Some Good (and Bad) News About Today's Election

Some good (and bad) news about today's election... History says stocks usually soar following midterms... But this one scenario has been terrible for the markets... Another strong quarter of sales and earnings growth... Our proprietary Complacency Indicator strikes again...

We'll begin today with some good – and some potentially bad – news about today's midterm elections...

First, the good...

Since 1946, there have been exactly 18 midterm elections in the United States. And according to research published in Forbes, the broad U.S. markets were higher 12 months later after every one.

Yes, you read that correctly: Stocks were higher one year later a perfect 18 out of 18 times. Better yet, the average gain during these periods was an impressive 17%.

In short, since the end of World War II, it simply hasn't mattered which political party controlled the White House or Congress prior to the election, nor which party controlled them after. Stocks moved sharply higher after every single one.

However, there is one potential caveat here...

If we look back a bit further, the outcome hasn't always been so rosy.

As most folks are likely aware, Republicans currently hold the presidency and both houses of Congress.

The latest polls say Republicans have a 90%-plus chance of keeping control of the Senate. However, polls suggest Democrats have a 90%-plus chance of winning the House of Representatives.

Why does this matter?

According to a note from Nautilus Investment Research, we've seen this exact scenario play out in two previous midterm elections. These were in 1910 and 1930, during the presidencies of William Taft and Herbert Hoover, respectively. And both were followed by less-than-stellar years for stocks.

Following the 1910 election, stocks fell 5.5% over the next year. In 1930 – which admittedly was in the middle of the Great Depression – stocks plunged more than 40% over the next 12 months.

Of course, this is an extremely limited sample size, so we hesitate to put too much weight in it today...

The reality is, politics matter far less to the markets over the long run than most people think. If anything, so-called "gridlock" – when no one party holds the presidency, Senate, and the House – has often been considered a bullish rather than bearish development. It meant the government would have a more difficult time interfering in the economy and mucking things up.

However, we'll also acknowledge that the market has risen significantly over the past two years.

Outside of the recent "trade war" with China, investors have generally cheered the efforts of President Donald Trump and the Republican Congress to cut taxes and ease some of the government's most onerous regulations. So it certainly wouldn't be surprising to see the market give up some of these gains if Democrats do win tonight.

In the meantime, the record-breaking streak of corporate earnings continues...

As of last Friday, 74% of companies in the S&P 500 Index had reported third-quarter results. And once again, they're on pace to absolutely trounce expectations.

According to the latest data from FactSet Research, companies are reporting year-over-year sales growth of 8.5%, well above estimates of 7.8%, and among the strongest rates in years. Meanwhile, year-over-year earnings growth is on pace to reach 24.9% in the quarter, which would mark the second-highest earnings growth since 2010. And these gains are widespread, with all 11 sectors of the S&P 500 reporting growth in both areas.

In other words, despite worries to the contrary, America's best and biggest companies are still doing incredibly well. And as our colleague Scott Garliss noted to Stansberry NewsWire readers this morning, this is one more reason to remain bullish on stocks today...

So far this quarter, earnings growth has lived up to expectations and then some... With roughly 75% of the S&P 500 having reported earnings, the blended growth rate is up 24.9%. That's considerably above expectations. As a reminder, Wall Street analysts have tended to underestimate actual earnings growth by an average of 4.6%. Currently, it's looking more like 5.6%...

Once more, I point this out because, considering the recent sell-off, there is still reason to be optimistic around valuation. The forward 12-month earnings estimate for the S&P is $171.79. That means the current price-to-earnings multiple is 15.94 times versus the five-year average of 16.4 times. That's a good case for owning stocks.

So, despite all the turmoil around the China/U.S. trade standoff and worries about global growth, domestic corporations continue to exhibit strength. Granted, there are headwinds – the dollar is rising, we've yet to feel the full effect of tariffs, and the European political landscape is in flux – but these are all obstacles that can be overcome... And if they are, current valuations will look like a gift.

Finally, we can officially score another 'win' for our proprietary Complacency Indicator...

If you're not familiar, this indicator is a composite of several different measures of market fear that Porter and the Stansberry's Investment Advisory team developed back in 2014.

In short, based on decades of back-testing, whenever this indicator drops below a key threshold – represented by a score of less than 30 – it suggests a market correction of 10% or more is likely within the next 12 months. And it has been remarkably reliable...

While it hasn't predicted every recession, it hasn't produced any false signals, either. Every time it has triggered, the broad market has in fact declined at least 10% over the next 12 months.

Longtime readers may recall this indicator was last triggered in September. As Stansberry's Investment Advisory senior analyst Brett Aitken explained in the September 11 Digest...

This month, the indicator dropped to 23. And it moves our primary indicator from "Neutral" to "Bearish."

While we consider this our primary sentiment indicator for the market as a whole, we can't know exactly when the correction will arrive. [But] based on almost 30 years of history, it will be in the next 12 months.

At that time, the Complacency Indicator had correctly predicted eight of the last 10 corrections, including February's 'volatility panic'...

As of last week, we can now officially add one more to the list. As Porter and analyst Alan Gula explained in the November issue of Stansberry's Investment Advisory, published on Friday...

Our indicator correctly predicted another correction. Recall that our indicator began flashing a warning signal in September when the complacency score fell to 23. And last month, it dropped further to 11. Investors had become extremely complacent. As you know... this is a bearish warning...

The benchmark S&P 500 reached an all-time high on September 20. By Monday this week, the index closed nearly 10% below that high, flirting with 11% lows during the day. The Nasdaq Composite Index was down as much as 13% in that same time period.

Including the two corrections it correctly predicted this year, our Complacency Indicator has now accurately predicted nine of the past 11 corrections. Hopefully, you heeded its warnings and maintained a hedged portfolio. Short positions, including buying put options, can insulate investors from market shocks.

Porter and Alan also noted that while the recent correction did officially meet the 10% minimum threshold, they're not quite ready to call the "all clear." You see, this indicator says investors are still extremely complacent right now...

You may be surprised to learn that, despite the recent sell-off, the complacency score remains dangerously low today at 8.

This doesn't mean the market will necessarily fall further. But it's a good reason to remain cautious and hedged.

New 52-week highs (as of 11/5/18): Blackstone Mortgage Trust (BXMT), CME Group (CME), Coca-Cola (KO), Lindsay (LNN), McDonald's (MCD), and Starbucks (SBUX).

A quiet day in the mailbag. What's on your mind? Let us know at feedback@stansberryresearch.com.

"The article entitled, "No recession – No Melt Down" was outstanding, where 3 of the 5 recession indicators were covered. One of the best readings I have seen. My suggestion – Every quarter, similar summaries should be sent to all subscribers, covering all 5 indicators. Perhaps, as the Melt Down indicators draw more near, the frequency should be more frequent. Thanks for considering." – Paid-up subscriber Lou V.

Brill comment: Thanks for the note, Lou. Unfortunately, it wouldn't be fair to Steve's True Wealth Systems and Melt Up Portfolio subscribers to share these indicators with all readers. But rest assured, if (and when) these indicators do turn bearish, Steve will let all of our readers know.

Regards,

Justin Brill
Baltimore, Maryland
November 6, 2018