U.S. election and market movement and rate cut prediction

Firstly, the Federal fund interest rate cuts are usually seen as a lagging indicator, meaning its response to economic conditions typically occurs after other factors. Therefore, using it as one of the factors to predict the future trend of the US stock market for the next year is not scientifically sound. The reason for the Federal Reserve's interest rate cuts being a lagging indicator is that: a) the Fed typically adopts rate cuts when there are economic problems to stimulate economic activity. b) Interest rate cuts are usually a response to inflation, unemployment rates, or other economic indicators. c) The Fed's decision-making process involves considering a large amount of data and economic trends, so it is typically not a leading indicator of economic changes. In conclusion, the Federal Reserve's interest rate cuts, as a lagging indicator, are usually a response to other economic factors, and the stock market, as an economic barometer, is also one of the factors influencing the Fed's interest rate cut decisions.

Taking the S&P 500 index as an example, its average annual growth rate over the past 30 years is 8.2%, but the funds tracking the S&P 500 index have seen a recent continuous increase, rising by 30% in 2021 alone, which invisibly raises its upward expectations. On the other hand, because it is the election year, the average increase in the S&P 500 during election years is 10%. The correlation between the stock market and elections may have a two-way relationship. Specifically, the performance of the S&P 500 index in the last three months before the election day typically highly predicts the winning party. When the stock market achieves positive returns in the last three months before the election day, the incumbent party usually wins, while if it is negative returns, the opposition party wins. This pattern has been correct in as many as 20 out of 23 instances since 1928. Therefore, interest rate cuts around the last three months before November may become something that the incumbent party, which Biden administration wants to push hard for, would try to achieve. The issue is whether the current Federal Reserve Chairman Powell, a Republican who was appointed by Trump to replace Yellen, will lend a helping hand to Biden through interest rate cuts remains uncertain. The objective fact is that the US stock market is already overheated, with no need for interest rate cuts, and the Biden administration may continue to exert pressure, so Powell may only consider a precautionary rate cut after August but before October.