Your stock portfolio is lately looking a lot beefier thanks to the “midterm miracle.”
Now, let’s top it off with some “gridlock gravy.”
Last fall, I told you stocks were poised for a major bull run.
I noted that – from one Congress to another throughout US history – the nine months starting Oct. 1 before midterm elections have consistently been the most profitable nine-month periods for stocks since 1925.
You may also recall that my forecast wasn’t a majority opinion.
Instead, we got rampant doom-and-gloom over inflation, rate hikes and recession fears.
So what happened in the end? We saw stellar S&P 500 gains through June 30, with a 25.7% rise that topped the 19.5% historical mid-term miracle average and put an end to 2022’s bear market.
What now? Expect more bearish hand-wringing – and more gains.
Stocks usually rise in the back half of presidents’ third years, albeit less strongly.
US stocks were positive in 75% of them. The last negative full third year of any president’s term: 1939’s 0.9% slip during WWII’s eruption.
On that note, investors can expect plenty more headlines on Ukraine – that Ukraine is getting tired, that America is getting tired of sending it weapons – or worse, running out.
But this war won’t stop stocks, as it didn’t after its initial blip.
Regional wars never topple stocks for long, and never have. Only world wars do that.
Back home, as the consensus grows that we’re not headed for a recession, after all (again – a minority opinion last fall that you read here), brace for alarm bells about persistent inflation, and how it might need a more dire response from the Fed — or scarier, tax hikes.
The reality: inflation doesn’t come from excessive economic strength or from government spending, but rather from excess money creation.
The latter has been in hand for quite some time now – and inflation is coming down.
As for the 2024 election, there is plenty of fear about Biden and about Trump.
But it’s worth noting that in every election, we get a winner.
Whether it’s preposterous or not, whoever wins we will like more than we did before.
Election jitters will fade to a bullish tailwind.
(Another bit of good news: Over 83% of presidents’ fourth years – like 2024 – have been positive, averaging 11.4%.)
Which brings us to our secret sauce in the back half of any given administration: gridlock.
The legislative quiet that follows midterms – whether it’s the president’s enemies who have regained control of Congress, or it’s Congress getting split between two parties – zaps uncertainty around new, controversial laws that always create winners and losers.
Political squawking remains, but big bills go nowhere. Political risk aversion falls, juicing stocks.
Further, most presidents shun major legislation as re-election bids near, lest they irk large swaths of voters.
They use unaddressed issues as fundraising bait and campaign promises. Get me re-elected – then I’ll fix it! Politics 101.
Hence, after two years of mega-spending bills, this year features mainly social and foreign policy chatter.
Cluster munitions, NATO negotiations, student loan plans and replans, SCOTUS hype. Important? Maybe. Headline fodder? Yes. But nothing to rattle markets. Pundits shriek. Markets shrug.
It also looks like the 2024 Senate election is tilted toward Republicans.
The GOP currently only has two slightly vulnerable seats – Ted Cruz in Texas and Florida’s Rick Scott.
Meanwhile, Republicans look poised to flip seats held by Democrats in West Virginia, Montana, and very possibly Ohio.
Democrats have five more relatively vulnerable seats.
So, the GOP almost surely wins the Senate regardless of who wins the White House. That also will build business enthusiasm as November approaches.
Perhaps political risk isn’t your go-to source for anxiety.
Look at commercial real estate. Working from home, interest rates and excess capacity are adding up to a spectacular bust.
It might be a Main Street worry, but not for stocks. This story has cried wolf too many times.
Old stories that we know too well lose their market mojo. You can bet on that, always.
In fact, business is upbeat as recession fears ebb, and that augurs for a shift away from the bounceback categories I’ve favored since last fall – big, high-quality growth names, tech or otherwise – toward more traditional industrial and economically sensitive names.
Still, the wall of worry bull markets legendarily climb won’t disappear (see above) and that’s a good thing.
And as inflation wanes slowly but surely, and as slow growth defies recession fears, gridlock also will help keep us in positive territory well into 2024.
Take that to your congressman if you like – and make sure you take it to the bank.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 17 countries globally.
