Skip to content
Resources/Weekly Insights
Subscribe
Volume 11, Edition 32 | October 31 - November 4, 2022

Politics and Investing Don’t Mix

Doug Walters, CFA
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

Election - congress
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.

0.75%

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 $2 billion.

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.

Related Resources