Markets Brief: Don’t Gamble on the 2024 Election

Tesla Back in Favor

US stocks fell last week, led by the basic materials (down 4%) and healthcare (3% lower) sectors. Previously overpriced, both are back in line with Morningstar’s estimates of their average stock’s fair value. In contrast, consumer cyclicals delivered a positive return, supported by Tesla TSLA, which accounts for 14.48% of the Morningstar US Consumer Cyclical Index. The stock rose 22% over the week, as investors appeared to forget the disappointment of the recent Cybercab event and were enthused by CEO Elon Musk’s optimistic predictions.

Investor Sentiment Changes All the Time

As most of Tesla’s value is derived from the anticipated success of future products, slight changes to these expectations have an outsized impact on its stock price. Because of this, it’s important to have an independent perspective on the company’s true value. Such an anchor helps reduce one’s sensitivity to changes in investor sentiment. Analyst Seth Goldstein increased his estimate of the company’s fair value by 5%. The firm now appears significantly overpriced in most scenarios.

Managing Earnings Expectations

With just over a third of the earnings season behind us, FactSet estimates that 75% of companies are beating expectations, despite earnings growth being a modest 3.6%. This reminds us how assiduously some managers work to guide expectations lower in the hope of a share price rise when they “surprise” investors. The main impact of this tedious game is needless volatility, which can encourage investors to make myopic decisions.

This problem can be exacerbated by trading platforms that encourage short-term speculation. Nicki Potts and Samantha Lamas of Morningstar’s Behavioral Insights team recently wrote about this, suggesting ways investors can reach their goals rather than derailing them.

The Election Is a Coin Flip

The US presidential election is naturally dominating the minds of most investors. When faced with such uncertainty, it is tempting to position portfolios to benefit from a particular outcome. Such a strategy is grounded in the assumption that other investors have mispriced the probability or impact of that outcome. While that may be true in some circumstances, it seems unlikely this year, given how close the race is.

This means positioning a portfolio for a particular outcome is a coin flip, and one should not risk a lot of capital on it. We should instead be positioning our portfolios to withstand a range of scenarios and looking for opportunities as the market adjusts to whatever new political reality emerges after Nov. 5. To this end, Danny Noonan recently laid out an evidence-based approach to addressing politics.

The Economy Is Accelerating

Approaching Halloween, there are plenty of opportunities for nasty shocks this week. The GDP data for the third quarter of 2024 will be released. The US economy is expected to have grown by 3.5%, accelerating from 3% in the second quarter. We’ll also see inflation data from the Personal Consumption Expenditures Index. The core measure is expected to have fallen from 2.7% to 2.6% over the last year.

The latest US employment report will also be released Friday. Since this data is backward-looking, it should have little impact on investor decisions. The election and the Federal Reserve meeting loom next week, and we can expect this news to create volatility and headlines.

Big Tech and Energy Stocks to Report

Earnings season continues, with Apple AAPL, Amazon AMZN, Eli Lilly LLY, and major energy companies in the spotlight this week. You can learn more about what’s happening with our market calendar and dedicated earnings page.

Highlights of This Week’s Market and Investing Events

• Monday, Oct. 28: Earnings from Ford Motor F
• Tuesday, Oct. 29: Consumer Confidence Survey, Job Openings and Labor Turnover Survey, earnings from Sofi Technologies SOFI, Pfizer PFE, Alphabet GOOGL, Snap SNAP, Visa V
• Wednesday, Oct. 30: ADP Employment Survey, Q3 GDP, earnings from Broadcom AVGO, AbbVie ABBV, Eli Lilly LLY, Meta Platforms META, Microsoft MSFT, Sirius XM Holdings SIRI
• Thursday, Oct. 31: Initial Unemployment Insurance Claims report, Personal Income and Outlays report, Chicago PMI, earnings from Uber Technologies UBER, Roblox RBLX, Mastercard MA, Cullen/Frost Bankers CFR, Apple AAPL, Amazon AMZN
• Friday, Nov. 1: Employment Situation Report, Construction Spending, ISM Manufacturing, earnings from ExxonMobil XOM

Check out our full weekly calendar of economic reports, consensus forecasts, and corporate earnings.

For the Trading Week Ended Oct. 25

• The Morningstar US Market Index fell 1.94%.
• The best-performing sectors were consumer cyclical, up 1.82%, and real estate up 1.02 %.
• The worst-performing sector was basic materials, down 2.57%.
• Yields on 10-year US Treasury notes rose to 4.25% from 4.08%.
• West Texas Intermediate crude prices rose 2.68% to $71.65 per barrel.
• Of the 888 US-listed companies covered by Morningstar, 633, or 71.28%, were down, 3 were unchanged, and 252, or 28.38%, were up.

What Stocks Are Up?

Altice USA ATUS, Li Auto LI, Pegasystems PEGA, Tapestry TPR, Tesla TSLA

What Stocks Are Down?

Capri Holdings CPRI, Expo Group Holdings XPRO, Genuine Parts GPC, Icon PLC ICLR, Intellia Therapeutics NTLA