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 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.
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.
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.
Daylight Savings is this weekend, and Veterans Day is Friday.
- To all the veterans out there, we thank you!
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