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TIGHTER FISCAL & MONETARY POLICY IN A MIDTERM ELECTION YEAR, WHICH TENDS TO BE MORE VOLATILE

by Fortem Financial January 25, 2022

As we have mentioned over the last few months, we expect market volatility to increase in 2022. There are a number of reasons for our concern such as the long running bull market, real Inflation for the first time in more than 20 years and rising interest rates. Maybe our largest concern was the midterm elections while our other concerns are playing out. Midterm elections tend to have larger equity market corrections compared to non-midterm election years with an average intra-year decline of 19 percent in a midterm election year and just 13 percent in the other three years of the presidential cycle. We believe this happens because:

  1. Sitting presidents realize they are about to lose control of the House and try to rev up their base voters with anti-growth policies.
  2. Market participants worry about gridlock should a new political party take over. Both of these factors are in play at the start of 2022.

Fortunately, this volatility tends to be temporary and stocks are up one year from the bottom by an average of 32 percent. Just getting to the election seems to be the catalyst for stocks to move higher.

Yesterday’s volatility is something we have seen in the past:

  • The 1987 crash
  • The worst of the GFC in 2008
  • The Pandemic low of March 2020
  • Yesterday

However, what is missing from the puzzle is what happens to stocks in the year following such a move? The short answer is they go up.

The key metric to watch for the midterm elections is the president’s approval rating. Biden’s 40 percent approval rating is consistent historically with a 47-seat loss in the House. Our sense is that Republicans will win 25-30 seats, but they need just five seats to win the House in November.

NOVEMBER 2021 ELECTIONS ARE CONSISTENT WITH A REPUBLICAN WAVE ELECTION IN THE MIDTERMS

On November 2nd Republicans moved the needle in the Virginia and New Jersey elections by shifting the Republican vote 12 and 13 percentage points respectively. Historically, these elections have been good leading indicators of midterm election results the following year and the results were consistent with national polling data. The takeaway from this is that fiscal policy in 2023 will come to a halt and passage of Build Back Better is now up to Senator Manchin, who is quite concerned about inflation.

TAPER QUICKLY EVOLVED INTO QUANTITATIVE TIGHTENING

In the same week as the Virginia election and the infrastructure bill passing, the Fed pulled back on its asset purchases, announcing a gradual decline in Treasury purchases that were initiated at the start of the pandemic. This is less of a concern as the Fed was purchasing the same level of Treasuries as it was at the start of the pandemic despite the deficit beginning to come in. But as inflation has accelerated, the Fed seems to be going all in on quantitative tightening. We believe this is for three reasons:

  1. Signaling: The Fed is out of patience and needs to show interest rates are going higher. QT is that signal.
  2. Yield Curve Control: The Fed does not want short-term rates rising faster than long-term rates and selling longer dated Treasuries helps.
  3. Politics: Tightening the balance sheet is less visible to elected officials and reduces the payments the Fed makes to banks.

The Market is oversold and patience will pay off during this rough patch in the market. As we move forward, we should be able to better judge the stickiness of inflation and the supply chain issues that still need to be addressed. Current Covid restrictions should subside and our current economic uncertainty should become much clearer. We believe market volatility will subside the closer we get to the elections in November. We are currently rebalancing our portfolios to better address the shift in market sentiment and to try and reduce some of the volatility on your portfolios.

Please feel free to call or email us with any questions or concerns you may have

Source: Strategas

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
Fortem Financial 2016. All rights reserved.

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