Date: November 9, 2022

***Special Election Update***

I don’t know how I am going to survive not seeing 8 straight commercials targeting MAGA Mike and Liberal Lisa. And who will send me a barrage of texts warning me that Pelosi is wrecking economy and Trump is threatening our democracy. I am so excited that it’s over.

I haven’t written much about the actual election because historically, it’s not a market moving event. Those wondering why I haven’t discussed my model for forecasting elections using stock market and economic data, it’s because it only works for presidential elections. No matter how hard I tried and how much research I did, I simply could not model midterm elections. Recall that my presidential model correctly forecast Biden, Trump, Obama, Obama, Bush, Bush and Clinton. In 23 months I will start to update that model again. But for this election, what little data I can model indicates a mixed result.

When I look at he range of outcomes, we know that the White House is blue and stays that way. The mostly likely outcome is that the House flips to red and the Senate remains blue. Divided government/political gridlock is what investors like most, to the tune of 15% on average the following year. Less likely would be a Senate flip to red, but that doesn’t change divided government. The presumption is that with a split Congress, the President’s agenda is dead and spending will be reigned in at a time when inflation is at a 40-year high. The least likely outcome is a blue sweep which would be the least favorable outcome for the stock market as more spending would ensue, again at a time where inflation remains a generational high.

As the markets open today, a rally will lead to some headline like “Stocks Rally As Divided Government Is Good”. If stocks open down, we could see “Stocks Fall As Investors Fear Gridlock”. The truth of the matter is that Thursday’s Consumer Price Index (CPI) release is much more important for short-term market direction.

On Wednesday I heard a number of pundits discuss energy. One person said that a Republican wave would lead to a new energy policy. Someone else opined that if the Democrats lost, a new wave of austerity would be ushered in. On both counts they are wrong. Lest they forget that the man residing at 1600 Pennsylvania Avenue remains a Democrat who will not sign any legislation for either. Social Security won’t be touched and neither will Medicare without the ability to override a veto. It’s all election nonsense.

With the midterms over, we can get back to focusing on the markets. We know factually that the third year of a presidency is the most bullish for stocks, especially a first term president. That year begins today. We also know that when there is a 10%+ decline during the midterm election year, that juices returns in year three. In 2022 the S&P 500 declined 25% and the NASDAQ almost 40%. In the interest of time, I will wait to post my barrage of charts showing these years until next time.

We also know factually that from the midterm election to year-end is very bullish. The 6 months from November 1 through April 30 beginning with the midterm has not been down since 1946.

So many of the stars have lined up for a major rally. And you already know that I labeled the October 13th bottom as at least a low of significance, if not the ultimate bear market end. However, I still have three concerns going forward.

On Monday we bought TQQQ, precious metals funds and more IJJ. On Tuesday we bought XME, FAS, PEY, more IJJ.


Paul Schatz, President, Heritage Capital