Broker Check

If you want the Florida sunshine, you'll have to put up with an occasional hurricane

June 01, 2022

We’ve reached that stage in the market’s decline when you are starting to notice just how crummy your portfolios look. Put another way, all the high-flying tech giants that were propping up the Nasdaq Composite over the past few years are falling back to earth even faster than they went up. It is important to note that when the markets plummeted from 2000 to 2002, the Price to Earnings for the Nasdaq was over 100. The average over time is 15 and today the p/e is 20. That indicates that the leader in the next move up will be the Nasdaq as the S&P 500 p/e is 29.

Put another way, if you want the Florida sunshine, you'll have to put up with an occasional hurricane. If you’re really having a hard time, then the instinct to just stop looking at your statements may actually be a good one. That’s because it will keep you from wanting to do something at precisely the wrong time. The Bottom line is nobody knows when or where the bottom will be. I can confidently tell you that my research tells me that the markets will be up 10% within the next 12 months and probably sooner…the end of the year. What we should be looking forward to is the elections.

We are now about five months away from the mid-term elections that will decide who controls the Senate and House of Representatives for the next two years. For the House, we think the Republicans are overwhelming favorites, with odds of at least 95% to reach a majority.

Why are we so confident? First, the GOP finished the last election cycle with 212 of the House’s 435 seats, so doing even slightly better should get them a majority. Second, the party not in control of the White House – this time, the Republicans – usually does very well in mid-term election cycles, like the GOP in 2010 and the Democrats in 2018. Third, President Biden is languishing in the polls, with an average approval rating of 40 - 41%. Fourth, the GOP is winning the average “generic ballot” poll (the poll that asks for which party people intend to vote) by two points over the Democrats.

A two-point margin is where the Republicans were on Memorial Day weekend in 2010 when they went on to win by seven points, an election that took them to 242 House seats. We also think the Republicans are the favorites to win the Senate, but not by as much. For the Senate, we think the odds of the GOP taking control are more like 85%. Why the difference? Two key factors: math and candidate quality. There are 435 House seats, and all of them require a vote. By contrast, with its six-year terms, there are only 34 Senate races this Fall that will go to the ballot box. And among those 34, Republicans must defend 20 of those seats; the Democrats only have to defend 14, which gives Republicans fewer opportunities to make gains. (The script gets flipped in 2024, when the Democrats will need to defend the most seats.) Meanwhile, in some states, the Republicans have had some trouble nominating top-flight political talent. And, unlike with House seats, candidate quality matters more in Senate races, where people usually find out more about state-wide candidates.

With this year looking like a classic wave in favor of the party not occupying the White House, it’s hard to see the Republicans losing any Senate seat they now hold, with the possible exception of Pennsylvania. Meanwhile, on a race-by-race basis, Republicans look favored to win in Nevada, Arizona, and Georgia, with a reasonable possibility of winning in New Hampshire and the ability to take Colorado if the wave turns into a tsunami.

Put it all together and our best guess is the GOP finishes with a net gain of three seats, taking them to 53. What would these outcomes mean for the next two years? That every piece of legislation reaching the president’s desk will need to have bipartisan support. Don’t take us the wrong way…I am not jumping up and down with joy that Republicans will win. I could write a book about how many mistaken policies Republicans have passed. What I am saying is that if a tax hike doesn’t get passed this year, it’s not happening until at least 2025. A Republican takeover of the House or Senate, or both, would mean at least some temporary gridlock in many areas of public policy, which means no new entitlements. The bottom line is much less growth in government due to new laws coming from Congress. And frankly that makes me ecstatic.

"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."