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Market Lab Report - Premarket Pulse 11/12/18 - What the election results means for markets to year end and a year out

by 

Dr. Chris Kacher

The Federal Reserve held interest rates steady on Thursday but is expected to hike for a fourth time this year when it meets in December. Markets are pricing in an 80% chance. The Fed's position remained the same except for business fixed investment which they said has moderated from its rapid pace earlier in the year. The Fed remains content with its slow and steady rate hike pace.

Meanwhile, the elections came and went. With the House majority now democratic, a divided Congress may seem counter to a rallying stock market, but historically, the S&P 500 has performed slightly better over the next two years when different parties held the House and Senate. Going back 60 years, a divided Congress has the best track record, followed by a Congress run by the president's party. As expected, the worst combination has been a unified Congress controlled by the party in opposition to the president. 

Gridlock can work in the market's favor as it can mean government gets out of the way. Regardless of political parties in place, out to a year from midterm election results, the historical precedent in every case has been higher markets. Over the shorter term, it has been for markets to underperform ahead of the midterm elections and then rally until year-end. Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one, rising an average of 17% in the year after a midterm election. And this despite having had every possible political combination over the past 72 years.

Out to year end, a shorter time horizon, the performance of the general market after midterm elections usually goes higher. Going back to 1990 year end, the major indices finished flat to higher in every case except for 1994.

Some have said that the democrats winning the House may mean less fiscal stimulus going forward. But so what as Federal Reserve has planned for higher rates given the alleged strength the U.S. economy has shown. Alleged because we have called into question the real strength of the U.S. economy given the adulterated CPI numbers. Nevertheless, what matters to markets is what will happen to trade, health care, immigration, taxes, and fiscal policy. Given Trump's pro-business and deregulatory policies in place, it seems  the next 12 months will, once again, for a 19th time in a row, bring higher stock markets.

But that does not mean the market cannot have sharp corrections along the way, thus it is always key to watch the price/volume action of the leading stocks and major averages. Mega-cap tech stocks continue to falter. All FAANG stocks have been underperforming. FB, GOOGL, and NFLX all trade under their respective 200-dmas. AMZN just broke above its 200-dma, and AAPL is the only one well above its 200-dma though has recently been caught on its back foot after a weak earnings report on a disappointing outlook and future downgrades.

Further, the recent action of stock markets at home and abroad has been abysmal. The S&P 500 lost more last month than it has since early 2009 while the global markets lost $8 trillion, losses not seen since the financial collapse in 2008. Thus, it is always possible the staggering levels of debt together with a poorly recovering global economy could induce a far deeper correction as the interest rate fuel tank still remains near empty. The Fed would have little room to stimulate the economy should it sputter. The Fed still sits in the proverbial corner.

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