With the Fed finally talking about cutting rates, there are some suggesting that the central bank may be seeking to help the incumbent administration with November’s upcoming election. Certainly, the market has already reacted favorably to what amounts to nothing more than a dovish hint. While we are completely in favor of a rate cut for purely economic reasons, the data clearly shows that election-year stock performance is actually a thing!
- We must start out by indicating that in Powell’s most recent speech (see summary here), the Fed Chair made it a point to say that politics play no role in their rate decisions…
- Further, Powell was extremely careful not to commit to a rate cut, even leaving the door open to further rate hikes.
- Powell’s point is that he will not support a rate cut until inflation starts to approach 2%, something he says is not forecasted by the great minds at the Fed to happen until 2026. Somebody should send Powell our recent post on Costco’s most recent quarterly release which highlights this leading retail company’s experience with deflation (sometimes approaching a -20% to -30% y/y decline driven by lower shipping costs).
- In any case, it seems evident from the table below that it’s usually a good bet that the stock market could outperform during an election year & it is notable that this dovetails nicely with the Fed’s newfound dovish stance…
Source: Matrix-Book-2021.pdf (pg 16-17)