What we could expect now that the mid-term election is over

Written by John B. Cox CFA®, CAIA Partner, Chief Investment Officer of Public Markets on December 7, 2022

Getting past mid-term elections has historically been a catalyst for the U.S. stock market, going all the way back to 1950. The year in which mid-terms occur has typically been very volatile with mixed market results; however, the one-year period following mid-terms has been positive for investors every time since 1950. The fact that Republicans have gained control of the House with the Democrats holding on to the Senate will create gridlock in Washington and should provide some balance when it comes to fiscal spending. Historically, markets have performed well regardless of the party in leadership; however, a Democratic President and divided Congress has been especially good. Something to watch, though, is the possibility of a debt-ceiling debate or a government shutdown, which have not been market-friendly events in the past.

While there are still short-term challenges for stocks and bonds, long-term factors that are more impactful include interest rates, market valuations and corporate earnings. Despite a recent rally in the capital markets, this has been a difficult year for investors, but the last five years coming into this year have been strong. The bond market is having one of its worst years on record, even though the adjustment to higher interest rates should bode well for all types of fixed income yields as we look forward. Stock returns have reflected the difficulty that companies and investors are facing with supply chain disruptions, spiking energy prices and rising labor costs. We think these headwinds are starting to abate, but it will take more time. There has been improvement in the bottlenecks that were causing shortages of computer chips, and inflation data is now trending in the right direction. A resolution in the Russia/Ukraine conflict would also have positive ramifications, not only from a humanitarian standpoint, but also in terms of energy and food prices.

Through the end of November, five of the eleven months this year have resulted in U.S. stocks either gaining or declining by at least 8%. While volatility such as this can be unsettling, it is not necessarily unexpected in a year in which inflation spiked to levels not seen since the 1970s, and interest rates across all maturities increased significantly. While the economic outlook for 2023 is uncertain, many market strategists are anticipating an economic slowdown or even a recession as the full impact of rising rates is felt by consumers, businesses, and the housing market. We are not ruling out a mild recession, but it is not likely to be a deep and prolonged recession, and our economy has proven to be resilient in much worse conditions than we currently face.

As we look out over the next 3-5 years, there should be good opportunities in both stocks and bonds. Volatility is likely to persist for the near future, but investors with a long-term time horizon have been rewarded in the past by exercising patience and discipline in the face of temporary challenges. We wish you the best as we wrap up 2022 and head into the new year.

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