News & Insights

With the first month of the 4th quarter behind us, and a rocky month to say the least, we think an update on the state of earnings, the market and thoughts post mid-term election are warranted.

A week after the mid-term elections, there is not much to say beyond what has already been said ad naseum. The bottom line is that the outcome was largely as anticipated – the Democrats regained control of the House (though by a smaller margin than expected by those hoping for a “Blue Wave”) and they also made net gains in gubernatorial races, but the Republicans increased their majority in the Senate. Elections can drive extreme emotions in all directions, but the relevant question for investors is, “What is the impact on US markets?” A handful of charts makes the case that the answer is, “Business as usual.”

What is important to realize, is that markets may be influenced temporarily by elections, but ultimately what matters is the state of the economy, the state of corporate earnings, the current valuation of stocks, and investor expectations.

With that said, we do think it is interesting to look at post mid-term market data.

Quoting Bespoke Investment Group, “Looking at both the table and charts, from Election Day through year-end, the S&P 500 has seen an average gain of 3.3% (median: +2.5%) with gains two-thirds of the time. While these returns are relatively good, they aren’t necessarily off the charts. Where returns really start to turn positive, however, is in the three, six, and twelve-month windows that follow midterm elections. Three months later, the S&P 500 saw an average gain of 8.0% (median: 7.7%) with positive returns in all but one period. Six months later, the S&P 500 was once again up in all but one period for an average gain of 13.9% (median: 17%). Finally, one year later, the S&P 500 was up every time for an average gain of 14.5% (median: 13.9%).”

A second chart from Bespoke compares the historical market performance over full presidential cycles to the current market performance under President Trump. History does not dictate the future, but it is helpful to see that markets go up and go down, no matter who is running the government:

Next, two charts from Clearnomics illustrate it is important to recognize that market performance is not always linked to election outcomes or who is in charge, since that performance might be driven by policies or events that happened months or even years before the election:

As we write this, both the economy and earnings are in solid shape (though expected to decelerate through 2019). However, investors should not be surprised by continued volatility going forward as the economy decelerates, earnings slow down, interest rates rise, and the Fed continues to “normalize” its policy.

The stock market is a discounting mechanism – it focuses less on current market conditions (which are already priced in) and more on future expected conditions. The US economy is humming right now, and corporate earnings are quite strong. However, both of those factors are expected to decelerate over the next 6-12 months, and the market is reacting accordingly.

This is why we consistently recommend remaining diversified and keeping your investment horizon aligned with your long-term financial goals and objectives.

In this “perfect storm” of rising rates, increased volatility, expected deceleration of economic growth and corporate earnings, and exogenous issues such as trade negotiations, the market decline and volatility should not be a surprise.

But a market downturn at the end of an exceedingly long bull market rally does not necessarily mean we are entering a bear market. The economy remains in good shape, earnings (while decelerating) remain strong, and interest rates and inflation, while increasing, remain manageable. There is no particular reason the markets can’t / won’t bounce back from the recent downturn.

Selling into a panicked market is a dangerous proposition, as individual investors rarely time their exits and re-entries well. It is human nature to want to sell into a downward trending market, but we recommend fighting this instinct.

This type of market volatility is exactly why diversification and an investment plan are important. For the past six or seven years, investors have enjoyed low volatility and a more or less straight up equity market. This is not a normal market environment and investors need to plan for and recognize that the underlying economic and market conditions are evolving.

As of now, the YorkBridge Investment Committee remains watchful but not overly concerned.

We believe the best course of action is to remain calm and to review your financial goals and financial needs to make sure your investments match your financial goals.

Of course, we will continue to re-evaluate our perspective as market conditions change, and share any change of view with you as quickly as possible.

As always, do not hesitate to contact us with any questions.

The Information contained in this document is based on data received from third parties which we believe to be reliable and accurate. YorkBridge Wealth Partners, LLC has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. Any opinions expressed herein are our current opinions only. YorkBridge Wealth Partners, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Registration of an investment advisor does not imply any specific level of skill or training. The information contained in this document is to assist with general planning. Please consult with your own tax advisor and attorney for more specific information.