Will the Midterm Elections Spark a Santa Claus Rally? Bob's Market Update 11/5
Channel: Payne Capital
Date: 05/11/2022

This is Bob Payne, Chief Investment Strategist with Payne Capital Management with this week's Market Update. This week on the Street of Dreams, the stock market ended higher Friday capping a rollercoaster trading session. The Dow Jones Industrial Average finished up 402 points or 1.3%, while the S&P 500 gained 1.4%. The NASDAQ rose 1.3. However, all three indices ended the week in the red. The Dow snapped a four week winning streak. The S&P 500 and Nasdaq each snapped two week winning streaks.

The dour week in the markets came in reaction to Federal Reserve Chairman Jerome Powell's comments at his press conference Wednesday after he announced a three quarters of a percent rate hike. It is the central bank's sixth increase of 2022 and fourth straight 75 basis point bump. This is as high as rates have been in nearly 15 years. He said the terminal rate or the rate that the federal funds rate will peak at could be higher than markets currently anticipate. That caused short term bond yields to rise to multi-year highs and the stock indices to post two consecutive days of decline. Now, on a more positive note, the central bank signaled that while it's tightening campaign isn't over, it might be getting closer to slowing the pace of rate hikes.

On the economic front, the U.S. economy added 261,000 jobs in October, more than forecast, but less than the prior result of 315,000. But the unemployment rate rose a tick to 3.7%. Wages grew 4.7% year over year, in line with estimates and down from a prior result of 5%. Now, overall, labor is clearly still in high demand, but not to the degree that the markets had feared. If economic demand can cool down enough and a slower wage gains incentivize companies to enact similar price increases, then inflation can calm down too.

The jobs report, could act as a first step in the Fed's eventual process of slowing down the pace of rate hikes. Even so, the bond and stock market need to see hard evidence that inflation is coming down. That evidence may come as early as next week as the Consumer Price Index, which hit the wires November 10 and investors are hoping for a decline below the September result of 8.2%. Stay tuned.

Although it was a losing week for U.S. stocks, it was a winning week for a diversified portfolio. Commodities rose over 5%. Energy pipelines are up 2%. Emerging markets rose 5.48% on the week, while other international markets saw gains as a result of a weaker dollar and continued speculation that China is moving to ease economically restrictive COVID 19 restrictions.

In closing, we're all looking forward to Tuesday and the midterm elections. And not just because it will signal the end of annoying political campaign advertising, but because the midterm elections have been consistently bullish for the market. According to Ed Yardeni of Yardeni Research, the upcoming midterm elections could spark a Santa Claus rally in the stock market that extends into next year. Based on historical data analyzed by Yardeni since 1942, the S&P 500 delivered average, three month, six month and 12 month gains post midterm election of 7.6, 14.1 and 14.9%, respectively. He concluded, yes, Virginia, there really is a Santa Claus rally. Apparently, it tends to be even more likely during midterm election year.


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