Is a Rally Coming in the American Stock Market?

The S&P 500 is currently at its all-time high. The index has risen by about 70 percent since October 11, 2022, and is currently at 5,800. The NASDAQ has also risen by about 85 percent in the same time frame, and is just below its all-time high. The stock market faces a big test. Investors are also afraid of both the impact of the election and the possibility that the indexes have become expensive. The subject of this article is whether we will see a rally in American stock markets after the election.

1-Are indices expensive?

Considering the rallies that the indexes have made in the past two years, most investors are now afraid that the rally will end, but when you examine it on a stock-by-stock basis rather than an index-by-index basis, there is something important that can be seen. The majority of the rally in the past two years has been driven by mega-cap companies. Of these companies, NVIDIA has increased by approximately 1,000% since September 11, Meta by approximately 360%, Google by approximately 100%, and Amazon by approximately 70%.

During the same period, mid-cap and large-cap companies did not show similar performances. Since companies with higher market values have a higher weight in the index, the main reason for the increase was large companies. To see this more clearly, we can look at the returns of unweighted S&P 500 funds. The two-year return of these funds is only 48 percent.

Therefore, even if we see sideways movements or declines in the indexes in the period after the election, this may be due to money flowing from large companies to smaller companies. Therefore, it would be healthier to follow smaller companies rather than large companies.

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2-Liquidity

One of the results of the high interest rate environment in the past was that money flowed into more liquid assets. These could be money funds, bonds and bills, or deposit accounts. With the interest rate cuts, the return on money in these places also began to decrease. This money can help balance the market's reaction after the elections, because these investors will want to enter the stock market again if prices fall.

If the rally starts, liquidity continues to decrease and declines may start to be seen as buying opportunities. This situation can also be a good protection shield against geopolitical risks that may arise next year. Oil prices have also been on a downward trend since April. Although this is also due to strong production in countries other than OPEC, it also shows that markets believe that the conflicts in the Middle East will not turn into larger wars.

One of the reasons people stayed out of the rally was fears that the economy would go into recession, but the rally continued. As a result, other investors who missed this rally have a chance to get back into the stock market. Some of the people who stayed out are fund managers. The people who manage these funds are now under great pressure to deliver high returns to their clients. If the stock market does not suffer major blows in the first or second month after the election, these people will want to join the rally.

3-Increasing Confidence in the FED

Recently, almost all news related to the economy and the FED has been received positively by the market. For example, after the 50 basis point cut decision, no news, including unemployment data and new inflation data, had a negative impact on the market. As mentioned in previous articles, the FED is walking a fine line, but it has been successful so far. The data that came after the 50 basis point cut showed that the economy was still not fast enough, in other words, it provided the FED with the option to make further interest rate cuts. Similarly, the inflation data that came pushed the FED towards making 25 basis points instead of 50 basis points at the next meeting. As you can see on FEDWatch right now, the probability that the FED will make a 25 basis point cut at the next meeting is seen as 92 percent by the market, in other words, we can say that there is little uncertainty about the FED.

4- Strong Cash Positions of Companies

Due to the high interest rate environment in previous years, most of the large companies hold huge cash positions. For example, at the beginning of this year, NVIDIA had 25 billion dollars, Apple had 60 billion dollars, and Meta had 65 billion dollars, and these positions have increased compared to the previous year. This both strengthens the companies' hand in the crises that may occur in the coming year and means that large investments can be made in the future. In a scenario where large companies are stable, we can see big increases in the index as a whole.

A similar situation exists in medium and small companies. Many companies in the US have tried to save cash because there was a perception that even if they expand, there will not be enough return in the weak demand environment due to high inflation. If this money is spent by all companies, there may be an overall improvement due to circulation.

Small and medium-sized companies can also use their cash to buy back shares. As I said, most companies have not performed well on the stock market. Share buyback programs like the one announced by United Airlines the other day could be implemented by various companies. This is very likely good news for shareholders.

5-Falling Interest Rates

"Fed slashes interest rates by a half point, an aggressive start to its first easing campaign in four years." www.cnbc.com

The decrease in interest rates has clearly had a positive effect on the stock market, but the real impact of these decreases has not yet emerged. In order to truly understand the impact of the decrease in interest rates, loans such as home and car loans need to be restructured. In this way, we can see increases in the purchasing power of ordinary people.

The sectors that have suffered the most in recent years have been luxury goods. This is because people are the first to give up on them in a high inflation and interest rate environment. As people's disposable income increases, these sectors can experience rapid recoveries. Due to the economy in America that has been growing and developing for many years, most people do not have a culture of taking precautions or saving. Therefore, it seems normal for people to want to spend on luxury items when the situation improves after long periods of hardship. For example, aviation, hotel companies or e-commerce companies can benefit greatly from this.

6-Election

There is a much more positive atmosphere in the markets towards Donald Trump. As you can see everywhere, if Trump wins, the markets will respond very positively. However, if Kamala Harris wins, it could affect the markets just as badly.

I do not agree with this view. Of course, if Kamala Harris wins due to the expectations, there may be declines in the indexes at first. However, as I mentioned under the liquidity heading, there is a group that can rebound from this. Similarly, I just mentioned that the increase in people's spendable money can also have positive effects.

If you look at Kamala Harris' general statements: $20,000 in initiative support for blacks, the beginning of the cancellation of federal higher education debts, support for home purchases, and increasing social support are things that will comfort people. In this way, ordinary citizens can increase their spending. Especially canceling loans is something that will comfort Generation Z. These high-interest debts and the bad job market are delaying most young people from starting to invest or starting their own businesses. It can also be said that stock markets have performed very well under the Biden administration. In addition, people around Harris say that they want to break the perception that Republicans have always been better at managing the economy in the coming years. From people's perspective, the performance of stock markets is an important indicator of how the economy was managed in those years. Finally, considering how Republicans used this after the Japanese carry-trade crisis, Democrats will want to avoid a scenario where the stock market constantly goes sideways or down.