Can the Market Defy The Election Year Trend?

September 3, 2020

August is typically a dud month for stocks as investors and traders leave for annual summer vacations, but 2020 is a different kind of year.  U.S. stocks had a great August this year with the S&P 500 experiencing its best August in 34 years (1986).  The S&P also closed the month with a 5-day consecutive winning streak. That has only happened twice in the past 22 years (October 2017 and March 1998) as the index set a new all-time high marking a definitive bull market recovery - the fastest bull recovery ever following March’s swiftest bear market decline in history.

The Dow Jones Industrial average turned positive for the year in August and set a new all-time high along the way. This index had a few changes that became effective in August with long time Dow components Exxon, Raytheon Technologies, and Pfizer being moved out of the index.  They were replaced by Salesforce, Honeywell International, and Amgen and these changes provided some lift to this price weighted index.

Meanwhile the tech heavy NASDAQ continued its rapid climb higher setting multiple new all-time highs throughout August. Tech stocks and blue chips led the way this month as the new, hopefully speaking, post-COVID economy has taken hold.  Small cap stocks, while positive for August, continue to lag.  An interesting note for the month is Apple’s (AAPL) market cap climbed to an extraordinary level and is now bigger than the market cap for the entire Russell 2000 Small Cap index.

Gold, traditionally considered a safe-haven of stored value for investors and one whose price moves opposite the value of the U.S. dollar, had been rallying due to the dollar experiencing a sharp selloff. In August, though, Gold was only slightly positive as the U.S. Dollar stabilized. Similarly, European equities had been underperforming, but there was a turnaround in August, and they turned positive for the month.

The Federal Reserve statement this month1 was very supportive of stocks as Chairman Jerome Powell stated they expect rates to remain near zero over the next 5 years. This helped stocks shrug off the Fed’s new stance on a wider inflation target surrounding the traditional 2% hard target.  With the COVID stimulus increasing the money supply and rates being held near zero that money seems to be finding its way into equities as it is one of the few places with the potential to get desired returns on investment.


September has historically been one of the worst months of the year for stock returns. September and October have historically returned negative numbers on average during election years with October being the worst month of the year during election years.  Could investors experience election anxiety in 2020?  2020 has been a year of firsts. In May, Federal Reserve Chairman Jerome Powell stated that economic downturn was, “…without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased.”2

We’ve already noted the descent into bear market territory was the swiftest in history. Powell’s statement was a call for quick and effective action on the part of both the Federal Reserve and the government. The Fed responded by keeping its heel on interest rates and worked together with the government, in sperate programs, to deliver unprecedented levels of economic aid and stimulus to both businesses and individuals.  While it remains to be seen what the long-term effects of each might be, in this year of firsts these actions provided undeniable breathing room for many who needed it the most.

As stated above, August is traditionally a weak month for stocks, but this year it was one of the best.  There is some speculation that the strength of individual stocks and continued market liquidity is due in no small part to the huge wave of retail investment dollars which has poured into the market since the initial COVID-19 lockdowns began. In 2019, individual retail investors accounted for 10% of market participants. During the volatility-driven market of recent months they’ve commanded up to 25% of market activity.3

Even so, it is unlikely that this new volume alone is powerful enough to influence valuations. Most likely, the Fed backstop during the first days of 2Q20 and subsequent stabilization of credit markets eased the concerns of investors such that the market roared back from its depths in March. Could 2020 buck the election year trend over the next couple of months?  No one really knows for sure, but it appears certain the major catalyst for stocks continues to be the support of the Fed.


With stocks climbing for the fifth month in a row our trend following technical measures are all solidly in positive territory.  We continue to see some technical divergence and less than favorable market breadth, but the price trend has been so strong the weight of the technical evidence remains high.

Brad Thompson
Chief Investment Officer

1; Published August 27, 2020; Accessed September 2, 2020

2 Published May 13, 2020; Accessed September 2, 2020

3 Published July 9, 2020; Accessed September 2, 2020

The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.

The Russell 2000 Index is a small-cap stock market index of the smallest 2,000 stocks in the Russell 3000 Index.

A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market's downward spiral to be self-sustaining. Investors anticipate losses as pessimism and selling increases. Stadion defines a bear market as a time when market indices fall at least 20%.

A bull market is a period of several months or years during which asset prices consistently rise. It is the opposite of a bear market, in which securities prices consistently fall. Stadion defines a bull market as a time when the market indices rise at least 20%.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange.

There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical measurements are one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity.

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