As the U.S. enters the typically volatile month of October during an election year, investors are increasingly focused on whether the recent market rally can be sustained. Historical data suggests that while September was strong for U.S. stocks, October remains uncertain, particularly in an election year when political factors can add to market volatility.
Historical Data Supports a Positive Outlook
Historically, the stock market tends to perform well in election years, and the strong performance in September often carries over into October and the fourth quarter. According to a report from CFRA Research, since 1945, when the stock market performs well in September during an election year, there is nearly an 80% chance of continued gains in October, compared to a historical average of 61%. This suggests that the U.S. stock market may continue to rise in the fourth quarter of 2024.
Both the S&P 500 and Nasdaq have recorded four consecutive quarters of growth this year, marking the longest winning streak since 2021. Analysts believe that China’s large-scale stimulus measures and the Federal Reserve's renewed rate cut cycle have played a crucial role in boosting market sentiment.
The Federal Reserve's Rate Cuts May Slow
As the U.S. economy shows signs of a soft landing, the Federal Reserve may slow its pace of rate cuts. The September nonfarm payroll data was strong, with 254,000 jobs added, beating expectations, and both July and August figures were revised higher. Additionally, the ISM services index reached its highest level since February 2023, indicating strong expansion in the service sector. The Atlanta Fed’s GDP Now model estimates that U.S. GDP growth for Q3 will reach 2.5%, well above the long-term trend of 1.8%.
Federal funds futures show that investors now expect a 90% chance of a 25-basis-point rate cut at the November Fed meeting, with little chance of a more aggressive cut.
Geopolitical Risks and Oil Price Volatility
In addition to Federal Reserve policy, geopolitical tensions are another critical factor affecting the market. Recently, international oil prices saw their biggest weekly jump since March 2023, largely driven by escalating tensions in the Middle East, where Iran launched missile attacks on Israel. Market fears that this conflict could spread and further impact global oil supplies are rising.
Some options traders are betting that oil prices could soon reach $100 per barrel due to concerns that tensions between Israel and Iran could lead to broader regional conflict, threatening the flow of crude oil. If oil transport through the Strait of Hormuz is disrupted, this could impact one-fifth of global oil supplies, pushing up prices and increasing inflationary pressures worldwide.
Looking Ahead
Going forward, investors need to keep a close eye on several key factors, including Federal Reserve interest rate decisions, developments in geopolitical tensions, and the upcoming U.S. Consumer Price Index (CPI) data. Economists expect headline CPI to decrease from 2.5% in August to 2.3% in September, while core inflation is expected to remain stable at 3.2% year-over-year. If inflation data comes in higher than expected, it could impact the Fed's rate cut plans and act as a headwind for the stock market rally.
In conclusion, while historical trends suggest that the fourth quarter could see further stock market gains, investors must remain cautious about the political and economic uncertainties that come with an election year. Geopolitical risks, in particular, could weigh heavily on the energy market and global economic outlook.
