FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 11, 2022

IN THIS ISSUE:

1. Why Midterm Elections Are Bullish For Stocks

2. Stocks Rallied After Every Midterm Election Since 1950

3. Why Stocks Routinely Rise After Midterm Elections

4. Worried About The Market? Consider Alpha Advantage Strategy

5. Strong US Dollar Not Pushing Stock Markets Lower

Overview – Why Midterm Elections Are Bullish For Stocks

2022 has been an abysmal year for stocks and bonds. Many investors are wondering if they should ride out the downturn or throw in the towel. Well, there is an interesting connection between the stock markets and midterm election years which you might want to consider before making that decision. This is what we’ll talk about today.

Following that discussion, I’ll dispel the myth that the strong US dollar is what is driving the equity markets lower this year. I will illustrate that historically the equity markets have risen when the dollar is strong and suggest why now may be a very good time to invest in our Alpha Advantage Strategy which has the potential to make money in rising or falling markets.

Stocks Have Rallied After Every Midterm Election Since 1950

This has been a gloomy year for most stock investors with the S&P 500 Index down over 20%, including a rough September in which the Index tumbled 9.2%. That marked the worst September showing since 2002, when the index fell by 11%.

Unless things change and fast, 2022 will go down as one of the worst years for stocks in a long time. But before you hit the ‘Sell Everything’ panic button, though, it’s worth considering at least one bullish catalyst on the horizon – that is, voters head to the ballot box on November 8th.

The data is clear: Midterm elections are historically bullish for the stock market.

Since 1950, there have been 18 midterm election cycles, and in the 12 months following each of those cycles, the stock market has had positive returns. Take a look below.

US stocks have consistently earned positive returns after previous midterms and delivered average annual returns of 18.6% compared to 10.6% in all other years.

Still ready to toss in the towel? But wait, there’s more...

If we look out two years after previous midterm elections, the average return has been a blistering 33.7%.

By now you may be wondering: Why are midterm elections such a bullish catalyst? Good question.

Why Stocks Routinely Rise After Midterm Elections

Theories on the topic vary, but in my view the most compelling reason for why stocks tend to see above-average returns after midterms is because there’s a tendency for more gridlock in Washington following midterms.

Investors think gridlock is good because it means less legislative risk. And anytime there’s less major uncertainty, it boosts investor sentiment. Higher sentiment usually translates to increased buying of stocks.

Midterm elections typically bring a more divided government because the sitting President’s party rarely captures more seats in Congress. In fact, just the opposite. According to FiveThirtyEight.com, a well-known polling firm, “One of the most ironclad rules in American politics is that the president’s party loses ground in midterm elections.”

America has long been a centrist country. Maybe that’s why voters routinely change their minds about how much power they want concentrated in one party’s hands.

Or, maybe the midterm swing has more to do with politicians’ tendency to overpromise on the election trail and underdeliver upon assuming office. Either way, it’s been a reliable indicator/timing point for over 70 years, and the next midterm election is less than a month away.

According to RealClearPolitics.com’s average of 10 polls, President Biden’s approval rating is currently hovering around 43%. If that sticks into November, history says it doesn’t bode well for Democrats’ chances of holding the House of Representatives and maybe not the Senate.

“The president’s standing customarily is critical to his party’s fortunes in midterms,” according to Langer Research, a nationally known polling firm, “Each election has its own dynamic. But in midterm elections since 1946, when a president has had more than 50 percent job approval, his party has lost an average of 14 [House] seats. When the president’s approval has been less than 50 percent — as Biden’s is by a considerable margin now — his party has lost an average of 37 seats.”

There is always a chance 2022 bucks the historical trend described above. After all, there is no shortage of major concerns right now. Obviously, inflation is way too high. As a result, investors worry the Fed will raise interest rates too far and spark a recession. These are just two examples.

In other words, earning positive returns between November 2022 and November 2023 isn’t assured.

