Talking Points – January 2022

January 25, 2022 – Why Midterm Election Years See Some of the Largest Pullbacks 

It feels as though we just completed the last election, yet attention will soon focus on this November’s midterm election. Before it becomes everyone’s focus, we thought now would be a good time to take a step back and consider what the election may or may not mean for investors.

Below, we see that the midterm election year has historically had the largest average intra-year pullback of any of the four years of a presidential term. If this were to occur again, it may feel particularly uncomfortable to investors that have grown accustomed to the very minor corrections that we encountered in 2021.

The glass half full view of the chart is that the average 12-month rally off the midterm year low was the largest historically of any of the four years.

We have talked many times over the years about the dangers of combining politics and investing. In fact, it was a top ten lesson in my book Investment Lessons of 2020: How An Unprecedented Year Taught Us Everything About Investing . Also, let’s not forget the enormous stock market rally after both the 2016 and 2020 elections.

We view the information in this chart not as a prediction, but as a reminder that volatility could increase as more investors get nervous. There is no better time to maintain a disciplined approach and avoid letting emotions drive your decisions.

January 19, 2022 – Are Higher Rates Bullish For Stocks?

Recently, interest rates have moved higher. While still very low historically, the 10-year yield is now back to about the level it was when the pandemic began in 2020. As a result, there is increasing concern that rising rates will be bad for stocks. We understand those concerns, as poor opportunities in fixed income has certainly been a factor in the multi-year stock rally.

However, looking at today’s chart we see that historically stocks did very well as interest rates increased. Much of this stock market success is because rising rates typically occur with an improving economy. The risk to the market in this rate cycle appears to be a mistake by the Fed. Will they be raising rates just as inflation rolls over and the economy slows? That is certainly a risk worth monitoring. In the meantime, we take some comfort in the history of rising rates and strong stock performance.

January 5, 2022 – A Good Sign For Inflation?

Inflation has continued to be one of the hot topics for investors. This week the ISM Prices Paid data was released and the sharp drop showed potential that there could be a cooling for inflation ahead.

At the same time, ISM New Orders came in strong showing demand remains firm. Also, data showing those quitting jobs spiked as many are taking advantage of higher wage opportunties.

This mix of data will likely continue to confound economists and investors, but we are at least seeing some hints of relief on inflation. The month’s ahead will tell us more.

Source: Greg Towner, CFA, CMT