Wow! How will the election be interpreted as the President has a record no President ever wishes to have…the greatest number of Congressional seats lost during a Presidency according to Roll Call?
The GOP has the largest majority in the House since WW II. Republicans control the Senate with three states still outstanding, one of which is Virginia where the Republican challenger was supposed to be crushed by the incumbent. Key governor races also went Republicans with perhaps the most shocking was Maryland.
Will Washington change and will there be Congressional entitlement, tax and debt reform, the odds of which I think rises exponentially?
How will the markets respond in the immediacy? What about the long term impact?
The latter is easy to answer. It will depend upon policy.
The former, as noted the other day, according to Barclay’s the median return of the S & P 500 for the 90 days following a mid-term election is 7.0%. Moreover since 1926, the S & P has posted a gain 86% of the time. It does not matter what party is in power. The reason for the advance…more certainty.
As noted yesterday, Friday is the release of October’s BLS employment report. It is now common knowledge jobs are the primary determinate of monetary policy. What happens if the data is stronger than expected, a strength that accelerates the timing of the first interest rate increase?
The onset of Fed tightening is not a reason, in and of itself, to expect the market to plunge. Indeed, the S & P 500 has typically risen for considerable time period after the Fed has raised rates for the first time.
The economic consulting firm Capitol Economics writes in the 21 months after the start of a tightening, the average return for the seven tightening cycles that have occurred since 1971 is 11.4%. Only once was the S & P 500 lower 21 months after the start of tightening…a 15.5% decline from June 1999-March 2001.
The S & P 500 greatest 21 month advance was 27.8%, the period from March 1984-December 1985.
I am certain the markets will experience “volatility” when the Fed does change direction, volatility that will probably accompanied by a strong negative narrative. However if history serves as a guide, this strongly negative narrative would be equivalent to the endless bloviation of the infinite number of possible outcomes as a result of yesterday’s mid-term election.
Commenting upon yesterday’s activity, the Dow was flat but the other popular indices were down between 0.3% and 0.4%, the result of the drop in oil prices, a decline that has decimated the prices of many energy companies.
Last night the foreign markets were up. London was up 0.90%, Paris up 1.28% and Frankfurt up 1.19%. Japan was up 0.44% and Hang Sang down 0.63%.
The Dow should open moderately higher on the heels of the Republican victory however the GOP must demonstrate unifying leadership. The 10-year is off 5/32 to yield 2.36%.