In recent times, your stock portfolio has seen significant growth, thanks to what I like to call the “midterm miracle.” And now, let’s add some “gridlock gravy” to further enhance your gains. Last year, I made a bold prediction that stocks were on the verge of a major bull run. History has shown that the nine months leading up to midterm elections have consistently been the most profitable period for stocks since 1925. Despite being in the minority with this forecast, the prevailing sentiment was filled with doom and gloom surrounding inflation, rate hikes, and recession fears. So, what ultimately happened? We witnessed impressive gains in the S&P 500, surpassing the historical average for midterm elections and effectively ending the bear market of 2022.
Now, what lies ahead? While stocks typically continue to rise during the latter half of a president’s third year, the upward momentum may be less robust. However, historical data indicates that US stocks have been positive in 75% of these instances. The only negative full third year in any president’s term occurred in 1939 during the eruption of World War II. Additionally, there may be ongoing concerns about the situation in Ukraine and the potential exhaustion of resources, but such regional conflicts have never had a lasting impact on the stock market, unlike world wars.
Turning our attention back home, as the consensus shifts away from the possibility of a recession (a view I expressed when it was still a minority opinion), prepare for alarm bells regarding persistent inflation and the potential need for a more severe response from the Federal Reserve or even tax hikes. However, it’s important to note that inflation does not arise from excessive economic strength or government spending but rather from an excess of money creation. This issue has been addressed for some time now, resulting in decreasing levels of inflation.
Regarding the 2024 election, there is understandable fear surrounding both Biden and Trump. However, it’s worth remembering that in every election, there will always be a winner. Regardless of the outcome, we tend to look more favorably upon the eventual winner. Election jitters will eventually give way to a bullish environment. Additionally, over 83% of presidents’ fourth years have historically been positive, with an average return of 11.4%.
Now, let’s focus on the secret ingredient for success in the latter half of any presidential administration: gridlock. Following midterm elections, a period of legislative quiet ensues, whether it’s due to the president’s political opponents regaining control of Congress or a split between two parties. This leads to reduced uncertainty surrounding new and controversial laws that often create winners and losers. While political squabbling persists, substantial legislation tends to make little progress. This decline in political risk aversion enhances stock market performance. Furthermore, most presidents shy away from major legislation as they approach re-election, avoiding the possibility of alienating significant portions of the electorate. Unresolved issues are often used as fundraising tools and campaign promises. It’s politics 101. Consequently, after two years of substantial spending bills, this year will focus primarily on social and foreign policy discussions. Although topics like cluster munitions, NATO negotiations, student loan plans, and the SCOTUS may seem important and generate headlines, they are unlikely to significantly impact markets. Pundits may be alarmed, but the markets remain unperturbed.
Looking ahead to the 2024 Senate election, it appears to be tilted in favor of Republicans. The GOP currently only has two slightly vulnerable seats, while there is a possibility of flipping seats held by Democrats in West Virginia, Montana, and potentially Ohio. Democrats have five relatively vulnerable seats. Therefore, regardless of the outcome of the presidential election, it is highly likely that the GOP will secure control of the Senate. This will undoubtedly boost business sentiment as November approaches.
If political risk isn’t your primary concern, consider the state of commercial real estate. Factors such as remote work, interest rates, and excess capacity have created concerns about a potential bust in this sector. While it may be a worry on Main Street, it is unlikely to have a significant impact on the stock market. This story has been repeated too many times without a substantial outcome.
Old stories that we have become familiar with lose their influence on the market. This is a bet you can always count on. In fact, as recession fears diminish, businesses are becoming more optimistic. This suggests a shift away from the bounceback categories that have been favored since last fall, such as big high-quality growth names in the technology sector, towards more traditional industrial and economically sensitive names.
However, the proverbial wall of worry that bull markets climb will not disappear, and that’s a good thing. As inflation gradually subsides and slow growth defies recession fears, the gridlock will continue to contribute to a positive market environment well into 2024. So, take this knowledge and share it with your congressman, and be sure to reap the benefits.
About the author: Ken Fisher is the brilliant mind behind Fisher Investments, a renowned investment firm. He is a prolific author, with multiple New York Times bestselling books to his name, and he regularly contributes columns to publications worldwide.
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