Market Volatility Ahead of Election Cycle

Investing.com – Wells Fargo strategists advise investors to brace for increased market volatility as the selling season nears, worsened by the upcoming election cycle.

Historically, significant declines in the stock market have occurred from late summer to early fall. Over the past seven years, the S&P 500 has seen sell-offs between 5% to 20%, and Wells Fargo predicts this trend will persist in 2024.

The tightly contested U.S. election adds to uncertainty. Strategists note, “A tightly contested and open election where the incumbent is not seeking reelection, as we have currently, only serves to increase the uncertainty.”

Looking ahead, they anticipate months of volatility, with stocks moving sideways and struggling for new highs.

Wells Fargo believes this volatility may present investment opportunities, recommending investors maintain a “shopping list” for potential market lows. They point to sectors like U.S. Large Cap Equities, and specific areas within the S&P 500, including Communication Services, Energy, Financials, Industrials, and Materials. U.S. Small Cap Equities may also provide attractive exposure if underallocated.

Conversely, they suggest trimming positions in overexposed sectors like Consumer Discretionary, Consumer Staples, Real Estate, and Utilities if markets reach recent highs.

Looking beyond 2024, Wells Fargo remains optimistic about the long-term outlook. They predict an economic shift from slowdown to growth in 2025, driven by an earnings recovery and a rise in equity prices. The firm advises investors to focus on 2025 while making decisions now, stating, “Keep an eye on ’25.”

In recent trading, the S&P 500 experienced a modest increase while the Nasdaq 100 fell due to a decline in tech stocks. Investors are considering the likelihood of a larger-than-expected rate cut from the U.S. Federal Reserve this week. The S&P technology index, the strongest of the 11 major S&P sectors this year, dropped 0.95%, making it the session’s biggest loser.