That said, there is pervasive bearish sentiment now, and the midterm election cycle has one of the most compelling track records on Wall Street. Investors ought to consider that before abandoning solid long-term investments.

Worried About The Market? Consider Alpha Advantage Strategy

If you are concerned about your equity investments, my strong advice is for you to take a serious look at our Alpha Advantage Strategy which combines multiple successful investment strategies, all of which have the ability to be 2X long or short, in a single account.

Alpha Advantage has delivered stellar performance since we began offering the strategy in early 2014. And so far, its having one of its best years ever in 2022, even though the stock market is down over 20% this year.

Since Alpha Advantage has the ability to be long or short or in cash (money market), the strategy has been net short at times this year and took advantage of the big drop in equity prices – whereas buy-and-hold investors have taken a huge hit this year.

You can see the actual returns in our Fact Sheet. I trust you’ll be very impressed! As always, past performance is no guarantee of future results.

With the stock markets down so much this year, we urge you to look into our Alpha Advantage Strategy, especially with the midterm elections less than a month away. Take a look and if you have any questions, call us at 800-348-3601.

Strong US Dollar Is Not Pushing Stock Markets Lower

Market analysts and forecasters are always looking to explain why markets go up or down in any given period. The current bear market is no exception, but this one is harder to explain, especially since the labor market is still super strong and the economy is still in positive territory.

One theory I’m hearing this year is that the strong US dollar is pushing the equity markets lower. That is simply not true. Here’s why.

In the decades since President Nixon severed the dollar’s link to gold (thus unleashing “strong” or “weak” dollars based on the currency’s direction), stock market returns were greatest in the decades when the dollar was “strong,” and weakest in decades when the dollar was “weak.”

When you put money to work you’re in pursuit of returns in dollars. More specifically, you pursue returns in dollars because of what dollars can be exchanged for. In that case, stop and think what’s more appealing to you as an investor: returns in dollars that are exchangeable for more and more goods and services, or dollars that fetch fewer and fewer market goods. The answer is obvious.

And it helps explain the absurdity of the belief by some that a falling currency renders a country’s economy more competitive. That’s a joke. If we ignore history yet again, and the economic collapse in countries which have pursued devaluation (think Argentina, Zimbabwe, Lebanon, etc.), we can’t ignore that devalued money purchases fewer goods and services.

Applied to production, the imported inputs that enable production become more costly. There’s no way to cut corners in the real world, which means there’s no way to devalue one’s way to prosperity, which also means there’s certainly no way to boost investor returns with it.

More specifically, as pursuers of dollar returns, periods of dollar weakness are bad for investors simply because they’re a tax on investment. Think about it. If you’re pursuing returns in a currency that is weak, any returns you achieve are logically worth less.

This helps explain why stocks went flat in the weak dollar 1970s, then soared so profoundly in the rising dollar 1980s and 1990s and declined substantially in the falling dollar 2000s. The direction of a currency very much affects returns.

All of the above is another signal of the investor challenge brought on by weak currencies. In other words, currency devaluation holds the present in place, thus slowing the funding of creativity meant to rush an altogether different future into the present. None of this is good for investors.

To be clear, in a perfect world the “rising” or “falling” dollar would rarely – if ever – be discussed. Money in a normal world would be quiet simply because money itself is not wealth. In reality money is agreement about value among producers that facilitate the exchange of actual wealth, and nothing more.

Finally, in a much better world, the dollar would be constant as a measure of value. Indeed, changes in a measure don’t alter reality for the better as much as they confuse it. The bottom line is, let’s not pretend that a rising currency spooks investors for it, thus rendering US companies less competitive, or whatever other theory is offered. Logic rejects such a view, as does history.

I hope this helps when you hear other people claim the strong dollar is the reason stocks have tanked this year. Again, take a look at our Alpha Advantage Strategy which has the potential to make money for you in rising or falling markets, just as it has done this year.

Wishing you profits,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.