An election year is usually good for stock markets says Fisher Investments. And it won’t just be the Magnificent Seven driving it.
Fisher Investments doesn’t shy away from taking clear contrarian positions.
But unlike what people sometimes think, taking a contrarian position is not simply doing the opposite of what everyone else is doing. It is about carefully assessing a situation and sticking with your conclusion, even if it is not in line with the crowd’s opinion.
Right now, one of the biggest contrarian positions the firm has is the assessment that politics will form a tailwind for equity markets this year.
Whereas many investors see the current geopolitical tensions, the increased political divisiveness in many countries and turmoil around Ukraine and Gaza as weighing on markets, Fisher Investments believes this year’s election cycle means markets will end the year higher.
Election years, not just in the United States but globally, tend to be great for the stock market. And the reason for that is because as politicians campaign and try to get reelected, they're full of words, but little action
“It is true that there’s huge turmoil and many, many problems in the world, but this year is an election year,” Michael Hanson, Senior Vice President of Research at Fisher Investments, says in an interview with [i3] Insights.
“Election years, not just in the United States but globally, tend to be great for the stock market. And the reason for that is because as politicians campaign and try to get re-elected, they’re full of words, but little action,” he says.
“If you take the United States for example, what we’ll have is our two candidates, presumably Biden and Trump, yelling at each other for the rest of this year, or at least until November, and talking about everything they will do, but actually not doing much.
“We have the most do-nothing, gridlocked Congress in more than 50 years in the United States,” he says.
Markets like the certainty that inaction brings and Hanson points out that historically in the US markets have ended the year higher in the fourth year of a presidential term 83 per cent of the time, often ending the year with double digit growth.
Capital Expansion
Markets are also buoyed by companies’ willingness to invest in future growth again. After the relatively short and shallow bear market of 2022, Hanson sees markets normalising and companies have been more willing to embark on capital expansion plans.
“We see more corporations trying to go a little bit on the offence rather than to play defence. This is just natural oscillation and cyclicality, because in the last year, as prices gave signals that things weren’t as good as people thought, many CEOs really took down their capital investment plans,” Hanson says.
“And so after being quite conservative, now that things look a little better many CEOs are starting to simply expand their activities again.
CEOs also can't be cautious forever. They have a responsibility to their shareholders eventually to deploy capital in some way on their behalf. They have to get out there and compete or return capital to shareholders
“CEOs also can’t be cautious forever. They have a responsibility to their shareholders eventually to deploy capital in some way on their behalf. They have to get out there and compete or return capital to shareholders,” he says.
Hanson has started to see some companies put capital investment programs in place and he believes that is likely to continue throughout the rest of this year. As that happens, there could be upside surprises along the way.
“We are in a place where people aren’t as negative as they used to be, still pretty sceptical, but results from earnings or economic activity in general have continued to surprise on the upside. Our view is that so long as that goes on, the bull market can continue at least through this year,” he says.
Magnificent Seven and Tech Stocks
Last year’s equity market performance was largely dominated by tech stocks known as the Magnificent Seven. But Hanson doesn’t believe we are in a new paradigm, where technology is driving most of the current economic activity.
“What sells the most, tends to bounce the most. The Magnificent Seven were simply rebounding because many of those stocks had fallen the most in the bear market,” he says.
“But after that rebound markets started to expand again and you saw parts of industrials, energy, materials, those are all starting to do well this year. By contrast, some of the Magnificent Seven aren’t as good as they used to be.
“What you have now is a story about those who are expanding their cloud services and then your semiconductor leaders.
Expansion in cloud computing and computer chips is partly driven by the current push in artificial intelligence (AI) and although valuations are high Hanson doesn’t believe that we are in bubble territory just yet. Besides, there are not that many companies with deep AI capabilities for a bubble to form.
“AI is really coming down to a few companies, and that ought to be intuitive because AI is not the territory for small players. It requires huge capital upfront, huge resources upfront and huge abilities upfront. Only a few firms can really do that,” he says.
AI is really coming down to a few companies, and that ought to be intuitive because AI is not the territory for small players. It requires huge capital up front, huge resources up front and huge abilities up front. Only a few firms can really do that
“And when you get AI start-ups, they have to be tremendously bankrolled and actually supported by Big Tech in the process,” he says.
One side of the AI opportunity is software. The release of more advanced versions of AI-powered chatbots has opened up a wide range of applications and services in both existing and new products.
Some of the most interesting applications of this is in word processing, desktop publication and image processing programs.
But Hanson also warns that these added AI features might not necessarily translate into greater profitability. Investors should be careful in assessing how AI will impact the bottom line.
“When you talk about those [applications], they may not have huge profitability up front and that’s where it can become dangerous,” he says.
The other side of the story is formed by opportunities in hardware, especially in the development of computer chips that are capable of running very large language models. Hanson expects to see a continued strong demand for high-quality chips, not just for new products, but also to replace older generation chips in existing hardware.
“It’s not just about adding chips, it’s also about the replacement cycle for so much of what’s already out there. There’s huge durable demand there,” he says.
Where Hanson sees this year as one when equity markets are likely to produce double digit returns, 2025 will look very different as change will filter through after the elections.
“In the US, we’ll have a new president, a new Congress and things could change very quickly. Also by then, the Fed is probably going to change some of its monetary policy,” he says.
In such an environment, we might see a style rotation from growth to value stocks, as more cyclical companies tend to do well in a more uncertain market.
“It’s typical for value stocks to do well post-election,” he says.
This article is sponsored by Fisher Investments. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.