Now that mid-term elections are behind us, economic and investment decision makers can get back to business. We will know soon how much of the October swoon was related to interest rate fears and how much was election related. Given the market’s strong initial reaction to the election, it looks like the risk of an unexpected election outcome was indeed weighing on investor concerns.
The likely outcome post-election is the constructive policy environment heretofore helping the US economy will remain in place for the next two years. Washington will continue to be a noisy and contentious place, but the helpful tax and regulatory cuts recently enacted by the Trump administration are not likely to be reversed by the newly elected Democrat majority in the House. Political grandstanding, investigations, threats and bluster aside, policy gridlock from here should be welcomed by investors and the virtuous circle of growth, employment and profitability should be able to sustain itself.
To be clear, other risks that impacted the market in October like China trade and tariff fears have not entirely diminished. Pessimists have believed the President’s trade rhetoric could lead to an all-out trade war with the second largest economy in the world, resulting in supply disruptions, economic uncertainty and slowdown. The equity market has consistently reacted negatively to trade announcements and negotiations no matter from where the trade fears emanated. The market has also responded well when those trade fears dissipated.
We have long argued much of the noise around trade talks is just that: noise. Negotiating from extremes, which has been an effective approach for the President previously, also causes anxiety among many investors. Thus far on the trade front (see NAFTA renegotiation), things have worked out reasonably well for the US. We believe the outcome of trade negotiations with China are also likely to end beneficially. We viewed this tweet from the President as an important indicator of a willingness to re-engage with Chinese trade negotiators.
Obviously, the outcome of US-China trade talks, as well as many other policy issues, are currently unknown. Yet, this market reaction to the election is telling. With stocks are off their interim lows; interest rates have stabilized, and volatility has fallen. Policy fears, one of the three factors leaning on stock prices in October, for now look like they are subsiding. To add fuel, consider this from Ned Davis Research:
” Since 1946, in years with midterm elections, the S&P has gained on average +20.0% in the nine month period from September 30 through June 30 of the following year.” What’s also true is in no year since 1946 when we’ve had mid-term elections has the market been down for that same period.
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ABOUT THE AUTHOR
David Cleary, CFA is a Principal and Portfolio Manager at Crow Point Partners
Previously he spent 23 years at Lazard Asset Management where he held a series of senior portfolio management roles over multi asset and global fixed income strategies. He additionally served as the firm’s global head of fixed income, a $26 billion platform. Prior to Lazard, Mr. Cleary worked at UBS and IBJ Schroder, mostly in fixed income asset management roles. Mr. Cleary began working in the asset management field in 1987 upon his graduation from Cornell University, with a BS in Business Management and Applied Economics. Mr. Cleary is a CFA charterholder.
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