portfolio did take a hit from broad market weakness. Large caps show the least amount of damage, down 3.9% since last update, small-caps were second worst, off 10.1% while Mid-caps got slammed, down 13.7%.

 

While numerous positions did decline, Super Micro Computer (SMCI) was responsible for just slightly less than half of the total portfolio decline over the last three weeks as it fell from over $800 to under $500. Given the lofty gains and earnings expectations of SMCI (and AI stocks in general), it was not much of a surprise to see it sell off. We had already taken profits in SMCI twice. The first time was when it doubled from its original price and a second time when it was trading around $900 in the first half of April. SMCI may have missed earnings estimates, but earnings were still up 78.1% compared to one year ago while revenues leapt 143%. When earnings were released, SMCI also announced a 10-for-1 stock split which is expected to be completed on October 1. Despite the recent sell off, AI is not going away, but until market volatility cools, SMCI is on Hold.

 

Another significant slice of the recent portfolio decline was the result of an earnings miss by Cbiz (CBZ). Shares had jumped higher in early July to over $85, but weaker than expected revenue, earnings, and margins reported on July 31 quickly erased the gains. CBZ closed below its stop loss on July 31 and was closed out of the portfolio for a 23.5% gain excluding any dividends or trading fees.

 

Also getting stopped out in late July was nVent Electric (NVT). Although not directly an AI stock, it had benefited from all the excitement with shares climbing above $85 in late May from around $56 in mid-January. However, that is where that run appears to have ended as NVT mostly drifted sideways and lower until mid-July when it began its retreat in earnest. NVT closed below its stop loss on July 30 and was closed out for a 38.4% gain excluding the usual fees and any dividends. NVT’s earnings released earlier this week also failed to meet expectations.  

 

On a positive note, InterDigital (IDCC) reported better than expected results on August 1 and raised its guidance. The “surprise” earnings and revenue beats helped IDCC avoid the mini market meltdown earlier this week and it has gained 10.6% since last update. With analysts scrambling to update their forecasts, IDCC is on Hold.

 

It wasn’t a major move, but AT&T (T) also managed to post a modest gain over the last three weeks and continues to slowly climb back to our breakeven mark (excluding dividends). T was originally added for its dividend yield and now that the Fed appears to be ready to start cutting rates, that yield is likely looking attractive once again to some. Hold T.

 

All remaining positions not mentioned above are on Hold. Please see table below for updated stop losses.