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Tom Kool

Tom Kool

Writer, Safehaven.com

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is now working as news editor for Oilprice.com and Safehaven.com

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Wall Street Has No Idea What Stocks Will Do At Midterms

Wall st traders

Speculators love to find patterns in the stars, and the latest mantra—at least for the stock market bulls—is that history claims to tells us that every time we’ve seen a significant amount of uncertainty ahead of a midterm election, stocks have jumped afterwards.

According to a recent analysis from Macro Risk Advisors (MRA), during mid-term election years, markets fare better in the fourth quarter. And they tend to fare better … significantly, as reported by Forbes.

MRA says that during a mid-term election year, the average stock gains for the month of October have been 2.43 percent, compared to only 1.03 percent for other years, with the exception of years in which presidential elections are held, when the October average gain is only 0.51 percent.

So, it’s October that’s the month to watch, if this analysis stands the test of time, because while the numbers for the rest of the quarter are also better than normal in a mid-term election year, the gains in November and December are smaller by comparison (1.91 percent average gains in November during midterm elections years and 1.5-percent gains in December for the same parameters).

But what happens when we through this particular midterm election into the mix? This time around, it’s possibly more heated than normal, and many see the potential for Republicans to lose control of the House—possibly even the Senate, though the chances of that are further remote.

In that event, would the bulls run for the hills? Or would the market simply stop tempting the bears amid a trade war that just took a sharp turn for the worse today?

September is generally a rough one for stocks when midterm elections are in question. But then again, September generally isn’t great for stocks anyway, but the political uncertainty adds fuel to that fire.

That said, according to chart analysis from Market Watch, stocks usually fair well enough as we draw nearer to election day, and post elections—no matter who wins. It’s more about putting an end to the uncertainty than is about who takes the House in the immediate aftermath.



Source: Market Watch

And it may just be a coincidence, anyway.

Market Watch quoted Deutsche Bank chief strategist Binky Chadha as saying that fourth-quarter performance may not be just about political uncertainty. It might have more to do with growth and earnings—those less exciting traditional fundamentals. To make the point, Chadha says that S&P 500 returns near midterm election times have a 76-percent correlation with changes in the Institute for Supply Management’s activity index in the same period. Related: Gold Exodus To Reverse

So, should you rush to buy stocks right now—in the apparently generous month of October?

Not necessarily. History is … history, and the newest administration in Washington has clearly demonstrated that tradition is not what it used to be.

It’s fun to try to detect patterns, but it this case, it’s not a cut-and-dry investment guide.

Wall Street was pretty bad at predicting what would happen to stocks when Trump won presidential elections.

“Market reaction to policy changes is often different than expected,” Mike Ryan, chief investment officer for the Americas at UBS Global Wealth Management, wrote in the firm’s Election Watch report, as reported by Bloomberg.

“Since few can claim the ability to reliably predict elections -- look no further than the Brexit vote and the 2016 US presidential election -- humility is called for as we look forward to November,” Ryan said.

By Tom Kool for Safehaven.com

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