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November 5, 2018
The midterm Election, dirty laundry, and 
  the statistic investors need to know now   

Election cycles no longer appear to be cyclical. It's more like they blend into the next one without any clear beginning or end. Politicians are in constant campaign mode; constantly raising cash for the next election. It's not hard to predict that every upcoming election cycle will produce a new campaign finance record.
Ahead of each midterm election, investors brace for sudden impact from fear of a market meltdown. Each side predicts disastrous results if the other side wins. Eventually, we become inured to the texts, emails, postcards, Facebook posts, lawn signs, bumper stickers, and robo-calls. The day after Election Day, we wake up with a sense of relief that it's over.
Like any emotion, fear is often not grounded in reality. But it is a powerful tool, nonetheless. Should politicians allay one's fear or stoke one's fear? Fear is visceral. It sinks into the mind quickly and is hard to extract. Dispelling fear takes time and logic. Unfortunately, there is no better way to reinforce one's fear than by telling them that their fear isn't logical.
So, I'll let someone else try to tell you, the investor class, that fear of a down market due to midterms has no grounding in statistics, history, or logic.
From Stephen McBride of RiskHedge via MarketWatch (special thank you to my friend for pointing this one out to me) :
Since 1946, there have been 18 midterm elections. Stocks were higher 12 months after every single one. Every single one. That's 18 for 18. Even though we've had every possible political combination in the past 72 years. Republican president with Democratic Congress. Democratic president with Republican Congress. Republican president and Congress. Democratic president and Congress.
From Ed Clissold of Ned Davis Research via The New York Times:
The numbers tell the story. Since 1946, in years with midterm elections, the Standard & Poor's 500-stock index has gained a median of 18.4 percent in the nine-month period from Sept. 30, just ahead of voting, through June 30 of the following year, according to data compiled by Ned Davis Research. In that same period in nonvoting years, the index gained 4.9 percent.
Maybe the trend will break this time around. Maybe President Trump is to unconventional for this statistic to work. Then again, the January to October period for midterm years, stocks drop an average of about 1%.
One more from McBride:
There's one last important point you should know. Leading up to midterms, U.S. stocks typically perform poorly. From January to October in midterm years, they drop an average of roughly 1%. In all other years, stocks rise roughly 7% in that time frame. 
Think of midterm elections like a thick fog covering markets. They obscure what the political situation will look like in the near future. Unable to see what's coming, investors get nervous and act cautiously. Just as they would slow down while driving a car through a thick fog. Once the election concludes and the fog clears, investors regain confidence and the market gets back on track. This year is following that script to a T.  
For all the market's gyrations in the past few weeks, the S&P 500 is roughly flat this year. If we stay on script, we should expect the market to surge in November after the uncertainty of the elections is behind us.
Back to Mitch: Another thing that's not hard to predict is that every upcoming election cycle will produce a new record in dirty laundry.    
Dirty Laundry by Don Henley! 

Don Henley Dirty Laundry HD Live 
Don Henley Dirty Laundry HD Live

 Read all about it here:
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All the views expressed in this report/commentary accurately reflect our personal views about any and all of the subject securities or issuers and no part of our compensation was, is, or will be, directly or indirectly related to the specific recommendations or views we have expressed in this report. This material is not intended as an offer or solicitation for the purchase of sale of any security or other financial instrument. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from securities or investments mentioned in this report may fall against your interests, and you may get back less than the amount you invested. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. You should consult with your tax adviser regarding your specific situation. Diversification is a method of managing risk and doesn't protect against loss in a down market. 

Mitchell O. Goldberg, AIF®, AAMS

President | Investment Professional

OSJ Manager 


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