Uncategorized, Weekly Update

Mid-Term Elections and the Stock Market


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Published July 13, 2018

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While we investors all know that past performance is no guarantee of future results, when an investment approach has worked 100% of the time, over a period of over 70 years and across almost 20 cyclicals of data, we take notice. A slide in this week’s presentation by CFRA offered just such a strong possibility of near-certainty.

The U.S.A. will be holding mid-term elections for Congressional seats this coming November. Mid-term elections are said to be, to some extent, a referendum on how the nation feels about the first 18 months of a new President’s performance. If so, the citizenry is routinely disappointed. The party of the new President regularly suffers losses in the mid-term elections. Pundits expect this year’s mid-terms to be no different, with a shift in Congressional seats from Republican to Democrat. The question is how many seats and whether that shift will meaningfully impact control of the nation’s legislative agendas.

The stock market thrives on certainty – has a strong dislike for uncertainty. Returns in 2017 were outstanding as a temporary period of relative certainty took hold. Returns in 2018 are decidedly mixed with rising uncertainty in almost every asset class. As we have now entered the final six month run-up to the mid-term elections, we anticipate this uncertainty will rise further. Chart 1 below shows that stock market returns in the six months before mid-term elections are completely mixed. 50% of the time, that six month period delivers a gain; half the time a loss. The size of the market’s loss is a bit higher for first term presidents.

 

Chart 1: Uncertain returns followed by very certain returns

Uncertain returns followed by very certain returns

That mid-term uncertainty gives way to certainty, though. The good news is that the 12 months following the mid-terms are a uniformly positive experience for stock market investors. There has not been a loss in those following 12 months in over 70 years of market data. Further, the gains the market delivers are well above average, with a gain of over 16%. We note that the last two instances of post-mid-term returns are well below the average, with gains of 6% and 3%.

Election cycles do not figure into our models. Nevertheless, as market observers, we are always interested in the trends, cycles, and behaviors of the market. Will the mid-terms deliver another gain in 2019? If so, will that gain be more like the historical average? Or another single digit performance?


Market Update

Investors began looking past the trade tariff spats to corporate earnings this week. That change was evident in Monday’s solid +0.9% gain. There was little specific news on the day other than a shift in money out of bonds and into stocks. Utilities, which had been on a remarkable +10% run over four weeks, gave back a third of that gain in Monday’s trade as money rotated out of the defensive, yield-sensitive sector. Another broad-based, albeit slimmer, gain for stocks Tuesday with a +0.4% lift. It was the fourth straight positive session for stocks as the Dow Industrials notably have outperformed, a sign of the easing concern over trade issues. However, trade blasted back into the forefront Wednesday with the announcement of a possible new round of tariffs on Chinese goods. Stocks paused in a -0.7% retreat led by industrial and material sectors, both in the cross-hairs of the trade tiff. Large cap tech/consumer stocks, the darlings for much of the past 18 months, ripped higher Thursday to lead the Nasdaq to a fresh record high. The +0.9% more than offset the prior day’s slip. The rise pushed the S&P 500 to the 2800 level, a location where the prior rally effort was halted. The market has not been able to clear 2800 since January. Big banks kicked off earnings season Friday morning. Investors did not buy the news, however, as the financial sector struggled to find positive ground. The broad market traded flat.

A second consecutive strong week for stocks with the Nasdaq finding new high ground. The S&P 500 (SPY) added +1.51% while the Nasdaq 100 (QQQ) rose +2.28%. Small caps (IWM) underperformed with a dip of -0.49% as the easing of trade concerns sent money flowing back toward larger companies more impacted by global trade.

Warm wishes and until next week.