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Midterm Elections: Market Commentary

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.


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