Politics and Investing Don’t Mix
Doug Walters
As the mid-terms approach, investors should take comfort in knowing that historically, election results are not a meaningful predictor of investment performance. We are much more interested in the development of the economic cycle than the election cycle.
Contributed by Doug Walters , Max Berkovich , David Lemire , Eh Ka Paw
We discussed the upcoming election in last week’s insights, focusing on investment returns following a mid-term election. They tend to be quite good, so hopefully, the coming months will stick to that trend! (see A Mid-Term Gut Check). We also referenced an oldie-but-goodie we published back in 2020, showing that the party in charge has little impact on future returns (Chart 5 – Focus on What You Know). Today we evaluate the data one more way, looking at returns and congressional control.
One of the big questions to be answered Tuesday (or, more likely, many days after Tuesday) is whether or not we end up with a divided Congress. We discuss this below in the week ahead. The good news for investors is that it does not make much difference in the long term.
Chart 1: Long-term US stock returns and elections
Source: Blackrock, Student of the Market, Q4 2022: Bear markets, recessions, and elections
Stock market represented by the S&P 500 Index from 3/4/57 to 9/30/22 and the IA SBBI U.S.L rg Stock Tr USD Index from 1/1/26 to 3/4/57.
We have made this point many times, but it is worth reiterating: companies in America are resilient. They operate in a robust capitalist framework where they are able to adapt to their environment and find ways to be profitable. What is far more important (for our investment portfolios) than who wins the election is how quickly the Fed can tame inflation. The economic cycle overshadows any legislative activity that Washington can take in the near term.
Evidence-based investors know this. We believe that stocks and bonds will offer attractive returns in the long term. We want long-term exposure to proven positive market factors (like Value, Quality, Momentum, Small Size). We base our tactical decisions on opportunities we see in those factors and where we are in the economic cycle. We will never speculate about the impact of a highly uncertain election on near-term asset values. That would be more akin to gambling. We prefer science over speculation.
Interest rate hike
The Fed raised interest rates another 75bps this week in an effort to combat stubborn inflation. Time will tell if they are getting it right.
Headline of the Week
US stocks ended the week in positive territory. It was a big week for economy watchers. The Fed had its rate decision on Wednesday, and the jobs number hit Friday. While the jobs number (which showed 261K jobs created, albeit with a higher unemployment rate) is important. But nothing carries the weight of a rate decision these days.
- The Fed raised rates another 75 bps on Wednesday to a 3.75%-4.00% range.
- The initial stock market reaction was positive, with the S&P 500 bouncing nearly 1%. But the enthusiasm was short-lived as Chairman Powell’s comments sent shares down 2.5% on the day.
- Powell dismissed the idea that they would be pausing the rate increases anytime soon, though he expects tightening to slow.
- As a result, expectations for peak rates increased.
For monetary policy to be effective against inflation, the Fed can not let market sentiment get too far ahead of the “pause” sentiment. If they signal that they are pausing too soon, the resulting positive market and consumer could provide unneeded inflationary pressures.
The Week Ahead
The Mid-Term Elections and a Consumer Price Index are next week’s main courses.
The In-Between
The U.S. elections on Tuesday will dominate the news early in the week, and if recent history has taught us, it may last for days, if not weeks after that.
- Mid-term elections are called that as this is the middle of the Presidential four-year term and has historically been a referendum on the Presidents effectiveness in the early part of his term.
- All 435 congressional seats, 35 Senate seats, 36 governorships, and numerous local elections are on the table.
- In the U.S. Senate, one pick-up in seats by the Republicans is needed to sway control. Twenty-one of the seats up for election are currently held by Republicans and fourteen by Democrats.
- In the House of Representatives, 220 Democrat-controlled seats, 212 Republican seats, and three vacancies are up for grabs.
- President Biden is entering into Tuesday with a 40% approval rating, the lowest in the last 60 years, which gives the Republicans an opening to take back control.
- If the 2020 elections are any indication, we might not know the results on Wednesday morning.
Sticky business
Consumer Price Index (CPI) for October is out on Thursday.
- Inflation has been stubborn, and prognosticators expect core Inflation (excluding food and energy) to decelerate modestly for both the year over year and month over month.
- Unfortunately, the facts are that big consumer companies (i.e., Pepsi, Johnson & Johnson, Coke-Cola and Procter & Gamble), during their earnings calls, stated they raised prices, implying that inflation is sticky, especially when it comes to rolling down.
Mousing around
Earnings are still coming out, but the big ones are mainly in the rearview. However, there are two worth watching.
- On Saturday morning, Berkshire Hathaway Inc. (BRKa,BRKb) brings Warren Buffet out to discuss his various businesses.
- The other significant earnings will be from The Walt Disney Company (DIS) on Tuesday night.
Don’t forget
Daylight Savings is this weekend, and Veterans Day is Friday.
- To all the veterans out there, we thank you!
About Strategic
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.
OverviewDisclosures
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.