Clint Carpenter, Director of Operations


Before getting into some data on midterm elections and their impact on stock markets, I begin with a caveat, of course. Past market performance and trends do not dictate what we do with investment portfolios, but they can sometimes provide some keen insights and if anything, as I’ll share in a moment, it can be a bit of good news in an otherwise turbulent time.


So when we look back through decades of stock market history, we see some pretty surprising consistency when it comes to midterm elections. If we break things down and look at the past in terms of presidential cycles, meaning just looking at each 4-year period of time a president is in power, we see that the midterm year is almost always the worst year in that 4-year cycle in terms of stock market performance.


We can also see that the S&P 500 has historically underperformed in the year leading up to the midterm election. The average annual return during the 12 month period prior to the election is only .3%, significantly lower than the historical average of any given year which is more like 8%.


So what happens after the election? The post-midterm period is a totally different story. The S&P 500 usually outperforms in the 12 month period after the midterm, with an average return of over 16%.


Narrowing in on that even a little bit more…


We can also see that in 17 of the last 19 midterm elections, stocks have performed better in the six-months after the election than they did in the six months prior to the election. All of this data is regardless of which party wins, by the way.


I know this can be a little difficult to follow, so we’ll be sure to post some charts on our website to help illustrate this. But basically, the bottom line is that we see a trend which shows that the year of the midterm election is almost always volatile, and the year after the election is almost always a positive return for the markets.


I’ll also add.. At any given time we have a lot of information that we’re taking in and synthesizing and using to take action in portfolios. This kind of historical election data is just one small piece of the equation, and by no means dictates solely what we do with investments.



Daryl Eckman, President


I'm going to talk more of a historical perspective.


Before I do that, I want to talk about the last year, year-and-a-half.


We made some decisions in the last year to sell some of our bond positions. We had some concerns as we went into early this year to sell some of those longer term bonds.


Some of that was skill, but we were also a little lucky to shift out of longer term bonds when we did.


As you have probably noticed, we also took some money away from the stock side. We were a little concerned early in the year with equities as some issues came up.


Inflation was not being talked about in 2021. Now, in 2022, we're seeing inflation be a big buzzword, so things have changed a lot.


We're managing the bulk of the portfolios conservatively. We're seeing a slowdown in the housing market with higher rates. Mortgage demand has come down.


Real estate is a big part of the market, and we are watching it closely to see how it will impact the broader U.S. economy.


Let's talk a little about volatility with the election.


The party in power makes a difference on how people feel about things. Republicans are more confident in the economy when Republicans have more power, and vice versa when Democrats are in power.


Whether it's Democrats or Republicans in charge, historical trends show market performance is similar with each party.


Stocks have gone up under both Democrats and Republicans.


Shifting to the future, we are going to ease into stocks with the market down. It will be slow and measured, but we want to very slowly get the cash on the sidelines to work.


Patience is so important, and we have been stressing patience during this market downturn.


There are numerous risks facing the economy, but those risks do create opportunities if we are patient.


Kris Venezia, Market Analyst


Shifting gears a little...


There's a strange split happening in the U.S. economy right now.


We're starting to see parts of the economy that are hurting. Rates have gone up a lot in a short amount of time, and it is having an impact on certain industries.


Job reports are starting to show job losses in the real estate and financial services sectors which makes sense. There's less demand for loans when rates go up because it prices people out of the new home or new car or other larger ticket items on financing.


Recently, we've seen signs of significant cooling in construction and manufacturing parts of the U.S. There are some early signs of job losses in those sectors as well.


While that weakness exists in certain sectors, other parts of the U.S. economy are booming. The services parts of the economy, like restaurants or hotels or entertainment industries, are doing terrific. We're seeing substantial job gains and job openings in those areas.


Caesars reported their best quarter for Las Vegas ever. They said visitors blew by expectations and spending was incredibly robust. Royal Caribbean reported record breaking bookings in the last week for a new cruise line. Airlines continue to have more demand than they can fulfill, even with air fares ridiculously high.


The biggest issue we're seeing from the services sector is they cannot keep up with demand. It's been difficult for them to fill open positions for waiters or hotel lobby employees.


The great divide between certain sectors in the U.S. is making it very difficult for policy makers. Inflation is too high, and the goal is to bring that down. But, if policy makers continue to tighten financial conditions, it poses major risks for real estate, financial services, and manufacturing sectors. If they do too little, the risk is that painful inflation continues.


The strangeness in this economy also makes it challenging for us as investors. It's hard to get a good read on what's ahead when Caesars announces record breaking Vegas numbers at the same time as Wells Fargo is planning layoffs in its mortgages department.


Kris Venezia, Market Strategist


I wanted to dig into inflation. Unfortunately, inflation is still running hot.


We had the CPI report, consumer price index, which is put out monthly. It gives us that inflation number we quote, right now it's 8.2%. The number reflects an 8.2% increase in what Americans spend on an average basket of goods.


The goal from policymakers is to have inflation around 2%. You can see we're miles away from two-percent.


The hotter areas of September inflation included airfare and medical services. The cost of buying a plane ticket is up 42% from the same time last year. Medical services, which includes health insurance and visiting the doctor, rose at its fastest pace since 1984.


Food at grocery stores and restaurants continues to rise at about 1-percent a month. There has been no cooling down there. The report showed rents rising more than half-a-percent. It's been up between half-a-percent and one-percent each month this year.


