Votes and portfolio returns

Stocks rallied yesterday on little news as markets prepared for mid-term elections in the US. Fed Funds should peak around 5% in the middle of next year according to the futures markets.

Choose knowns over unknowns? How do you turn a tumultuous market regime marked by fears of 1970s-style stagflation, double-digit portfolio losses, global unrest, and a mounting energy crisis into an even more rowdy passage? Why, throw in a contentious mid-term election which can tip the scales of control in not one, but both chambers of Congress. Sounds scary, doesn’t it? From a market perspective, it’s not as scary as you might think.

Politics aside, markets should be trading on facts which will impact companies’ ability to operate profitably. When one political party controls both the legislative branch and the executive branch enacting laws faces little opposition. That simply means that the party in charge gets to have its way. If that “way” is aligned with the company or industry you are invested in, well, you are in luck. Not so much if it is not.

There are a number of politics-driven themes currently playing out in the market. It is well known that Democrats have been threatening stricter regulation on large technology companies. Dems are also keen on strengthening Medicare’s power over prices for procedures and pharmaceuticals. While they probably have good and altruistic reasons for this, legislation in those areas would weigh on tech and healthcare companies’ ability to profit. That is why a shift of power would most likely be viewed as positive for sectors like information technology, communications services, and healthcare. Not all tech will benefit, however. Some Trump-era trade policies were sustained by the Dems while others were left to expire. A Republican win could see a ratcheting up of anticompetitive trade policy aimed at China which can have an impact on semiconductors, consumer electronics, and Chinese manufactured solar components. Though historically, Republicans have been more favorable toward the energy sector, the sector has thrived under Dem rule due to the global energy crisis that has ensued in the wake of the Ukraine war. Despite this, a Republican shift of power would likely receive applause by the energy sector. Seems simple, right? Of course, it is not. Let’s remember that even if the Republicans sweep the Senate and the House, the President still has veto power and the ability to enact policy through executive order. Therefore, any meaningful legislation is unlikely to come out of Washington. What does the market think about that? It loves it, actually. Political gridlock means that chances for extreme legislating go down… and the market loves nothing more than eliminating unknowns. So, overall, it is possible that markets will benefit from split control in the nation’s capital. Wait, this is the stock market we are talking about, we probably have some data on this.

Looking at the period from 1945 through the last Presidential election, we note the following. On average, the S&P500 returned +9.8% when the US had a Democratic President and Congress. If you were wondering, and I know you were, a Republican-controlled Government yielded a higher +12.9%. Being that the job of President is not up for grabs at the moment, let’s assume a Democratic President. If that is combined with Republicans in the majority in both chambers, the S&P returned +13.0%. Most interestingly, the winningest scenario includes a Democratic President along with a House and Senate split between Republicans and Democrats, coming in at +13.6%! That number goes down to +5.2% with a Republican President. Can it be that gridlock under a Democratic President is the cause of those historic wins? Let’s just stick with the facts for now. Past market performance does not guarantee future performance, but it’s nice to know. Beyond that, if the Republicans do end up with control over one or both chambers today, there is some common ground. Both parties are likely to favor strengthening domestic production and competition in everything from microchips to pharmaceutics, and even possibly energy. We are also likely to see common ground in increased defense budgets given the quickly deteriorating geopolitical balance of power. Finally, and in a similar vein, with increased cyber security threats mounting as result of tensions between the US, China, Russia, North Korea, and Iran, lawmakers are sure to find common ground in increasing cyber security investment across the board. Go out and vote… vote wisely… and thoughtfully.

WHAT’S SHAKIN’

Take-Two Interactive Software Inc (TTWO) shares are lower by -18.46% in the premarket after it announced that it missed EPS and Revenue estimates. The company further lowered full year guidance below analyst targets slighting a slowdown in global bookings of mobile devices.  Potential average analyst target upside: +37.2%.

SolarEdge Technologies Inc (SEDG) shares are higher by +10.75% in the premarket after it announced that it beat Sales estimates though it missed EPS targets. The company provided full year guidance that was above analyst estimates. Potential average analyst target upside: +37.2%.

NVIDIA Corp (NVDA) shares are trading higher by +2.65% in the premarket after the chipmaker announced that it will sell a new chip in China that will adhere to regulations designed to minimize China’s access to cutting-edge AI. The company is set to announce earnings next week. Dividend yield: 0.11%. Potential average analyst target upside: +36.6%.

DuPont de Nemours Inc (DD) shares are higher by +2.04% in the premarket after it announced that it beat EPS and Revenue estimates by +3.41% and +3.18% respectively. The company provided current quarter and full year guidance that was in line with prior estimates. The board approved a $5 billion stock buyback. The company is experiencing a softening demand in consumer electronics and expects further currency headwinds. Dividend yield: 2.13%. Potential average analyst target upside: +17.3%.

YESTERDAY’S MARKETS

Stocks rallied in yesterday’s session as investors prepared for today’s mid-term elections in the US. The S&P500 rose by +0.96%, the Dow Jones Industrial Average jumped by +1.31%, the Nasdaq Composite Index climbed by +0.85%, and the Russell 2000 Index advanced by +0.55%. Bonds slipped and 10-year Treasury Note yields added +5 basis points to 4.21%. Cryptos traded lower by -1.15% and Bitcoin declined by -2.11%.

NEXT UP

• NFIB Small Business Optimism (Oct) came in at 91.3, lower than expected but higher than September’s 92.1 read.
• The Treasury will auction $40 billion 3-year notes today.
• Mid-term elections in the US. Vote.
• After the bell earnings announcements: Akamai, Lucid Group, Disney, Plug Power, AMC Entertainment, New Corp, and Novavax.