• Donald Trump’s return to the presidency has unleashed a wave of optimism in equity markets as investors price in tax and regulation cuts, but are curiously ignoring potential downsides from tariffs.
• One factor that may be helping boost stocks over and above the election results is the fact that we are now in a strong seasonal period for both the TSX and S&P 500.
• The six months starting in November have produced both the highest six-month return and the highest probability of a positive return in both markets that we are primarily invested in.
• This track record does not preclude a return of volatility, in fact we would count on it at some point given the unconventional approach being taken in putting together the next U.S. administration.
• In the short term, the probability of U.S. recession seems to be receding further, but tariffs will loom large in 2025.
• Markets are always changing, and a new U.S. administration is at its core another change we will need to manage.

The media has spent the past two weeks deeply focused on the results of the U.S. election, with talking heads on TV pontificating endlessly about the potential impact of each proposed policy announcement and cabinet pick. Many surmise that rising stock markets are acting as an endorsement of these policies, and to some degree that is likely true – after all, stocks tend to like lower taxes and less regulation. Curiously lost in translation is the bond market’s firm signal that potential tariffs and bulging deficits portend future inflation, but for now stocks are taking it all in stride.

While we can’t discount the value of having the uncertainty of the election spectacle behind us, we would note that we are also entering what has historically been a very strong seasonal period for the stock market. Over long periods of time, stocks on both sides of the border have shown defined performance trends that shift with the calendar, and once Halloween passed we entered what has historically been the most fruitful six-month period for equity investors in both Canada and the United States.

Headed to what is typically a wonderful time for U.S. stocks…

As seen below, starting in November, the S&P 500 has historically returned 7.1% over the next six months with positive returns 77% of the time. This table also somewhat validates the popular “sell in May and go away” strategy suggested by market watchers every spring, but note the returns are still positive on average and up more than half of the time.

… and Canadian ones as well

The figures are just as impressive in Canada, with the TSX up 8.7% in the six months from November over the long term, reporting a gain 83% of the time. We would note that in the aftermath of the election the TSX is also trading higher despite being one of the countries most likely to be impacted by tariffs, which suggests to us that leaving that uncertainty behind and the seasonal effect are at play here.

Seasonal trends are far from the only consideration we make when constructing and managing portfolios. They do however give us a sense as to when the odds are on our side, and right now they appear to be. In our view, the near-term probability of recession has likely fallen a bit more as “animal spirits” seem alive and well, but we know the ride won’t be smooth. Today’s election enthusiasm may well be followed by tomorrow’s tariff tantrum. We saw a great quote this week that said the markets are the same today as they were five years ago and ten years ago in that they are always changing. We have received a lot of questions from clients asking if we are taking material actions in portfolios in response to the election result. While it has created a lot of headlines, at its core it is another change that we will need to manage through as we have so many others.

 

The Harbour Group

416-842-2300

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