The biggest concern I have, which bleeds through into this entire hot inflation report, is on the labor market. Restaurants, airlines, and medical facilities are still having a difficult time staffing. In order to lure workers, they are having to raise wages. When they raise wages, they pass on some of that cost to prices.


Until the labor market improves in these service jobs, it's difficult to see some of this inflation come down. You create a spiral of higher wages, leading to higher prices that continues until demand breaks. Eventually, prices get so high that people just can't afford the plane ticket, the dinner at Outback, or that physical therapy. And that's when you see real economic pain.


Daryl Eckman, President


The point I want to make is that we have dealt with volatility like this before.


Inflation really comes from an overheating of a variety of factors. Some of the stimulus that went into the global system certainly triggered, or was a factor, in the current inflationary environment.


We're seeing some concerns in the real estate market. There's some difficulties as activity slows down in that space. Real estate plays a big role in the U.S. and global economy. Jobs, economic activity, and other items stem from the real estate industry.


We have put cash on the sidelines to do buying in our clients accounts. We have been fortunate to be out ahead of some of this downturn.


We have started nibbling a little bit, but we're still not feeling like now is the time to be very aggressive. The Fed has been aggressive trying to combat inflation and that has an impact on stock prices.


I want to encourage you to call in if you're feeling uneasy. We get paid to talk to you during the tough times. If you're looking at your statement and not feeling well, give us a call. The good times outweigh the bad times, but the bad times obviously do not feel good.


Clint Carpenter, Director of Operations


I’d like to just give a brief update on the eventual transition that is taking place after Charles Schwab’s acquisition of TD Ameritrade. Combining two companies like this takes quite a bit of time, and it sounds like a lot of work has been going on mostly behind the scenes up until this point. Schwab and TD have begun to outline the transition process to advisors like us and we now know that the transition will take place in Spring of next year, 2023.


We know that in almost 99% of cases, this will be a completely hands-off transfer. No paperwork will be required and accounts will simply move to the Schwab platform. The biggest difference clients will notice will be new account numbers and that statements will come from Schwab instead of TD Ameritrade. There are no changes to our relationship with clients whatsoever, and it will be very much business as normal. We do understand that you may have questions about this transition, however, and of course invite you to reach out with any questions ahead of next year. We’ll be sure to communicate more firm dates as we receive them.



Kris Venezia, Market Analyst


The market took a spill on Tuesday. The major U.S. indexes had their worst day in over two years. The Nasdaq lost more than 5%.


The catalyst for the decline was the CPI report or Consumer Price Index. It's a way to measure a basket of good that's designed to make up the average cost of what Americans spend money on. When people quote inflation, it's the CPI number that is commonly used.


The expectation was for inflation to decline from July to August, but it actually rose .1%. This caught investors off guard and.. prompted a wave of selling.


Gasoline prices, as many of you have probably noticed, have dropped since the summer highs. That's terrific. But, there's sticky inflation in other places. Food continues to rise at about a percent a month rate. Rent is also a major issue pushing inflation higher.


Outside of CPI, other data shows the cost of manufacturing goods in the U.S. is starting to flatten or decline. But, the services part of the economy is way too hot. Medical care, going out to eat, transportation services, are all steadily rising.


The main issue hitting services is higher labor costs. Employers, especially at restaurants, medical centers, transportation like truck drivers, have been really struggling to hire people. It's forced them to raise wages which get passed on in some form to the consumer.


So it's great that gas prices have fallen, and it certainly helps the average American. However, the stickiness of inflation in other parts of the economy is a major challenge.


Clint Carpenter, Director of Operations


As we’ve mentioned, with the Fed staying committed to raising interest rates to combat inflation, this has the effect of making short-term bonds an attractive investment again.


What we have been doing with the conservative portions of a lot of client portfolios has been introducing laddered positions in short-term treasury notes. These are bonds that are purchased directly from the U.S. treasury, so, backed by the full faith and credit of the U.S. government. So far, we’ve just been interested in bonds that have a maturity date about one year out.


The idea is to purchase these bonds in stages, spreading out the purchases every few months so that we’re not locking all of it up in a single bond at one time. This means we can continue to take advantage of rising rates each time we purchase a bond, without having to wait and try to time the peak of interest rates.


Staggering the bonds this way also means that around this time next year, that first bond matures, and then a few months later the second one matures, and so on. So eventually you can see there is a cycle where bonds are coming up on their maturity and can either be reinvested into a new bond, or allowed to remain in cash, or perhaps used for stock purchasing.


As I mentioned, this is something we have already been doing in our client investment portfolios, but if this sounds like something you might be interested in for cash you have sitting around in a bank account or some other sort-of short-term investment, we’d be happy to discuss whether this is a good strategy for you as well.


Daryl Eckman, President


Real estate is something I am watching closely. We'll see what happens with home prices over the next 12 months.


Real estate has a big effect on the economy. If we see a real estate pull back, that would certainly have an impact on the overall state of things.


We want to buy stocks low so we want to start nibbling with dollar cost averaging into the market with stocks tumbling.


We will look at funds that have performed well and have come down in prices. We will dollar cost average there.


The times are difficult right now, but we are savvy investors, and we know that there are long term opportunities by being smart.


We will be monitoring and getting some cash to work where it is appropriate.