Election chaos and Friday’s tech outage are taking the market on a wild ride
The S&P 500 is up more than 16% so far this year and hasn’t fallen by 2% in more than 353 trading sessions. That’s the longest such streak since 2007 (right before the financial collapse).
But this has been a destabilizing week for US stocks and the market trajectory could be shifting.
Investors have struggled to find their footing in recent days as they contend with an assassination attempt on former President Donald Trump, rising odds that President Joe Biden will drop out of the election, attacks on Big Tech and chipmakers from both sides of the aisle and a global computer outage affecting airports, banks, hospitals and other businesses.
The Dow was down more than 430 points, or 1%, in the morning trading session on Friday as the tech outage continued to rattle investors. The S&P 500 and the Nasdaq Composite were both around 0.6% lower.
It’s the latest session to see stocks oscillating this week, reaching new highs before swinging back down again.
The S&P 500 posted a new record high on Tuesday. By Thursday, the index had logged its worst two-day decline since April — when Iran launched an attack on Israel. On Wednesday, the Nasdaq had its worst day since 2022.
The selloff “came amidst intense political uncertainty,” wrote Jim Reid at Deutsche Bank, “as speculation continues to mount that President Biden will stand down as the Democratic nominee, perhaps before Monday according to many reports, which has the potential to completely upend the dynamics of the presidential election in November.”
Investors crave stability, and with about 100 days left until the election, they’re worried that market mayhem has set in.
So what does that mean for your money?
The standard advice for investors is to invest for the long term and to avoid making any short-sighted election-inspired trades.
“We do not favor making meaningful portfolio changes based on who you think might win the November election,” said Scott Wren, senior global market strategist at Wells Fargo. “The economy’s trend seems to be a clearer signal for an investor than trying to predict the eventual market impact of any election.”
Still, some argue that we’re in the midst of a larger market rotation.
Small-sized stocks prevail
For the last two years, the stock market has been tied to the Federal Reserve’s actions. Inflation and interest rates have been a guiding light for markets: A higher-than-expected inflation reading or tough speech from Fed Chair Jerome Powell have frequently thrown stocks into freefall. Meanwhile, any data that shows signs of a crack in the job market has sent stocks soaring as investors bet on impending rate cuts.
Now, investors are parrying that central bankers will finally cut interest rates in September after first signaling a move last December. And they’re celebrating. Liz Young Thomas, head of investment strategies at SoFi, said she also thinks that investors might be more certain about the election than before, as President Donald Trump has seen better polling in the days following an attempt on his life.
One clear indication of that celebration is the return of small-cap stocks.
Smaller companies typically outperform large caps in declining-interest-rate environments because it’s cheaper for them to borrow money and grow. This makes them more attractive to investors looking for better returns.
In just seven trading days, the Russell 2000 (a small-cap index) has moved more than 10% higher. Before the move, the S&P 500 was outperforming the Russell 2000 by 16% year-to-date. That gap has narrowed to just 6%.
“The new information has been a combination of lower US Treasury yields, cooler inflation data, and increased risk appetite on the possibility of a more certain US election outcome,” said Young Thomas. The earnings data helps to confirm that the move has fundamental support from the index, but likely wasn’t the driving force.”
Tech selloff
Part of the reckoning between large-cap and small-cap stocks has been due to the sudden tech selloff.
As expectations increase that the Fed will begin cutting rates in the fall, investors are starting to move out of the Magnificent Seven tech stocks that fueled record highs this year.
Tech stocks took an additional pummeling this week after Bloomberg reported Tuesday that the Biden administration is mulling plans to impose more sanctions on Chinese tech firms and to heighten semiconductor trade restrictions between the US and China.
Former President Donald Trump, meanwhile, said in an interview with Bloomberg that Taiwan should pay for its own defense. “They did take about 100% of our chip business,” Trump said. Shares of Taiwan Semiconductor Manufacturing are down 10% over the past five days.
On Friday, a massive global outage of Microsoft’s Windows operating system, caused by a faulty update from cybersecurity company CrowdStrike, furthered the tech stock rout.
Shares of Nvidia, Microsoft, Meta Platforms, Amazon, Apple and Alphabet are on pace to close the week lower.
The bright side
Investors have been largely resilient this year and some financial bigwigs say the election won’t change that.
JPMorgan Chase CFO Jeremy Barnum said during an earnings call last week that even though the election cycle is making big news, it isn’t “financially material in the context of earnings.”
The current economic environment, he said, is “no different than any other.”
Amidst the global computer outage affecting various businesses and the political uncertainties, investors are rethinking their investment strategies in the business sector. Despite the challenges, some analysts argue that we're witnessing a larger market rotation, with small-sized stocks gaining momentum.
