Midterms & market prognostications

US Midterms are upon us today. How will they affect the markets?

Here’s a chart of the latest Predictit poll re; todays vote. Polls are currently favoring House & Senate leaning towards the Republicans.  No matter- US equities tend to weaken into elections and rally after elections. Thereafter, we are in the seasonally strong period of the year  and could see a move into year end. More on that below. However, it may be difficult for markets after that point. We’ll cover that when we get there.

Meanwhile…Oil could be an exception. After the elections, the White House might start to phase-out Strategic Petroleum Reserve (SPR) releases. There is no immediate supply emergency and the need to keep oil down for the elections is gone. Separately, the EU sanctions are going into effect on Dec 5 to reduce total Russian supply by 2ml bpd (barrels per day). I expect this combined supply shortfall could give WTI significant upside into 2023.

There are also implications for the USD from the policy paths expected under a Republican vs. split Congress. Some intel form AGC Analytics: With the United States moving towards a recession in 2023, a Republican-controlled Congress is far less likely to enact a significant fiscal stimulus.  However, Democratic control of even the Senate increases the likelihood that Republicans compromise on a relief package. The debt ceiling could also represent a threat to markets as partisanship could force brinksmanship and a potential government shutdown. Last-minute debt ceiling debates tend to be dollar positive.

Elections and Thursdays CPI report should be watched

Given that post-elections (no matter the result) tend to lead into a bit of downside, AND the CPI report due this Thursday – We are holding off with our cash for a few more days. However, there are enough arguments that a move into year-end might make sense.

The chart below suggests upside into year-end of 4000-4100 (trend channel top to 200 day SMA). The last peak was near 4200, which could prove to be the ultimate upside potential. RSI hooked up and MACD is moving up as well. However, some weakness has appeared on that indicator of late. Keep an eye on that one.

China isn’t necessarily the markets white knight.

The market has had some strength based on China’s potential return to less COVID-restricted activities. However, the markets excitement may be premature. Regular reader Wendy sent me this article

Barrons: China Quashes Rumors It’s Set to Ease Rigid Covid Containment Measures

 

 

The China CZH index rallied on the recent excitement surrounding COVID policy easing. But the chart suggests a potential topping at its last peak resistance near 165. Looks like we probably shouldn’t count on China’s re-opening as a positive for the markets just yet.

 

Conclusion

My thoughts are that, if the markets pull back into the late part of this week, it might be a buying opportunity. I’m thinking there is enough evidence, including the points noted in my recent Bear-o-meter blog, to merit some strength into the end of the year or so. Oil will probably carry on much further than that time period.

I’d like to see a move over the 200 day SMA and the last high (4200-ish) on the SPX before getting too frothy, but theres likely enough evidenced suggesting some near termed profits can be had once we get thought this week.

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6 Comments

  • When do higher energy prices benefit the markets? Higher natural gas and oil prices drive up inflation causing central banks to raise interest rates, no? Also, there is something wrong with crude prices, the DXY or both. The inverse of the DXY was a leading indicator of crude price until they diverged after the covid crash. This means that the real cost of crude is sky high because of having to buy expensive US dollars to buy crude. Would like to get your take on it.

    Reply
    • Good comment on the $ Don
      Anyhow–to me the move on oil is going to do as you say – drive inflation higher. So the “stock market” will not do as well as inflation hedges (oil, materials, possibly gold at some point)
      Not sure if you got our research report back a few months ago–but one of the discussions in that paper was how cap-weighted indices change over time according to what’s hot, and what’s not. So eventually, if energy outperforms along with materials, the composition of the index will change making the market strong again. But that’s a transition that wont happen overnight. Thus, better to be in the right sectors at the right time right now, rather than index-invest. The passive buy/hold index ETF “couch” portfolio is not working now and may not be working well for another year or so.

      Reply
  • Thanks for the analysis Keith.

    I like ZEO.to to play oil.
    It has a balance of mid-stream companies and large cap producers. Pretty risk adverse these days.
    HOG by Horizons would be even more conservative but not sure the up side.

    Anyhow, can I get your thoughts on ZEO?

    Appears $70 provides resistance.

    Reply
    • Hi Lance as you know I am hesitant to comment or advise individual investors decisions for compliance reasons but I’d say you are correct in your analysis

      Reply
  • Hi Keith,
    With yesterdays sell off, and then US inflation data coming in weaker than expected, is this the signal to buy into this rally? Or am I missing something that could send markets down again over the next few days? Markets sure like to whipsaw investors!
    Thanks
    Wendy

    Reply
    • CPI came in light (vs hot in Canada) -so the markets are in rally mode. I’m inclined to add to stocks (but not with both feet – recall my 200 day SMA rule and last peak trend rule), however perhaps todays reaction is not what I want to buy into.

      Reply

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