S&P 500 and Stocks Will Keep Making New Highs in Election Year

The upside momentum in stock markets doesn’t seem to stop, with the S&P 500 index printing a new record higher at 5,537 points. The sentiment remains positive as central banks start the monetary easing period, albeit slowly, but with more to come on everyone’s mind. This is an election year for many important countries, but that’s not offsetting stock buyers who keep buying the retreats lower.

S&P 500 Chart Daily – The 20 SMA Pushing the Lows Higher

Stock Market Market Performance Ahead of Election Results

European and US shares closed higher, with UK stocks also showing strong performance ahead of the election results. The final changes for the day were:

• Stoxx 600: up 0.6%
• German DAX: up 0.4%
• UK FTSE 100: up 0.8%
• French CAC: up 0.8%
• Italy MIB: up 0.8%
• Spain IBEX: up 0.1%

Election Influence on Market Strategy

It’s a long-held belief of mine that buying equity indices ahead of election outcomes is a wise strategy. Elections often induce significant anxiety but typically result in minimal actual change. Consequently, the market tends to breathe a collective sigh of relief, regardless of the election results.

Why Markets React This Way

Market Psychology

• Anxiety vs. Reality: Elections are usually surrounded by uncertainty and fear of change. However, once the results are in, markets adjust to the new reality, often finding that the anticipated changes are either manageable or overestimated.
• Relief Rally: The relief from the end of uncertainty often sparks a rally. Investors, having braced for worst-case scenarios, feel reassured once the outcomes are known, leading to a surge in buying activity.

Historical Patterns

• Past Trends: Historically, markets have shown resilience and even strength in the face of election results. This pattern suggests that the fears leading up to elections are often not justified by the outcomes.

Strategic Insights

• Pre-Election Opportunities: Taking advantage of pre-election dips can be profitable. As fear drives prices down, savvy investors can buy into equities at lower prices, benefiting from the post-election relief rally.
• Diversification: Spreading investments across various indices can mitigate risks associated with any single market’s reaction to election outcomes.

Conclusion

In conclusion, while elections do create a lot of noise and anxiety, they often have a limited impact on the fundamental economic and market conditions. This makes them more of an opportunity than a threat for investors looking to capitalize on market inefficiencies and psychological biases.

S&P 500 Live Chart