Broker Check

Election day is today!

November 08, 2022

Election day is today and will bring results for key Senate, House, and Governors races from all around the country, plus local legislative races and more. For the federal races, our projection is that the Republicans are essentially a slam-dunk to take back the House of Representatives (98% likely) and very likely to take back the Senate (about 80%). 

If I’m right about the election outcomes, or even close, many stock market investors might take it as a reason to be bullish. The result would be “gridlock,” which means no major federal legislation could be enacted unless it got significant bipartisan support.

Gridlock has been good for stock market investors in the past few decades, particularly when there’s been a Democratic president and the Republicans in control of at least one house of Congress. For example, under President Clinton, from the market close on election night 1994 – when the Republicans took control of both houses of Congress for the first time in forty years – to the end of the Clinton presidency, the S&P 500 generated a total return of 20.7% per year. Under President Obama, from the close on Mid-Term Election Night 2010 – when the GOP took the House and made gains in the Senate – through the end of his presidency, the S&P 500 generated a total return of 13.3% per year.

But there are some big differences between the current economic situation and those other two episodes. In November 1994, consumer price inflation (on a year-ago comparison basis) was running at 2.7%; in November 2010, the CPI was running at 1.1%. Right now, inflation is running north of 8.0%, and the Fed is ratcheting up rates no matter who wins.

Back in the 1990s, theoretical “gridlock” ended up being a mirage, as President Clinton and congressional Republicans ended up agreeing on welfare reform, trimming Medicare, cutting the capital gains tax, and expanding free trade. If scandal hadn’t interceded late in the Clinton presidency, even Social Security reform would have been possible. President Obama and congressional Republicans agreed on much less, but “gridlock” meant no more expansion of entitlements, like health care, and did result in a compromise that extended much of the Bush tax cuts originally enacted in 2001-03. 

If the stock market soon rallies broadly because investors think a current episode of gridlock under a Democratic president will end up looking like the last two, we think they end up disappointed; the rally will fade, just like the bear-market rally we had this past summer (mid-June to mid-August).

This doesn’t mean investors should ignore the election results. Who wins and loses should have an influence on which sectors might do better for at least the next couple of years. But expecting a quick and broad end to the bear market is expecting too much.

The same goes for a rally that might materialize if and when the Federal Reserve stops raising short-term interest rates next year. Yes, investors might bid up stock prices initially in relief. But that rally could fade, as well. It all depends on Corporate profits and the underlying strength of the economy, which today is good.

Ultimately, the stock market will be dominated not by election results but by fundamentals. Higher interest rates have been the key headwind for stocks this year; next year it’s likely to be weaker profits as the “sugar high” of stimulus fades. That will slow down corporate profits, but it is still not known whether the corporations will find a way to create profits through reduction of costs and innovation.

The election results today are unlikely to have an effect on interest rates or corporate profits in 2023. Meanwhile, President Biden is very unlikely to start cutting tax rates, government spending, or regulations that impede energy production. Vetoes and Executive Orders are more likely. Will he have a change of heart and, like Clinton, move toward helping Americans to improve their lives? The jury is out and we will follow closely his reaction. I will be changing portfolios in the coming weeks to become more defensive and to weather this storm. 

If you like one political side or another, we’re sure today will give you reasons to cheer or jeer. But don’t let your personal political preferences cloud your judgement. The bear market has further to go and a recession is highly likely in the next 18 months, no matter what the outcome. The question is whether that recession will be mild and a catalyst to market upturns or not. 

 "This material is provided for general information and is subject to change without notice.  Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. The information does not represent, warrant or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Past performance is not a guarantee of future results.  Investors should always consult their financial advisor before acting on any information contained in this newsletter.  The information provided is for illustrative purposes only.  The opinions expressed are those of the author(s) and not necessarily those of Geneos Wealth Management, Inc."