/perspectives/weekly-viewpoint/will-gridlock-be-good

Will Gridlock be Good?

The major market indices finished higher for a second straight week as investors continued to take advantage of the October sell-off to add equity exposure to their portfolios.  

November 12, 2018    |    By Mike Schwager

Performance for Week Ending 11/9/2018:

The Dow Jones Industrial Average (Dow) gained 2.84%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.74%, the Standard & Poor’s 500 Index (S&P 500) closed up 2.13% and the Nasdaq Composite Index (NASDAQ) tacked on 0.68%. Sector breadth was positive with 10 of the 11 S&P sector groups finishing the week higher. The Healthcare sector (+4.01%) led the way higher followed by Real Estate (+3.65%) and Utilities (+3.10%).

Index* Closing Price 11/9/2018 Percentage Change for Week Ending 11/9/2018 Year-to-Date Percentage Change Through 11/9/2018
Dow 25989.30 +2.84% +5.14%
Wilshire 5000 28669.10 +1.74% +3.22%
S&P 500 2781.01 +2.13% +4.02%
NASDAQ 7406.90 +0.68% 7.29%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 11/5/2018 – 11/9/2018

The major market indices finished higher for a second straight week as investors continued to take advantage of the October sell-off to add equity exposure to their portfolios. The bulk of the gains came on Wednesday when the major indices advanced by greater than 2% following the as expected outcome (Democrats retaking the House and Republicans maintaining their slim majority in the Senate) to the midterm elections. While the polls had been accurately predicting the results for many weeks, the actual confirmation of the outcome helped removed uncertainty that has acted as a headwind to the markets.

A split Congress (i.e. “gridlock”) has historically been a promising environment for the equity market as it helps take political extremes off the table. Furthermore, a Republican President and split Congress has been a favorable combo for market performance with average annualized gains of 15.7% (since 1950) under such a scenario.

FOMC Meeting: As expected, the Federal Reserve left interest rates unchanged at last week’s meeting and stayed on course to hike in December as strong economic growth, higher tariffs and rising wages look set to spur inflation. The central bank said, “economic activity has been rising at a strong rate” and job gains “have been strong,” acknowledging a drop in the unemployment rate, while repeating its outlook for “further gradual” rate increases in its after-meeting statement. The unanimous 9-0 decision left the benchmark federal funds rate in a target range of 2 percent to 2.25 percent.

Oil Slides: After hitting a 4-year high in early October, the price of oil has fallen into a bear market (defined by a 20% retreat from the recent high). Oil prices have been suffering in recent weeks reflecting a surge in domestic production and concerns the slowing global economy could impact demand. According to the Energy Information Administration, American producers are now pumping a record 11.6 million barrels per day while crude stockpiles have risen to the highest levels in seven months.

The silver lining is that lower oil reduces input and transportation costs for corporations (a headwind that was cited throughout Q3 earnings season) and ultimately benefits consumers through lower gasoline and heating costs as we enter the colder weather months. Since the early October peak, the national average of gasoline prices has declined from $2.91/gallon to $2.72/gallon.

Seasonals Remain Favorable: While October was a very rocky month, it also sets the stage for a very favorable seasonal period for the market. Going back to 1928, the November through April time frame has been the best 6-month window for the markets. In addition, the period following midterm elections has also been a fruitful time for the market. Guggenheim’s research team has analyzed mid-term election years and the market’s performance going back to 1946. What their work shows is that markets tend to find their footing ahead of the election and then show relatively robust performance in the 6-months that follow, with average gains during that window ranging from 12-15%.

Bottomline: Even with the October drawdown in the market and the surge in volatility, the outlook for the market continues to lean bullish. The earnings environment remains strong, the economy is in great shape, valuations have contracted, and sentiment has turned bearish (a contrarian indicator). Our belief is that as long as the economy and earnings continue to grow, equity prices should ultimately follow suit.

The Week Ahead: Third-quarter earnings season will continue to wind down with only a dozen members of the S&P 500 scheduled to release results. Included in this group are three components of the Dow Jones Industrial Average. The data calendar will be back-end loaded with the bulk of the reports released on Thursday and Friday. Reports of interest include; the October consumer price index (CPI), the November Philadelphia Fed business outlook survey, October retail sales, the November Empire State manufacturing survey, October import and export prices and October industrial production and capacity utilization. Fed Heads will be out and about with nearly a dozen appearances scattered throughout the week, including Fed Chair Powell who is scheduled to speak on the economy at an event in Dallas.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.


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