Wouldn’t it be wonderful if the day after an election…we knew exactly who had won and what was going to happen next?
As I write this, two weeks after the 2022 election, we’re still not there yet.
While I wish I could get out my financial planning crystal ball, unfortunately, it’s in the shop. But there are some points that I do want to explain that might help you as we watch the final outcome.
The Market Hates Uncertainty
The stock market is considered a forward-looking market; this means that analysts often price stocks based on what they think a company will earn in the future. This is why it is such a big deal when a company misses its earnings estimates.
When there is perceived uncertainty in the market, prices in the market tend to be lower. Our elections are a great example of this: heading into an election, there is an assumption by investors that one party winning over another will impact businesses. Not knowing who will win is the uncertainty.
It appears that this year is following the trend post-elections for a market rally – a big part of which is newfound certainty. The irony is that it is less dependent on who won and more dependent on certainty.
What does history tell us about midterm elections and the stock market? (Source)
Most data point to an upturn in the S&P 500 after the midterm elections.
Since 1950, the average return for the S&P 500 in the 12 months after a midterm election is 15%, surprisingly with no down years, (John) Lynch says.
In 17 of the 19 midterms since 1946, stocks performed better in the six months following the election than they did in the six months leading up to it, Liz Ann Sonders, Schwab's chief investment strategist, said.
Will Stimulus Spending Stop?
When the COVID-19 vaccines arrived and cases began to drop, many restrictions were eased, allowing people to head back outside and begin to spend again. There was a rush from consumers to take advantage of the goods and services they were denied during the pandemic, like vacations and dining out. Government aid in the form of stimulus checks, unemployment payments and child tax credits also pumped more money into the economy. This created a surge in demand.
However, the supply lagged behind. Recently reopened businesses faced a mountain of challenges to provide goods and services to consumers after the pandemic. On top of staff shortages spurred by sick workers and changing work patterns, supply chains also completely broke down. The pandemic disrupting supply chains, as well as the war in Ukraine, put additional pressure on key resources like gas and grain. (Source)
So what does this mean for further government aid?
As we all just witnessed during the pandemic, it is tough to get anything through congress, even with a majority in both the House and Senate and a president who is a Democrat. Now, it’s about to get even tougher.
One assumed takeaway from this is that there will not be another stimulus spending bill anytime soon. This may have been the case regardless of who won. This is important on the inflation front and it also sets the framework if we are in a recession or heading into a recession as to the likelihood of government stimulus.
The Fed Remains an Independent Body
Right now, the most influential person with regards to our economy is most likely the Federal Reserve Chair. While the Fed has several key roles to play, one of their largest is to control inflation. They have a long-term target to keep inflation around 2%.
We are currently in the middle of one of the most aggressive rate increase cycles in the history of the Fed. Why? Because if we don’t control inflation and the economy heads south first we will be revisiting the 1970s era of stagflation. (Ouch!)
While wages are rising, inflation is impacting the poorest in our country the most. From recent reports, we know that inflation is coming down – the big question is how quickly. I’ve read many different estimates, but only time will tell.
And remember: “The government has little recourse for action towards inflation. A few tactics they could implement include raising taxes, removing import tax tariffs, limiting prices and reducing spending. Ultimately though, the solutions to limit inflation rely on the federal reserve and the behavior of global markets, not on politicians.” (Source)
Still feeling uncertain? We’re here to answer your questions. Feel free to reach out to the team at C. Beach Brown: CLICK HERE