The US stock market follows a cyclical pattern around midterm elections, experiencing turbulence and relatively poor performance before the elections and then seeing an upswing afterward. However, this year, there are additional risks identified by investment banks, including the Fed’s interest rate hikes, rising oil prices, and the nearly 20-year high in government bond yields.
Citigroup stated in its September monthly outlook report released on September 25th: “Given the backdrop of rising oil prices, higher interest rates, adverse seasonal factors in September, and increased volatility in US interest rates, the performance of the stock market has been impressive.”
Currently, Citigroup is waiting for a market pullback before increasing its risk exposure. The bank mentioned that historically, stock markets tend to pull back after the Fed’s initial interest rate hike rather than before, and it remains unclear what conditions would prompt a shift in the Fed’s hawkish stance.
The Federal Reserve recently raised interest rates for the first time since 2023, increasing the benchmark rate by 0.25 percentage points to a target range of 3.75% to 4%. It is anticipated that there could be further rate hikes before the year-end. Historical data indicates that periods of rate hikes often coincide with short-term weakness in US stocks, but investor focus has shifted to the extent of Fed rate hikes and the economic response.
Furthermore, Citigroup mentioned that stock markets typically show weakness before midterm elections, followed by the traditional year-end rebound rally.
Based on historical statistical data, the US stock market typically follows a cyclical pattern of “pre-election turbulence and post-election rebound” around midterm elections. Data from the past few decades highlights the high consistency and reproducibility of this market behavior.
J.P. Morgan’s statistics show that in every midterm election cycle since 1962, US stocks have experienced various degrees of corrections just before the early November election day, with an average pullback of around 8.1%. The market usually reaches a significant interim low around mid-October, with the fear index (VIX) historically spiking from the end of the third quarter to the beginning of the fourth quarter. Once the election results are announced and the greatest “policy uncertainty” is lifted, the stock market typically triggers a strong relief rally.
Barclays pointed out that the stock market is currently following the typical seasonal pattern preceding midterm elections, but oil prices and interest rates are the decisive factors for future market trends. Stock sensitivity to these two factors has turned negative, prompting the government to have more motivation to control energy prices.
In terms of investment strategy, Barclays recommends adopting a moderately risk-averse position, prioritizing bank stocks, value stocks, and sectors benefiting from capital expenditure, while hedging with defensive sectors like telecom and utilities. For other investment targets, waiting for further stabilization of oil prices and interest rates is advisable.
Meanwhile, the focus in the market is also on the US 10-year Treasury yields. Data shows that the yield on the 10-year Treasury has been steadily rising, surpassing 5.17% on September 24, compared to below 4.8% two weeks earlier, with a brief dip below 4.6% in August.
According to CNBC, the rapid increase in the 10-year Treasury yield has raised concerns on Wall Street about potential risks in the financial markets. Market experts have expressed particular worries about the speed of the yield increase. Looking back over the past 50 years, whenever there has been a similar rapid climb in the 10-year Treasury yield, it has often been accompanied by significant financial market volatility, even sparking financial crises.
A review of the 10-year Treasury yield trends over the past 50 years revealed that there have been 16 instances of similar rapid rises, each accompanied by some form of financial market disaster. The scale of these events has varied, including the bankruptcy of Silicon Valley banks in 2023 and the stock market crash of 1987.
J.P. Morgan’s trading department has recently warned investors to watch out for bond market volatility, indicating that drastic fluctuations in the bond market may present even greater headwinds for the stock market compared to the level of yields themselves.