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Will The Bull Market Hold Through Midterms?

             9/3/2018

Bull Market

                                                                                                                                                                                                                                                 

“Markets will be closely watching the upcoming midterm elections as shifts in the balance of power in Washington could have meaningful implications for fiscal policy and foreign relations,” said Niladri Mukherjee, director of portfolio strategy in the Chief Investment Office at Merrill Lynch and U.S. Trust.

Fiscal policy has had some intense swings during the Trump Presidency thus far. While his tax cuts made waves both economically and politically in a positive way, some argue that his stances on international "fair trade" have been causing market instability.

What will happen to the market up through the midterms? And what will happen in the aftermath of the elections?

A Republican win would signal to the market the potential for more tax cuts, potentially extending the life of an already historically long bull market.

“The odds of the Senate flipping to the Democrats are slim,” thinks David Page, a global economist for AXA Investment Management. “You already have had a significant number of pro-growth policies, more than any president has achieved in such a short period, and I think you keep that momentum going into 2019.”

“The tariffs are being used at this stage quite effectively to exact decent concessions, like we have seen from South Korea and will probably see from the EU,” says Page. “This is a populist policy. Even in areas hit by trade tariffs, there is a politically positive effect in all this,” he says. “Republican tax reform was a doozy. To go a couple of years without legislation in the event of a divided congress isn’t that bad considering what we had up to now.”

Regardless of tax cuts, record employment among minorities and a solid stock market, November is being billed as a referendum on Trump. The president is the wedge issue. For some Democrats, impeachment is the answer. That will unsettle the market massively.

Keeping in mind that I am not a professional analyst, since 1946, the midterm election year performance of the S&P 500 between April and October has been a coin toss, up nine times and down nine times. The magnitude of losses is not always big either. CFRA Research’s chief investment strategist Sam Stovall's data shows four midterm years with single-digit May through October losses. His data also shows five double-digit losses for the S&P 500 over the last 18 midterm election years’ worst six-month periods being: 1946: –20.9%; 1962: –13.4%; 1966: –11.9%; 1974: –18.2%; and 2002: –17.8%.

The odds of summer and fall investment discomfort are elevated, but so are the odds of being compensated for it if you believe the historical presidential term cycle for the stock market will continue its normal pattern this year. Obviously, there's no guarantee. Arguments could be made in either direction. Bulls can point to strong earnings and continued economic expansion. Bears can point to valuations and political uncertainties both domestically and internationally.

If the Republicans can hold onto a strong majority in Congress, the market should fare well given what we have seen from the prospective policy. Tax Cuts 2.0, hopefully, reduced tariffs, and if the President sticks to his word, no more massive Omnibus spending bills.

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