Hello & Happy Fall. This year has flown by – we hope it has been good to you & your family.
Our last note was back in mid-January. The two primary things that have changed since that missive (click here to re-read) are we began a ‘war’ with Iran and, as of yesterday, thankfully (!), the midterm elections are finished.
The S&P500 was within 2% of all-time highs when those first strikes hit Iran on February 28th. Over the next 4 weeks, the world’s most important market index fell over 8%. That pullback made a lot of sense. If anything, we were a bit surprised it wasn’t a deeper correction.
Our take at the time was along the lines of (a) this war should be ‘quick’ and (b) if Russia is no longer a Superpower (arguable considering they cannot ‘beat’ Ukraine 4 ½ years later), then maybe the world will ultimately be a lot safer with one less nuclear threat.
But then something ‘weird’ happened: the market bottomed in 4 weeks. We slowly rebounded and, by April 15th, the S&P500 was back to all-time highs and continued to climb thru early June. We spent a LOT of time having very consistent client conversations that all started with ‘This market doesn’t make sense’.
For the record, the stock market never really makes sense. Why? Three reasons: data looks backwards, we humans see TODAY, and markets look ahead – WAY ahead. In fact, markets look so far ahead it’s unknowable.
We’ve discussed the concepts of ‘hard data vs. soft data’ before. Hard data are facts, statistics, etc – things that already happened. Soft data are opinions & polls driven by human emotion & bias….business, political, or otherwise.
For a LONG time (almost 4 years) hard data in the U.S. has continued to get incrementally better. Soft data continues to be mostly awful. Corporate earnings and gross margins are at all-time highs and continue to climb (hard). Terrible consumer sentiment and fear is prevalent (soft). What has kept us invested and, frankly, continues to paint a positive economic outlook is the hard data. That will change eventually, but so far, so good.
Back to whether the market strength this past Spring made sense in the face of the Iran War? No, it didn’t, on the surface. How do we explain our markets essentially shrugging of the Iran War? The short answer: our economy is THAT strong. In general, our economy produces very consistent long-term growth. But, when you add in the $4+Trillion Artificial Intelligence buildout, that gets reflected via a very resilient stock market ramp. So far, AI is ‘beating’ Iran. We’ll take it.
Let’s switch gears and discuss the Midterms through a historic lens. First, we believe history matters – especially relative to U.S. elections & the markets. Second, we’ll also remind everyone we feel our role is to share only our ‘Political vs. Financial Markets’ views. We leave all the other ramifications of politics, however important to you, up to opinions of others. If you’re happier today, we get it. If you’re mad or scared, we get it.
Everything shared below are FACTS. They really happened. The why’s & how’s differed tremendously across reasons, world events, interest rate cycles, economic tragedies/successes, and decades.
- Since the 1938 Midterm elections, EVERY President except for two (Clinton’s 2nd term & G.W. Bush 1st term) ‘lost’ the Midterms – that’s 21 of 23 times over 88 years
- Since 1950, the average S&P500 return from the mid-term year market bottom thru the following 12mo has been +36%
- Since 1950, the S&P500 has averaged +8% when Congress is controlled by one party vs. 15% when split
- Since 1950, the three strongest quarters (in the stock market) of the Presidential cycle have historically been this current quarter & the next two
- Since 1950, the full calendar year after the mid-terms has averaged +17% and has been positive 17 of the last 19 (19 of 19 if you include dividends)
Last night’s results were zero surprise to the markets. ‘Odds’, polls, expectations have leaned toward these results for quite a while. The truth is the markets really don’t care too much about politics, in general. Humans do, obviously. We are emotional and emotions can drive action. That action usually spells volatility driven by fear around elections. At LJI, we call that opportunity.
One last stat before closing: Since 1990 there have been 10 occurrences where the S&P500 has lost at least .45% three weeks in a row while the VIX has been below 20. The VIX is a measure of fear/volatility & when below 20, markets are deemed ‘calm’. Last week was #10. The previous 9 times the S&P500 was in positive territory over each of the next 3mo, 6mo & 12mos. No guarantees this time nor vs. anything cited above, but we definitely don’t believe it makes sense to be bearish right now, at current levels.
As always please NEVER hesitate to reach out with questions or concerns. We work for you and we appreciate the opportunity. Happy Thanksgiving to you and your family.
Sincerely,
Your LJI Team