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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%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.