November 13, 20189

The stock market reacted positively to the election results last Wednesday, with the S&P 500 rising over 2% Wednesday. There was a bit of buyer’s remorse late in the week, but long-term results after mid-term elections have been Gangbusters. According to Yardeni Research, the S&P 500 has been up in the 12 months following every midterm election since 1952, starting with +33.2% in the year after the 1954 mid-terms – even gaining 1.1% in the 12 months after the 1986 mid-term elections, including the 1987 crash!

The shorter-term post-midterm-election gains have been even more impressive. According to Yardeni’s research, the average three-month gain after the 16 mid-term elections since 1954 have been +7.9%. The only exception was a 7.8% downdraft in late 2002, at the tail end of a bear market. The average six-month gain after a mid-term election since 1954 has been +14.8%, with no downdrafts at all, even in 2002-03.

In the mid-term situations that most resemble the current situation – i.e., the first mid-term election of a newly-elected President – the 6-12-month post-election market gains have been phenomenal:

  • In 1954, after the Democrats took control of the House from the Republicans, following the first two years of Republican control under the Republican President Dwight Eisenhower, the S&P 500 gained 19.7% in the six months after the election and 33.2% after the first 12 months.
  • In 1974, the Democrats made their greatest-ever mid-term gains in the House, picking up 49 seats after President Nixon’s resignation. The S&P 500 rose 19.9% in six months and 18.7% in a year.
  • In 1982, the Democrats gained 26 seats in the House, in protest against new Republican President Ronald Reagan’s policies. The S&P 500 gained 17.9% within six months and 19.9% in a year.
  • In 1994, in response to overreach by the Democrats under Bill and Hillary Clinton in their first two years, the Republicans gained 54 seats to take control of the House for the first time in 40 years. The response? The S&P 500 gained 12.5% in the next six months and 27.1% in a year.

Gridlock is also good for stocks. In the 1950s, 1980s, and 1990s, stocks had great decades under split control of power in DC, with a Republican President and Democratic Congress (1950s and 1980s) or the reverse (1990s). That is the situation once again, with a Republican President and a Democratic House.

With gridlock returning to Washington DC, we return to a focus on business. In the next six weeks, we should see a rise in holiday spending. Personal consumption expenditures rose 5% (y/y) in September. Prices at the pump are down. Wages are up 3.6% (annual rate) now and 3.1% over the last 12 months, a 10-year high. The jobless rate is 3.7%, a 49-year low, with seven million jobs going begging. The stock market has recovered from an October spasm. All this adds up to a happier consumer in the holiday season.

The October Consumer Optimism Index (which is economist Ed Yardeni’s average of the Consumer Sentiment Index and the Consumer Confidence Index) is at its highest level since November of 2000:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The National Retail Federation (NRF) sees holiday retail sales rising 4.3% to 4.8% over last year, excluding sales of autos, gas, and restaurants (but including on-line sales), on top of a 5.3% increase last year. Craig Johnson, president of Customer Growth Partners, goes one step higher, predicting a 5.1% rise in in-store and online spending this season. Many retailers have stocked up early to avoid paying higher prices for imported products, due to higher tariffs. So overall, we should have a jolly holiday season.

The Wall to End All Walls Fell on November 10, 1989

Last Sunday marked the centennial of Armistice Day, the 100th anniversary of the end of “the war to end all wars” on the 11th hour of the 11th day of the 11th month in 1918. World War I cost approximately 10 million lives in a little over four years, but roughly twice that number died of a global influenza epidemic in barely over one year at war’s end, 1918-19. What’s worse, the Allies bungled the Peace deliberations at Versailles, which led directly to a replay of that war in an expanded nightmare known as World War II.

Almost immediately following that war, the Soviet Union erected what Winston Churchill called an “Iron Curtain,” soon erected literally in the form of the Berlin Wall in 1961. Then, quite suddenly on the night of November 9-10, 1989, that Wall came tumbling down, marking the end of 75 years of conflict (1914-89) and over 40 years of a Cold War which often boiled hot (in Korea and Vietnam) and sometimes came close to Armageddon. The Soviet Union hung on briefly but officially disbanded on December 26, 1991.

Invisible trade walls were far higher than the rock-and-concrete barrier in Berlin. The fall of the Berlin Wall 29 years ago ushered in the greatest era of global prosperity in human history. Nations that once hated each other began to shake hands and make trade deals. As Walter Russell Mead wrote in The Wall Street Journal on October 30 (“Geopolitics Trumps the Markets”), the fall of the Wall created a miracle:

“Between 1990 and 2017, world-wide gross domestic product rose from $23.4 trillion to $80.1 trillion, the value of world trade grew even faster, more than a billion people escaped poverty and infant mortality rates decreased by more than 50%. The number of people with telephone service grew roughly 10-fold.”

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As we enter the 30th year of the post-Berlin Wall world, we need to beware of setting up new walls – both physical and economic. America currently needs more workers. We have over seven million job openings in America with fewer than six million jobless Americans looking for work. Where will we find qualified workers unless we open the borders to those qualified workers? A billion people want to live in America, so we have the luxury of deciding who enters. A few million should enter, and enter fairly soon, I’d say.

When it comes to trade, President Trump may have a master plan to reduce tariffs to zero or near-zero in exchange for property rights protection in China and elsewhere. So far, he has made great strides in North America and Europe, but China seems intransigent. Let’s hope China’s “Year of the Pig” brings progress, but if not let us keep the trade channels open with the rest of the world – to keep global growth humming.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*

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