New market thoughts from Raymond James’ Andrew Adams: “Charts of the Week” 11/07/18

Raymond James Chief Investment Strategist, Jeff Saut, will be doing a webinar with Michael Fredericks, portfolio manager of the BlackRock Multi Asset Income Fund, tomorrow, November 8. To register, use this link and the telephone number to listen in the U.S. is +1 (562) 247-8422, the access code is 141-871-528, and the audio PIN will be provided after joining the webinar.
It was almost exactly two years ago that I spent Election Day creating a Charts of the Week report under the assumption that Hillary Clinton would be elected president and not Donald Trump. That was based not on my own inexpert opinion, but instead on almost all of the sophisticated pre-election polling models that gave Trump very little chance of winning. Of course, we all know how wrong those models were, and, as a result, I was up well before the crack of dawn that Wednesday morning rewriting almost the entire report. So, you’ll have to forgive me for being a little hesitant to devote too much effort to this edition of Charts of the Week before seeing the official election results and related market reaction, no matter what the models implied going into yesterday’s important vote.
This time the models did get it mostly right, though, with the Democrats winning a majority in the House of Representatives and the Republicans maintaining control of the Senate after a back-and-forth night for both sides. Now, the debate across Wall Street is whether or not “gridlock is good” and the answer largely seems to depend on which small sample size of data is being used to defend one’s views. I came across this headline yesterday on one of the prominent financial news sites – “The most likely election outcome has historically been terrible news for stocks” – only to discover upon clicking on it that it was based on TWO occurrences in history when a Republican-controlled presidency and Congress ceded control of the House during midterms. Those two occasions were in 1930 and 1910, not exactly timely references on which to base investment decisions unless you happen to be Jesse Livermore. And that is the trouble with trying to extrapolate too much about the stock market from the historical political party composition in Washington – the sample sizes are just too small to be of any statistical relevance, not to mention the fact that each and every economic and political environment is very different to begin with. It likely would not have mattered overmuch who was elected back in 1930 since I’m skeptical that the Great Depression that followed would have been magically transformed into the Great Expansion just based on one election outcome. Therefore, I have not spent much time trying to draw definitive conclusions for our current market based on the different combinations of parties being in power throughout history. Overall, the numbers seem to suggest that just having the midterms behind us is favorable, with the president’s third year in office being the best by far out of the four year presidential cycle according to Strategas’ Technical Strategy team. Since 1949, the S&P 500 has been up an average of 16.1% in the third year of all presidents’ terms, including a 19.2% return when we only count the performance during a president’s first term in office. And as you’ve probably seen by now, the S&P 500 has been higher 12 months later after each of the last 18 midterm elections, so, once again, just having that certainty in place can be a good thing.
I closed last week’s front page of Charts of the Week by writing that I was proceeding under the assumption that the lows had been made, and nothing over the last week has changed that view. The bounce from the low has not been exceptionally strong, but that is not too surprising given that investors likely did not want to get super aggressive right before the election. Yet, the fact that the S&P 500 has managed to rally even 5% while Apple, its biggest stock, fell 10% just since last Thursday shows that there has been some strength under the surface of the market. Normally, I would think stocks were about to kick it into high gear to rally into year end with the midterms now behind us , but the gaps formed in the S&P 500, NASDAQ, and DJIA (and other indices) after last Wednesday’s strong session still worry me a bit. It is not written in stone anywhere that all gaps have to be filled (or filled immediately), but just as nature abhors a vacuum, financial markets seem to abhor gaps in the price charts, which means the ones created last week could still be an eventual target for traders. We think the ideal pattern would be to see another leg down that fills the gaps and then gets bought heavily to help confirm a major bottom has been made. Sure, we would take a straight-up rally back to new highs, but that does not seem likely and it would probably leave behind many investors still looking to put cash to work after the recent pullback.

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