Stay invested and manage volatility through hedges

As the final quarter of 2024 gets under way, market conditions remain volatile on the back of escalating Middle East tensions, mixed US data, and a close US presidential race.

Investors will be closely watching the scale of the Israeli response to Iran's missile attack on Tuesday. Markets will also be awaiting the US September employment report, out on Friday, for further guidance on whether the economy is headed for a soft landing. A private sector payroll report from ADP on Wednesday pointed to stronger job creation than expected. Finally, polls show Vice President Kamala Harris holding only a narrow lead over former president Donald Trump, making the outcome hard to predict with confidence.

Against this backdrop, the mood was cautious in markets on Wednesday-with the S&P 500 closing flat after a 0.9% decline on Tuesday. So far this week, the index is down 0.5%. Brent crude is up a further 0.9% on Thursday at the time of writing, and has gained 3.7% so far this week, reflecting concerns that the conflict in the Middle East could interrupt oil supplies.

But while further volatility is possible over the coming days and weeks, we advise investors to consider strategies to manage market swings rather than exiting risk assets. We continue to believe the environment is positive for stocks, even after strong September and year-to-date performance. The S&P 500 rose 2% in September 2024, a month that typically sees weaker behavior, with an average return of -2.3% over the past decade. Year to date, the index is up 19.7%, following a 24.2% rise in 2023. We forecast the S&P 500 to reach 5,900 by year-end and 6,200 by June 2025, compared to 5,709 as of 2 October.

• The impact of geopolitical tensions tends to be short-lived. Historically, markets recover quickly from international conflicts. Since 1941, the S&P 500 has been higher two-thirds of the time in the 12 months after the start of a geopolitical crisis, and half the time, markets have taken just a month to recover.
• Equity market returns tend to rise around presidential elections. Since 1928, the S&P 500 has averaged 4% returns in the 90 trading days before an election and around 5.5% in the 150 days after. Excluding the 2008 election, which took place during the Global Financial Crisis, average S&P 500 total returns in election years have been roughly similar regardless of the winning party.
• The macro backdrop and fundamentals are favorable for equities. We believe the outlook for equities will be supported by a soft landing in the US, Federal Reserve rate cuts, strong earnings, and optimism over AI commercialization. Currently, the Atlanta Fed GDPNow model estimates real GDP growth at an above-trend rate of 2.5% in the third quarter of 2024. The Federal Reserve has started easing policy, and we anticipate another 50 basis points of rate cuts this year, followed by an additional 100bps in 2025. We believe that easier monetary policy will likely help cushion the growth slowdown. Historically, equity markets have performed well when the Fed cuts rates without a recession. We expect this time to be no exception.

So, as we progress through the fourth quarter, while the overall environment is constructive for equities, investors should prepare for political risks and market volatility. To manage election and geopolitical uncertainty, we recommend capital preservation strategies, diversification, and exposure to hedges such as gold and oil. Within equities, we prefer semiconductor stocks and tech megacaps. We also recommend focusing on quality companies and see opportunities in select firms exposed to the energy transition.