Economic Insights Newsletter

Are you ready for the mid-terms?

Arrow pointing up
Once the mid-term results are announced and the uncertain political change becomes certain, the markets have a history of getting back on track.

One correlation that is noteworthy is the degree of S&P returns after a negative January thru November mid-term election year (1962, 1966, 1974, 1990, 2002). I would not attribute this information to only mid-term election years. Positive market returns six and 12 months after large market drops are a natural part of market cycles, indicated in the macrotrends chart below.

Chart 3

The 2022 YTD performance of the markets can be viewed as a positive set up for the next year but, we’re not out of the woods yet. Inflation remains a key component for lower performance in 2022, especially in technology and other high growth-related sectors. The October headline inflation report coming in the first week of November (AKA October CPI numbers) can determine how aggressive the Federal Reserve can remain with the blunt instrument of quantitative tightening (QT). The markets have priced in a future fed funds rate of 4.25% or approximately 1% higher than where we are now, 3% to 3.25% fed funds rate. This proposes approximately two more rate hikes before year end, 0.75% in November and 0.50% to 0.75% in December. A higher than expected, CPI report in November can extend the bludgeoning of QT and potentially create additional volatility into 2023.

Chart 4

I remain cautiously optimistic and rely on the weight of the evidence for further economic data as it is released. This may be one of the best opportunities for long-term investors to own financial assets in over a decade. Retirees are now able to own US Treasuries with over a 4% risk free return -- yield levels that haven’t been available for 15 years. Long-term investors of stocks are able to purchase stocks of Fortune 500 companies or broad market funds below their historic average price. The famous investor, mutual fund manager, and philanthropist, Sir John Templeton stated, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Christopher Brown, CIMA®, CRPC™, Financial Advisor, Synovus Securities, Inc.

Important disclosure information

  1. Standard Deviation YTD for S&P 500, Back