It’s shaping up to be a big week in markets.
We’ve had our October correction.
But where to from here?
We know interest rates and trade war talk is playing on the mind of the market.
But there’s another factor which has markets on edge.
And it gets a little less airplay.
The US midterm elections.
That’s why this week is big.
Whilst there’s no chance of a new president, the midterms will decide who controls the US Congress.
The result could reshape the economic landscape for the next two years.
It has the market nervous.
I’ll get to what this means for markets in a minute.
But first, some background on the midterms…
Like here, the US government is made up of two houses. The House of Reps and the Senate. And both chambers are at stake.
Members of the house of Reps serve two-year terms. So all 435 seats of the House are up for grabs.
Senators meanwhile serve six-year terms. So not every seat gets contested. As it falls, only 35 seats are up for grabs this time round. And most of those 35 seats are already held by Democrats. The pollsters say it’s unlikely to see any change there.
But, if some of the survey polling is close to the mark, there could be a real shake up in the house of Reps.
If the Democrats gain control of the house, that would give them one chamber of Congress.
But, it’ll be enough to control the passage of laws.
And any further Republican reforms would be dead in the water and the Trump agenda in trouble.
Elections in the US can be hard to judge. Voting is not compulsory. Also, less voters turn out for midterm elections, making it even harder to gauge.
But you get the feeling this midterm is a little different. Democrats may relish the chance to get out and vote, this time round.
Trump could lose around 30 to 44 seats. Democrats need only to win 23 seats to take control of the House.
So, to bring this all back to practical trading.
What impact will the US Midterms have on the stock market?
What impact will this political upheaval have on markets?
Will markets tank?
In fact, history suggests the result simply doesn’t matter.
Research published by Forbes last week, went and studied every midterm election since World War II.
There’s been 18 of them.
Here’s what they found…
US stocks markets went higher in the following 12 months, after every single one.
Let me stress the point.
With every combination of political result, US stocks went higher, after every single midterm election.
And you can sort of understand why.
In one word, ‘uncertainty’.
Markets hate uncertainty.
From that view, you can see why stocks are likely to perform poorly leading up to the midterms.
But once the election result is known, good, bad or otherwise, markets can move on.
And history suggests, they usually do.
What can we expect to see?
If all goes to script, and history is to repeat, markets may well go higher from here.
Last month’s correction brought out all the bears, along with the sweeping statements about an imminent collapse.
But the market is not quite the economy.
The US remains in reasonable shape.
That’s if the October jobs report released last week be any guide.
It was a blowout jobs number for the month.
A figure of 250,000 new jobs for non-farm payrolls.
The expected number was only 190,000.
Jobs growth is steamrolling ahead.
Here’s how that looks on the graph.
Source: US Bureau of Labor Statistics
The unemployment rate came in at 3.7%, still holding at 49-year lows.
Job openings of over 7 million is the highest on record.
For five straight months, the number of jobs is greater than the number of unemployed.
The labour market is tight in a strong US economy.
The jobs report also had plenty to say about wage growth.
The 3.1% year-on-year increase is the best wage growth since April 2009.
Bottom line, the US economy is in reasonable shape.
A higher move up in markets, (should it eventuate), won’t be completely baseless.
So should you side with the bulls or the bears?
Don’t take a position.
You don’t need to read everything about where the market is going from here.
Let the market tell you.
The US market has put in its October low.
And it will likely retest that low over some concern or worry. There’s always something to worry about!
That October low now gives you a bit of a reference point, to judge where the market is heading.
If it breaks or holds, that tells you plenty about where the US economy is headed.
It tells you far more than some opinion piece from some analyst.
But now let’s bring it closer to home.
Where is the Australian market headed right now?
Here’s a point to keep in mind.
Australia has never gone into recession, unless the US has done so first.
The US unemployment rate is holding at 49-year lows. Job openings are setting records and wage growth is the best it’s been in almost a decade.
I’ll let you be the judge on whether the US is on the verge of collapse.
Chartist, Phil Anderson’s Time Trader
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