How Do We Put Odds On The Midterm Elections?
We at Minter Have been asked quite a few times lately how we think the election will turn out and how will it affect the market.
For starters, handicapping elections and predicting the outcome of House and Senate seats in places such as California, Florida and West Virginia, we think is best left to the experts. It seems to us the general consensus is that the Democrats will win the House, the Republicans will keep control of the Senate.
- Large changes to future campaigns and ethics laws (Republican will fight)
- Infrastructure Investment (maybe able to work with Republicans and Trump)
- Drug prescription costs (Should be issue that all can agree on, except those representatives that are supported by pharma!)
- Investigations into President Trump and his administration. (Will there be any cooperation if the Democrat controlled House goes hard on attacking the administration?)
We believe that if:
Republicans hold both house and Senate, the markets will be pleased short term and expect more tax cuts and business friendly focus from Washington.
Democrats win House and focus on above issues, we think the market takes little notice and rather takes lead from trade developments and the Fed.
Democrats should happen to win House and Senate, we envision the markets not liking the scenario of a 2 year battle between Trump and the Democratic controlled Congress.
What does the past tell us?
According to an interesting report published by Wells Fargo:
- In previous Midterm elections the S&P Index has had a sell off early in the year and on average ends the first 9 months of the year slightly lower. Currently slightly higher than start of year.
- Equity markets have tended to rally in the 4th quarter as the election settled.
- Since 1962, 4th quarter returns for the S&P Index during midterm elections years have averaged 7.5%
- Wells Fargo states that since 1962, equity market corrections have been great buying opportunities.
- In all years when midterms have take place since 1962, the Index was higher one year later by an average of 31%.
- Historically the U.S. equity markets have seemed to prefer when Republicans are in control as compared to the Democrats.
Our medium term view is that the global equity markets will trade lower due stronger USD hurting U.S. companies profitability, higher rates, and due to the growth cycle running out of gas. The question for us is do we experience a post-election, yearend rally to sell into or will investors be disappointed and not get the chance to sell at higher prices?
We at Minter think the S&P has more bounce in it up to the 2780/2800 level. At that point we will square up and look for signs that the retracement of the sharp move down is over.
Dollar Index looking to retest highs or fill gap lower? We look for retest of highs
|Ticker||Date Opened||Entry Price||Stop||Target Price||Current Price|
|Long Gold (XAUUSD)||11/10||1209||1209||Increase on break above 1231/1238||1234.81|
|Long S&P CFD||31/10||2711||2670||2800||2735|
|Long Deutsche Bank (DBK)||2/11||9.22||8.80||First 11.00|
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– Mark W