Forget the election, stocks face this crucial test right now, analyst says

Investors may be sweating the November presidential election, but the stock market’s true test is likely to come in the current quarter, says one Wall Street bull.

“Traditionally, you’ll see the market price in the outcome of an election about six weeks prior to that election,” Jeffrey Schulze, investment strategist at ClearBridge Investments, a money manager with around $147 billion in assets under management, told MarketWatch in an interview on Monday. “Leading up to that election, [the market] is really going to focus on the economy — is that economy healthy or slowing down or in a recession.”

Read: History will repeat itself when it comes to stocks in 2020, Goldman Sachs says

He noted, in the chart below, that in 20 previous presidential election years stretching back to 1936, the S&P 500 index SPX, +0.12%  has been positive 85% of the time in the six-month period leading up to election day — and 55% of the time in the three-month lead-up.

ClearBridge Investments

More pressing for investors is the question of whether the economy could suffer a significant growth scare in the current quarter.

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Schulze, in a note, recalled that ClearBridge’s own recession-risk dashboard turned yellow back in June 2019, where it remains. On average, an overall yellow signal has turned back to green — signaling a soft landing — or turned red — signaling recession within six to nine months. That also lines up with how the S&P 500 performed in the wake of a third interest rate cut by the Federal Reserve. The Fed, which ended its hiking cycle early last year, delivered a third rate cut in October.

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