Wednesday, November 7, 2018

Chart of the Week: Mid-Term Elections

Mark Nickel
Author position
Chief Investment Officer

The Polls Were Correct. So Now What?

Going into the November 6 Mid-Term Elections, the consensus was that the Democrats would take the House of Representatives and the Republicans would keep the Senate. And in fact, this did play out and continues a recent trend of shifts in political power. In the seven elections since 2006, US voters have removed the party in power six times. Going back 100 years, this type of political volatility is unprecedented.

Chart of Market Corrections During Years of Mid-Term Elections

So now what? Here are key market-related observations from our perspective:

  1. We now know the composition of the US government for the next two years. The market does not like uncertainty, and uncertainty has been removed.
  2. Gridlock likely will prevent any further tax reform or significant legislation. Historically, the market has performed well when we’ve had divided government.
  3. The election results will have little if any impact on global trade policy and tariffs. For the most part, the President sets trade policy independently of Congress; we’ll watch with interest how this issue develops.
  4. With the election behind us, market-watching can focus on hard data such as corporate earnings (up ~26% YOY in Q3) and a sound US economy (~3% 2018 GDP).
  5. As a rule, equity volatility has accompanied mid-term election years (see chart above). However, stocks have responded quite strongly in the twelve months following these past corrections. Seasonally, the back half of the fourth quarter has been a very strong period for stocks.

Lastly, welcome to the first day of the 2020 Presidential Election! Buckle up; it’s likely to be an interesting ride.


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