Phew! Now that mid-terms are behind us (well, almost behind us with results still pending in Florida and Arizona), we can start focusing on the Presidential election for 2020! We're kidding, of course. Sort of...
With this week's record-setting turnout and enthusiasm, atypical of mid-term election years, both Republicans and Democrats can each claim victory. We would remind you, split governments bode well for equity markets on average, and the S&P 500 has not declined in the 12 months following a midterm election since 1946.
Although we think we will get a reprieve from the current volatility once we finally settle the mid-term elections in Florida and Arizona, we still believe the "all-clear" has yet to be seen and that Q4 volatility may remain elevated. Market internals remain unimpressive, and we need to see more "thrust." Amidst the tepid macro backdrop (peak vs. slowing growth), seasonals remain a tailwind and Healthcare/ Retail stocks remain standouts. More broadly, we continue to think the US economy will outperform other markets, and because of impending fiscal stimulus across the globe, we may finally see some performance from international markets in the next 12 months.
"The equity markets enjoyed a strong post-election rally with the Dow Jones Industrial Average gaining over 500 points on Wednesday", and then settled down on Thursday and Friday because of the unsettled election results in Florida and Arizona. "The major indices were positive for the week despite a repeat of an end-of-the week selloff on Friday. For the week, the Dow gained 2.84%, followed by the S&P 500® Index (2.13%), the Nasdaq (0.68%), and the Russell 2000® Index (0.10%). The ‘divided Congress’ results of the midterm elections were largely in line with market expectations; the outcome diminishes the likelihood of legislation which might have significant negative consequences for the market. Uncertainties regarding trade, oil price declines, mixed economic data, Italy’s budget standoff, and the release on Wednesday of Minutes from the Federal Reserve’s October Meeting, resurfaced as investors turned their attention away from the elections.
In China, a decline in auto sales, and news of governmental efforts to stimulate growth, raised concerns about an economic slowdown. Investors seem concerned that side conversations during the upcoming G20 meeting may not lead to a truce in the trade tariff war. Elsewhere, oil prices entered bear market territory even as the ban on Iranian oil exports took effect on Monday. Some see the decline in oil prices as a signal of slowing global economic growth and falling demand. And yet, this point of view overlooks strong worldwide demand, especially from India and China; last month, China reported record oil imports. The uncertainty in oil prices relates more to the readjustment of demand and supply as the U.S., Russia and OPEC countries increase production to offset the reduction in Iranian exports; and the Trump Administration’s announcement of a six-month waiver to eight countries, including China, India, Japan and South Korea, to lessen the impact of sanctions on oil prices.
Minutes of the Fed’s October Meeting revealed no significant changes in policy; investors seemed disappointed that trade tariffs will apparently not slow the gradual increase in interest rates. Quarterly earnings reports remain strong even as investors focus elsewhere. Technology companies continue to struggle as the markets seek to determine their future growth prospects. Many companies recently reported impressive results with tangible growth opportunities which exceed those seen in several years. Even so, investors seem cautious, and concerned about uncertainties. Headline news events will likely provide the market catalysts as investors gain more insight into the economic growth outlook in 2019."
Source: (1) Strategas and (2) Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
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