How Investors Can Ride 'A Bull Market of Negativity'

What You Need to Know

Election years are volatile, but results don’t lag other years’ returns by much.
U.S. stocks lean on “stronger balance sheets, sturdy economic fundamentals” and innovative capacity.
Money market rates will likely trend lower, opening opportunities for high-dividend-paying equities.

Even as the stock market has soared into 2024, investors face ongoing uncertainty — a contentious U.S. presidential election, a possible recession, a warming planet and the financial effects of wars in the Middle East and Europe.

Given the unknowns, clients may wonder how to position their portfolios to weather whatever electoral, geopolitical and economic turns that the year brings.

Election years tend to bring more stock market volatility, and this one appears to come with heaping doses of voter anger, fatigue and dissatisfaction, Bank of America’s chief investment office noted in a Jan 30 report. The report cited, among other concerns, “the crisis of democracy and the polarizing U.S. election.”

Joseph Quinlan, head of CIO market strategy, and Lauren Sanfilippo, senior investment strategist for Merrill and Bank of America Private Bank, said Americans are “living through a bull market in negativity” that’s just hitting its stride.

The report from BofA’s CIO team sought to provide advice that financial professionals and clients can use to construct portfolios amid the gloom.

With the presidential election 10 months away and so many unknowns along the way, investors should keep some key points in mind, said Quinlan and Sanfilippo.

Contents

Stay ‘Long’ the U.S.

The Bank of America CIO team started by offering reassurance that the United States isn’t necessarily in such troubling straits.

It’s a “false narrative” that “the country is going to hell in a hand-basket. Nothing could be further from the truth,” the report said. “Nearly a quarter century into the 21st century, the U.S. economy remains among the most dynamic and resilient in the world, accounting for roughly 25% of world output last year with just 4.5% of the world’s population.”

“No economy is as productive and wealthy as the U.S. Stay long America. We believe U.S. assets should be core holdings in portfolios.”

The firm prefers U.S. stocks based on the nation’s “stronger balance sheets, sturdy economic fundamentals” and innovative capacity.

“Europe and some emerging markets look attractive based on valuation metrics, but heightened geopolitical risks, (e.g., the threat to global trade, and China’s structural slowdown) keep us guarded in our bias towards developed and emerging market (EM) assets,” the CIO team explained.

Remember: Profits Over Politics

Profits have always mattered more than politics when it comes to the economy and markets, Quinlan and Sanfilippo wrote.

“Sure, politics matter to the markets, but the long-term driver of returns has been with company profits,” they said, adding, “the profits recession is over” after a second-quarter 2023 trough.

“For 2024 — amid the election frenzy — earnings expectations are skewed to the upside, with the consensus expecting 11% earnings growth this year. Fueling the upturn: better-than-expected growth, retreating inflation, the lower cost of capital and a weaker U.S. dollar.”

Focus on the Horizon

While investors frequently associate election years with more market volatility, U.S. stock returns historically resemble those in non-election years, the team noted. The S&P 500 has averaged 7.5% in election years going back nearly a century, compared to 8% in other years, they wrote, citing Bloomberg data.