At the end of each of the three days after the election, both the Dow and S&P500 set new, all-time closing highs. I think one can assume that “the market” was pleased with the national results.
Also during the past week, gold sunk to its lowest since mid-2010, as the still surging dollar and stronger stock prices further weakened the investment case for holding no dividend, no interest earning bullion. Silver fell even relatively harder to hit its cheapest since February 2010. Short-covering on Friday moved prices up somewhat but not very much. Perhaps this is the asset class that has been the bubblicious one all along???
So, did the elections change the market outlook? In a phrase, not so much. Here’s why I think so.
New Senate math
Historically, midterm elections come along with healthy stock market returns, as investors embrace the certainty, at least in the short term, the results bring. Examples of that are noted below.
In the Senate, 89 of the ones who were in place in the last session will be returning next year. The result of Tuesday’s voting has brought us 11 new faces. So it seems any really contentious, playing to the “fan base” legislation, backed by either party, is likely dead in the water. I think that what we have now seems somewhat similar to the White House / Congress relationship from 1994 to 2000. For the record, this period wasn’t exactly a time when politicians held hands and sang Kumbaya. Nonetheless, the economy roared and stocks consistently moved higher.
One of the great myths about the stock market is that it cares about politics, as in the daily back-and-forthing. Net-net, in my experience, the market really is mostly non-partisan. Traders can and will respond to the occasional political dust-up but investors can just watch the show. I’ve seen too many investors let their political leanings interfere with their investments. That’s really not a good idea. That’s simply because I’ve seen the stock market do well under both parties – and it’s done poorly under both parties, as well. Trying to build an investing strategy based on politics misses what truly drives the market over time. This is always the underlying fundamentals, especially as expressed in corporate earnings.
There are some people who claim that DC gridlock is good for the market because nothing gets done. Perhaps, but that’s a very minor factor. The stock market will continue to be driven by the fundamentals. That’s why I make so much about earnings and the trends thereof.
So, where does that put us now?
Let me use this quote from Howard Ward, CIO of growth equities for Gabelli Asset Management Company when he was speaking at the Schwab IMPACT conference in Denver this past week to illustrate a view I totally share.
“America right now is the crown jewel in the global investment landscape. (Kinda sets the tone, doesn’t it?) We are benefiting from lower commodity prices; we have the best demographics in the developed markets. We have a manufacturing and energy renaissance … and our relative bond yields are very attractive, which is going to continue to favor capital flight to the United States and favor the dollar. The US economy is really shining pretty bright right now. There are signs that the growth is even going to accelerate from here … and it’s going to be even higher with the plunging price of gasoline.” Well said, Mr. Ward.
Market strategist Dr. Ed Yardeni added these comments. “Last week, I observed that the one-year periods following mid-term congressional elections and third years of presidential terms have been consistently very bullish for stocks. Since 1942, the S&P 500 rose on average by 8.5% for the subsequent three-month periods, 15.0% for six months, and 15.6% for 12 months. There was only one out of the 45 periods that was down and just for three months! One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results.”
Bespoke Investment Group’s co-founder, Paul Hickey added this data note. “In addition to stocks’ normally strong performance from November through January, stocks also do well following off-year congressional elections and at the end of lame-duck presidential terms. That is true even when stocks have risen a lot in the previous year or two. Stocks also often advance when Washington is gridlocked.”
And then there’s this from the Stock Trader’s Almanac. “Fourth quarters of midterm years have produced an average gain of 8 percent in the past 65 years. They’ve been followed by rallies of almost that much in the next three months, making the average 16 percent two-quarter rally the best combination of the election cycles.”
Economic reports and trends remain good so, as always, ignore the headlines and stay with your strategy. This rally will continue, but likely at a slower pace for a while. Fundamentals continue to improve. The earnings season is winding down, so it’s all about the economy and the debate of when the Fed will change monetary policy, so the current euphoria in the market is going to lessen a bit with all the political noise in the background.
Bottom line is that I believe you shouldn’t be on the sidelines. Time and tide wait for no one, especially in the market sense. Markets may have changed a little, but the reasons clients invested have not changed. Investing to help you meet your goals is not a part-time undertaking, to be carried out only when conditions “feel” right.
By the way, in case it slipped your mind, 10 November is the 239th Birthday of the finest fighting force the world has ever known – the US Marine Corps. Feel free to raise a toast…or two.