The hotly contested midterm elections ended last week, and now U.S. voters will watch to see if newly elected officials will deliver on promises to lift the nation out of its economic morass.
Many voters made their decisions out of frustration with current economic conditions, such as excessive government spending, ineffective stimulus measures and stubborn unemployment. And given the potential for change in U.S. economic policy, investors will likely be eager to see what the stock-and-bond markets will do in the months to come.
Although there is unlikely to be any quick decision making in Washington, investors will hope for the status quo in at least one area – a continued market rally, which is the norm for midterm election years.
"The question is, 'Did the markets go up in the midterm election years by more than average in non-election years?' Brian Gendreau, market strategist for Financial Network told U.S. News & World Report. "And the answer is, 'Yes, by a huge amount more.'"
A study released last week by Bespoke Investment Group examined every midterm election year since World War II. One year after Election Day, the Standard & Poor's 500 Index averaged a gain of 15.8%, with positive returns every year.
Although some think the S&P 500 has already priced in gains, markets that are headed up leading into the elections historically continue that rally after the election-day dust has settled. In years when the S&P 500 rallied more than 5% in the two months preceding the elections, there was only one period where the S&P 500 traded down more than 5% in the year following Election Day.
This year, the market rallied more than 5% pre-election – meaning investors could be facing a key buying opportunity ahead of year long market growth.
What do midterm elections have to do with market performance? Well, first and foremost, election results tend to eradicate the single-biggest enemy of the stock market: Uncertainty.
"Changes in congressional majority power in midterm elections appear to have little to do with causing the strong performance of equities following the election," The Leuthold Group's Eric Bjorgen told Kiplinger. "It's knowing what's going to happen, knowing how policy will be formulated. It's a clearing up of the clouds of uncertainty."
Wall Street got the Republican House majority it had hoped to see, as well as a slimmer Democratic majority in the Senate, and many are hoping the power shift will help boost stocks and bring the country closer to financial stability.
"Most of the people I'm dealing with are hoping Republicans get a firm grip on things, and the thinking is that that ultimately helps out the economy," Phil Streible, a senior market strategist with futures broker Lind-Waldock, told CNN. "Spending won't be as loose, budgets will be more in line and fiscal responsibility will kick in."
While some will view this historical uptrend as a "Buy" signal, others will exercise caution and preserve capital in safer investments – or in commodities or emerging-market stocks – until the economic outlook clears.
The intense focus on the midterm elections and the changes likely headed for Washington prompted last week's installment of the Money Morning "Question of the Week": What investment moves will you make now that midterm elections are over? Do you think there will be a market rally, as we've seen like in other election years? Are you optimistic about the direction of U.S. economic policy and stock markets, or do you have less confidence in a strengthened economic recovery than before the elections?
Readers sent in the following investment moves they're making now that elections are over, as well some comments on what the results could mean for the U.S. economy and investment landscape.
Victory for Some, Loss for Investors
Now that the elections are over, and the Fed has announced that it will be creating $75-$100 billion per month, much of which will likely go to buy stocks, everyone appears to feel that the only direction for the stock market is up. This really scares me.
Years ago, decades probably, there was a television commercial with the tag line "It's not nice to fool Mother Nature!" The markets are another manifestation of Mother Nature, where there are natural laws at work. When arrogant men set out to manipulate and direct the markets, they may well succeed for a while, but in the process they will distort things, and when those distortions correct themselves, watch out!
I consider it likely that stocks will continue upward in the short term, but not having any confidence as to when the short term may end, I am reluctant to invest for the long term. I have some money in gold and silver, and related stocks. I have some in other resource stocks. I have a little in high-tech stocks that may well go to zero, but may also return 10-100 times. I do not have any money in U.S. Treasuries or bonds, unless you count cash sitting in money market accounts while I look for good places to invest them.
I also worry because the lame duck session of Congress convenes on November 15, and with so many of them not returning in January, I figure that they are scheming as to how to pass as much legislation as possible, especially bills that will help them feather their nests as they go looking for jobs. And a big crisis would be just the thing to help them push something through, with big coattails to carry lots of unrelated amendments that would never pass on their own.
And what do government officials have the power to do to cause a crisis on demand? They have a lot of options, but something that would tank the stock market suddenly would be pretty easy to do, and I think that they are so confident of their ability to manipulate the markets that they would figure they could run it up again when it seemed convenient. As I say, my confidence in honest investing in the markets is gone.
– Gordon F.
The Big Three: Silver, Gold and Oil
My small portfolio is emphasizing silver, gold and oil companies with hopes of outrunning the declining purchasing power of the dollar.
– Frank S.
Silver and gold – to ride out the lame duck massacre
– Paul N.
The election will be over and the election promises will be forgotten by the public as they struggle on with their lives and the government will go on as usual, bickering, screaming, pointing fingers of blame, and come November 2012 the voters will again "throw the bums out" and it goes on and on and on.
Want to really be smart? Buy gold, silver and other commodities. They are going to soar as this country evolves into an economically third world country dealing with its debt by trashing the value of the dollar used to pay back the debt. Now there's something about the future you can count on.
– Jay C.
Washington's "Ugly Stalemate"
Over the last two years Republicans have opted out of governance and refused to participate. Their success in the latest elections is an encouragement for them to continue taking that position – it hardened that position. The election not only removed Democrats from office, it removed them across the board, including many moderate Democrats who were attempting to work with Republicans. In addition, right-wing Republican candidates have managed to remove many moderate Republicans from office, which will further reduce opportunities for bipartisan agreement. The result will be an ugly stalemate in Washington.
There is no reason to expect serious debate or useful legislation to arise out of this election; invest accordingly.
– John D.
It's All Going Down
Back to the good old days of Republicanism, slack banking laws, regulation, printing more money, contracts for Halliburton Co. (NYSE: HAL) and another war somewhere.
Hip hip hooray – for the U.S. economy to hit the swamp. You citizens have very short memories of what these guys lead you into, and you want them back to power.
Have a reality check!
– David B.; Ireland
[Editor's Note: Thanks to all who responded to last week's "Question of the Week" feature regarding post-election investment moves. Be sure to answer next week's question: Are you seeing signs of inflation? What, specifically, are you seeing? Are these rising prices putting the squeeze on your household budget? Do you think the Fed has misjudged the inflationary risk? What steps are you taking as a consumer and investor to protect against inflation?
Send your answers to email@example.com.!
Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at firstname.lastname@example.org. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.
Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
News and Related Story Links:
- Money Morning News Archive:
Midterm Elections Stories
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Will Midterm Elections Ignite a Stock Market Rally?
- Money Morning:
Voters Frustrated With U.S. Economy Turn to Republicans in Midterm Elections
- U.S. News & World Report:
Why the Dow Usually Rallies After Midterm Elections
How Elections Affect the Stock Market
- Money Morning News Archive:
Question of the Week Feature