US Stocks and the Mid-Term Elections
When reading market forecasts for the November congressional elections, one may get the sense something is missing.
The Big Q: What’s that?
The Big A: The market forecasts!
While Wall Street is flooded with efforts to frame outcomes as the vote approaches, there is a discernible vagueness when you get to the part where strategists say what stocks will do.
The Big Q2: What is causing this?
The Big A2: It has to do with the last round of predictions for the Y 2016 Presidential election.
Recall the trepidations in the air over how markets would receive a Donald Trump victory in November 2016. Forecasts for declines of 5 or 10% in the S&P 500 were common and 20% too were on the lips of pundits. Now, as we all know, they did not happen, and this time strategists are leaving a wider margin for error.
Wall Street thinks it knows how the election itself will go: Democrats will take the House, while Republicans hold on to the Senate.
UBS puts odds of that outcome at 60%, Societe Generale calls it its “best guess,” and BMO Global Asset Management says the likelihood is high.
Attempts to predict a percentage change in the S&P 500 are few and far between.
It is ironic, that just 2 years ago, Wall Street was too happy to say the market would Dive if Donald Trump were elected. Now the Street is mum and it is President Trump’s warning of a crash if he is impeached successfully.
Gone is the art & science that attended the Y 2016 election.
The call was anti-Trump that turn pro-Trump on a dime and the rest is history, record stock market highs across the board.
Wall Street moves as a herd, except that is for the contrarians.
Notably, its forecasters have never once predicted a down year in the S&P 500 since Y 1999. Estimates cluster around safe bets. Year in, year out, the average annual return seen by forecasters according to my work comes to about 9%, almost exactly the gauge’s historical return since the 1920’s.
Wall Street strategists are willing to predict volatility will rise as November approaches.
Midterm election years historically have seen the largest intra-year pullbacks, and the 2nd and 3rd Qs tend to see weakness. In the last 20 years, the S&P 500 on average has declined 3% in those Quarters of election years, compared to a gainer of 1.5% across all Quarters regardless of the year.
This year has proved to be an outlier.
The S&P 500 gained near 3% in Q-2 after an impressive earnings season helped US stocks find their footing after the January-February pullback.
This Quarter, the benchmark index is up more than 6%.
On average, an ETF that tracks the S&P 500 (SPY) has moved less than 1% in the days before and after the last 6 midterm elections. In 5 of the 6, the Cboe Volatility (VXX) Index, aka VIX, has declined. and not much will change for markets in the aftermath of the mid-term elections.
Friends, very 2 years, pundits and politicians alike tell us this is the most important election of our lifetime. The fact is, the policies that have been put into place, tax reform, regulatory rollbacks are not going to change regardless of the outcome of the election.
So, if there is a pullback, and it is blamed on the mid-term elections, it is a buying opportunity.
Have a terrific week.
Keeping America Great!