It was a busy week with the midterm elections, the Fed’s policy meeting, as well as ongoing quarterly earnings announcements. There was a strong global rally leading up to the midterms, which continued through Wednesday after most results had been announced. This allowed U.S. stocks to stay nicely positive, despite a nasty selloff on Friday. Foreign developed stocks ended the week flat, while emerging markets posted declines. Commodities were also down after concerns over increasing supply pushed oil prices near bear market levels.
S&P 500: 2,781 (+2.1%)
FTSE All-World ex-US (VEU): (-0.4%)
US 10 Year Treasury Yield: 3.18% (-0.04%)
Gold: $1,210 (-1.9%)
USD/EUR: $1.134 (-0.4%)
After all the hype, the midterm elections are finally over. Turns out there was not a massive “blue wave”, nor was there a Republican sweep. Instead, results turned out almost exactly as expected. Congress is now split with Democrats taking the House, and Republicans maintaining control of the Senate. So what does this mean moving forward?
Well, markets definitely rallied on Wednesday. Perhaps investors were cheering the fact that a split Congress makes it less likely any major legislation will pass. Or maybe markets were glad the blue wave never materialized, making it more likely the tax cuts are here to stay. Another possibility: maybe everyone was simply relieved they don’t have to listen to all those annoying political ads anymore. Regardless, now that the election is over, it does remove a bit of uncertainty. This is something investors tend to like. And markets historically have rallied following midterm elections, especially in the subsequent calendar year where returns have averaged roughly +17.9% going back to 1927.
But will history repeat itself? Very tough to say. Whatever the reason for Wednesday’s big rally, it certainly appears fleeting. Both Thursday and Friday’s consecutive market declines suggest reality has once again set in. Because at the end of the day, nothing has fundamentally changed in the macroeconomic backdrop. The trade war is still ongoing, and it’s doubtful the election results will prompt any sort of speedier resolution. Moreover, strong U.S. economic growth continues to warrant further rate increases. In fact, there wasn’t a single mention of October’s market slide in the Fed’s policy statement.
So despite this being a particularly noisy week, markets are picking up right where they left off.