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Volume 11, Edition 31 | October 25 – October 28, 2022

A Mid-Term Gut Check

Doug Walters, CFA
The mid-term elections are upon us, and many investors are wondering how the results may impact their investments. If history is any guide, they should not be overly worried.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

Investors are approaching the upcoming mid-term elections with anxious anticipation. The recent rally has likely helped to reduce trepidation. But based on questions we are getting from clients, there is still some concern about how the election results will impact their investments. If history is any guide, they should not be overly worried.

Historically there is no correlation between the party in charge and stock market returns. The US stock market generally goes up over time. Why? Companies are adaptable. The stock market reflects the fortunes of all public companies. These companies are good at adapting and finding a path to profitability regardless of the nuance from one administration to the next. We showed this in Chart 5 of our Q3 2020 Perspectives.

A chart we first introduced during the 2018 midterm elections is perhaps more intriguing for today. The chart looks at stock market performance in the six-month period from November through April in mid-term election years versus Presidential election years. The data goes back to 1930 and shows that months during and after a mid-term election tend to be strong for stock investors. Great! While we like the implications of the chart, as evidence-based investors, we must say that this is not very robust evidence. Yes, the data goes back to 1930, a long time, but that only equates to 23 elections. So still a small sample set.

Election Performance

We show this data not as a prediction that the next six months will be strong but rather to remind investors that as challenging as the current environment feels, the stock market tends to go up, and a mid-term year is as good as any to start the next rally.

16%

The outperformance of Value versus Growth in 2022

The Russell 1000 Value index (down -10.4%) has significantly outperformed the Russell 1000 Growth index (down -26.5%) so far this year.

Headline of the Week

Stocks ended the week definitively in positive territory despite big misses from some of the market’s heavy hitters, namely Microsoft (MSFT), Alphabet (GOOGL), and, most notably, Amazon (AMZN). The online retailer was down almost 15% on the week. The positive market move gives us our headline of the week.

  • The Russell 1000 (US large cap) was up over 2% on Friday and ended the week up over 4%.
  • It has been an excellent start to Q4, with US large and small caps up nearly 9% and 11%, respectively.
  • The factors leading the market higher are Value and Momentum stocks. Value (VLUE) is up around 14%, while Momentum (MTUM) is up nearly 13%.

Value investors have had to be patient in recent years as growth stocks have been dominant. Recently their patience has been rewarded. Year-to-date, the Russell 1000 Value index is down -10.5%. That may not seem impressive, but the Russell 1000 Growth index is down -26.5%. Outperforming in a downturn is a good recipe for long-term investing success.

The Week Ahead

Not trying to spook anyone, but interest rates will go higher this week as both the Federal Reserve and Bank of England have a rate decision to make. Friday, we will have the last jobs report before the mid-term elections that could jolt the market.

The Banker

The Federal Reserve is almost certain to hike rates by 75 basis points on Wednesday.

  • This hike will be the 4th of that magnitude.
  • The focus will instantly turn to what will the December meeting bring.
  • So far, aggressive hikes have slowed the economy, but inflation, not so much.

The Robber

The Bank of England also has a rate decision to make on Thursday.

  • After a new Prime Minister was installed and credit markets quelled, there is talk of a less aggressive move in rates.
  • Jeremy Hunt, the finance minister, was able to reverse almost all tax cuts the previous Prime Minister Truss introduced, which has reduced the odds of a 1% hike significantly.
  • Lost in the shuffle is that The Bank of England will start selling its hoard of bonds, quantitative tightening, on Tuesday.

The Psychic

The first Friday of the new month will bring the non-farm payroll report.

  • Early predictions are that 220,000 jobs were created in October, another drop from the previous report but still above the 200,000 mark.
  • It will be a little easier to predict that number the closer we get to Friday as there will be an ADP payroll report and a Job Openings and Labor Turnover Survey (JOLTS) out earlier in the week.

The Newsman

A 3rd Quarter GDP from the European Union, an election in Brazil, Purchasing Managers Index, and Earnings reports will create headlines.

  • The European Union is expected to print a 2.1% expansion in its Gross Domestic Product.
  • Brazilians will vote for a President on Sunday. The choice is between the far-right incumbent Jair Bolsonaro and the leftist former president Luiz Inacio Lula da Silva (Lula).
  • Lula is ahead in the polls and had a high approval rating last time, despite a bribery and corruption scandal bringing him down in 2011.
  • Both candidates have loyal followers who have already clashed with each other, so fear of post results violence is running high.
  • Purchasing Managers Index(s) are expected to come in above 50, meaning the economy is still expanding.
  • Another heavy week of Earnings will have the likes of Eli Lilly (LLY), Pfizer (PFE), Mondelez (MDLZ), Qualcomm (QCOM), and Hershey (HSY) catching some attention.

Speaking of Hershey… Happy Halloween on Monday.

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