With the Election Over What Does it Mean for your Investments?

Nov 07, 2018

The markets are acting relieved more than anything else as the as-predicted election results have come to pass with the House flipping to Democratic control while Republicans gained seats in the Senate. Given the results the market is staging something of a relief rally with the Dow looking to open 200 points higher and Treasury prices also trading higher with the 10-year note up 7/32nds and the yield dipping to 3.20%. The House flipping to Democratic control will complicate life for President Trump what with investigative and subpoena powers at their disposal, but we also think the Democrats will be wise to not overplay their  investigatory hand and look to move on mutual items of interest like a middle-class tax cut, an infrastructure bill and more work on healthcare. Also, expect President Trump to continue working the trade angle as that can be done mostly without Congressional interference. We discuss in more detail our thoughts on the election and the possible impact to investments but suffice it to say, if historical precedence is any guide, just the passing of the event risk surrounding the election, regardless of results, indicates a pretty good track record for equities as we move through year-end and the next couple quarters in 2019. Let’s hope that trend stays true to form.

 

  Economic News

 

While some races still remain in doubt the Democratic takeover of the U.S. House of Representatives, as predicted, has come to pass.  What does that mean for the markets and for the economy? Well, it’s not likely to wreck either one once we get over the raw emotions that are now a regular feature of national elections in the U.S.

 

We’ve tried to foresee what a Democratically-controlled House will mean but there are many ways for this to go. At the extreme, there will be voices in the party wanting to push forward with impeachment charges but we think those voices will remain on the fringe. It’s probably far better for Nancy Pelosi and the Dems to act as a check on the worst impulses of the Trump administration while at the same time foregoing a paralyzing pursuit of impeachment. Lest anyone forget, the Senate remains in Republican hands so any charges brought in the House would have to be heard and tried in a Republican-controlled Senate.

 

Another fact for the Dems is that many of the seats won last night were from Republican-leaning districts such that holding them again in 2020 will be far harder for a party that is determined to push all the country’s business aside to pursue various investigations. Rather, the smarter play would seem to be to work with the president and Republicans where they can, as many Dems promised to “reach across the aisle” during their campaigns. If a sincere effort is engaged to pursue mutually-agreeable policies, say a middle-class tax cut for one, infrastructure bill for two, that would seem a far better strategy that offers the chance for Dems to hold the House past 2020 rather than some slash and burn oversight and investigative strategy that’s likely to lose the support of moderate Republicans and Independents. And lets face it, Trump is not exactly a long-time dyed-in-the-wool Republican. If he senses a political benefit for him by negotiating deals with the Dems he’s certainly confident in his powers of persuasion that he can sell that to his base.

 

Thus, we think it quite possible that economically-beneficial strategies may in fact see the light of day once in awhile over the next two years rather than the quagmire and stalemate that some are predicting. So far, the market response is more of a relief rally in both stocks and bonds as the pre-election predictions more or less came to pass.

 

Also there is a little matter of historical precedence that says the results of midterms bear a striking similarity regardless of the changing in political power on Capitol Hill. Since 1946, every midterm election has seen the S&P 500 Index end the year higher than the preceding October low. While we certainly suffered equity selling and volatility to rival any period in recent  memory in October, if the historical trend remains in place we’ve seen the worst selling for this year with an equity rally likely to ensue. Santa Claus Rally anyone?

 

While the historical trend of post-midterm trading is bullish for equities that paints a decidedly different picture for bonds. With the big event-risk of midterm elections now behind us, the risk-off trade that rallied Treasuries over the past month is likely to relent with stocks trading higher and bonds moving in the other direction.

 

Again, the historical benefit is more to stocks than bonds and if stocks indeed rally into year-end that will only embolden the Fed to stay with their quarterly hiking posture at least into the first half of 2019. That implies further pressure on the short-end with the 2-year likely to move over 3% as a three-hike scenario in 2019 become more plausible. In the meantime, while a drift higher on longer-term bond yields is possible, moderating inflation pressures and  economy (from 3+% GDP in 2018 to mid-2%’s in 2019) are likely to keep higher yield moves in check. Thus, further flattening of the 2yr-10yr curve is expected, and an inversion is not out of the question if a rally in longer-end maturities gets going.

 

 

 

Market Update  Next Three Quarters Historically Bullish for Stocks

 

With the tumultuous midterm elections now in the books, attention turns to how the election results will impact investment results. The short answer is election results are merely a sideshow to the stronger presidential-cycle seasonality. The graph shows the average quarterly Dow gain/loss for presidential cycles dating back to 1896. As shown, the best trio of quarterly gains follows the midterm elections with the first quarter of the third presidential year posting the best overall gains. This performance speaks more to the seasonality of presidential cycles than it does to the political power structure in Congress. So the good news is despite whether you liked the results of last or night or not, it looks like we’re about to embark on what should be a positive stock market run.

Next Three Quarters Historically Bullish for Stocks

 

 

Agency Indications Agency Indications — FNMA / FHLMC Callable Rates

 

Agency Indications — FNMA / FHLMC Callable Rates

 

 

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