The first two quarters of 2022 were horrible in the stock market. The third quarter started well, but the last three-and-a-half weeks have not been great. One of my partners at Fortress Planning Group wrote an article about inflation, the Fed, and the midterm elections. In this episode of Best in Wealth, I am going to highlight some of Brian’s key points. My end goal is to encourage you to remain hopeful about the economy.
Outline of This Episode
- [1:10] The positive impact of routines
- [2:45] Inflation, the Fed, and midterm elections
- [7:40] 8 reasons to have a positive outlook
- [10:17] The impact of midterm elections on the stock market
- [12:49] Discipline is the key to successful investing
Inflation, the Fed, and midterm elections
On August 26th, Jerome Powell told investors that the Fed is committed to raising rates to fight inflation until it gets the job done. The stock market has steadily declined ever since.
However, Brian points out that September is traditionally a weak month in the market. The upcoming midterm elections also leave people fearful. Why? The Fed is getting aggressive with interest rates. Their end goal is to return inflation down toward the 2% range, or a “neutral rate of inflation.”
In the 12–15 years before 2021, we averaged 2% inflation. The labor markets are still tight and economic slowing is needed. Europe is about to enter a recession. China is still implementing its zero-Covid policy, impacting supply chains. Russia is causing problems with global energy supplies. Add all of this up and we likely see little upside in stocks.
8 reasons to remain positive about the stock market
I believe we can have hope. Here is why.
- Leading indicators continue to point to deviation/disinflation. Over 40% of the components that make up the consumer price index have declined from their recent highs.
- US corporations remain impressively resilient, emerging from the global pandemic efficiently, with better cost discipline. They are weathering the inflation surge impressively.
- The US economy has absorbed the massive Fed rates.
- Labor issues are improving, evidenced by last month's job reports showing an increase in participation rates.
- Investor sentiment remains near rock bottom, worse than the great financial crisis. Why is that good news? When it is low, it is a sign of the bottom.
- There has been a drop in energy, housing, and commodity markets which supports a lower inflation outlook.
- We were supposed to hit $140 per barrel of oil this summer. Currently, oil sits at $86 a barrel—far below the Russia/Ukraine crisis levels. Oil was higher when the war with Ukraine started.
- ISM manufacturing prices paid index fell to the lowest levels of the year, in line with pre-pandemic figures.
These 8 positive signs show us that we can see positive outcomes in the remainder of 2022. This is all good news for investors and the mainstream media is not pointing it out.
The impact of midterm elections on the stock market
We cannot forget about the role of elections. The midterms are Tuesday, November 8th. Historically, in the 12 months before election day, market performance has been muted at best and is generally volatile.
But in the year after midterms, the S&P 500 sees market returns on average of over 16%—regardless of which party is in power. The S&P 500 has produced positive returns every 12 month period following a midterm election since 1940.
Does that mean it will happen again? It is never guaranteed. But it helps to look at what is happening historically. We may have already seen peak inflation. The economy remains healthy and unemployment rates are low. Publicly traded companies have absorbed interest-rate increases. Maybe, just maybe, the worst is behind us.
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The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.